Fee litigation hits higher education

By Dean Leffelman, Mary Beth Braitman, Craig Burke, Tara Sciscoe, Marc Sciscoe, and Chris Sears
Ice Miller LLP
Updated 9/22/2016 12:56 PM

Nearly identical class action lawsuits were filed last week against eight private universities sponsoring defined contribution Code Section 403(b) and 401(a) retirement plans. Each suit contends that the university paid excessive record keeping, administrative, and investment fees and failed to remove expensive, underperforming investments from the plan's menu of investment options in favor of lower-cost investments.

The lawsuits argue that these actions/failures to act breached the university's fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA requires plan fiduciaries to discharge their duties with respect to a plan solely in the interest plan participants and "with the care, skill, prudence, and diligence ... that a prudent man acting in like capacity and familiar with such matters would use ..." This standard of care is sometimes referred to as the "prudent expert" standard.


While lawsuits alleging excessive investment fees have become increasingly common over the past few years, this is the first wave of suits targeting institutions of higher education and 403(b) plans. This is significant because 403(b) plans offered by educational institutions have a much different legal history from that of 401(k) plans offered in the for-profit sector. As recently as 2009, before the Internal Revenue Service issued final regulations under Code Section 403(b), many employers considered 403(b) plans to be more in the nature of a payroll practice than an employer-sponsored retirement plan for which the employer had fiduciary responsibility.

The recently-filed suits allege that the following practices breached ERISA's duties of loyalty and prudence: The use of multiple recordkeepers -- for example, the use of both TIAA and Vanguard -- led to higher participant fees, because the university could not fully leverage the plan's assets to take advantage of economies of scale and lower fees.

The inclusion of a large number of funds in the same asset class resulted in higher fees and expenses by depriving the university of bargaining power to negotiate lower fees.

The offer of many actively managed funds having the same management style resulted in the plan effectively having an actively managed index fund with much higher fees than a comparable passive index fund.

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The failure to monitor and remove underperforming funds, in part because of restrictions imposed by the vendor, resulted in lower returns to participants.

By offering higher-cost retail or retirement-class mutual fund shares instead of institutional-class shares of the same mutual funds, the university failed to take advantage of negotiating power that should have been associated with a plan of its size.

The use of multiple record keepers and an unreasonably high number of investment options resulted in participant confusion and decision paralysis.

The payment of administration and record keeping fees through asset-based revenue sharing, rather than a per-account fee, resulted in unreasonable fees not justified by the services provided.

The failure to solicit bids from competing vendors resulted in higher fees due to the university's failure to exercise its negotiating power.

The complaints allege that the universities and, where applicable, members of the plans' investment and administrative committees, are personally liable for restoring any losses to the plans resulting from these alleged breaches of fiduciary duty.

While the universities targeted by these suits sponsor retirement plans with billions of dollars in assets, recent "excessive fee" lawsuits have also targeted much smaller plans, including a plan with $9 million in assets. Although the recent suits are directed at private institutions subject to ERISA, similar suits based on state fiduciary law could be brought against public institutions exempt from ERISA. In fact, the same law firm that filed the eight recent suits has filed a similar suit alleging state-law fiduciary violations against a church plan which, like a governmental plan, is exempt from ERISA. Public institutions (and institutions sponsoring church plans) should consider the potential application of state law, as well as possible defenses available under state and federal law.

The recent suits highlight the importance of private and public institutions reviewing their processes for selecting and monitoring vendors and the investment options available under their plans. Because courts are generally reluctant to second-guess such decisions, they often focus more on the decision-making process than the decision itself. Therefore, it is important that plans have in place written procedures for evaluating and monitoring vendor and investment performance and costs. Such procedures should, at a minimum, designate the individuals making decisions, assure that decision-makers are qualified and receive appropriate professional advice, and specify the criteria for making decisions. • For more information, contact Dean J. Leffelman at dean.leffelman@icemiller.com or (630) 955-6390. This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.

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