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Fiduciary Liability: A Look at Recent Spate of University Lawsuits over Retirement Plan Fees

Fiduciary Liability A Look at Recent Spate of University Lawsuits over Retirement Plan Fees

Fiduciary Liability A Look at Recent Spate of University Lawsuits over Retirement Plan FeesIn August several prominent U.S. universities made headline news when they were sued by a number of employees that alleged their retirement savings were fraught with excessive fees. The first three of these universities that hit the news were Massachusetts Institute of Technology (MIT), New York University (NYU) and Yale – each with retirement plans holding more than $3 billion in assets. Following on the heels of this news, it was also announced that Emory University was being sued for breach of its fiduciary duties under the Employee Retirement Income Security Act (ERISA).

MIT, NYU & Yale Lawsuits

The complaints allege that these three universities, as the retirement plan sponsors, failed to monitor excessive fees paid to administer the plans and did not replace more expensive, poor-performing investments with cheaper ones. Had the plans eliminated their long lists of investment options and used their bargaining power to cut costs, the complaints argue, participants could have collectively saved tens of millions of dollars. MIT, NYU and Yale have 403(b) plans, similar to 401(k) plans but offered by public schools and nonprofit institutions like universities and hospitals.

“It is important for retirees and employees of universities to have the same rights and ability to build their retirement assets as employees of for-profit companies,” said Jerome Schlichter, a founding partner of the firm representing the plaintiffs, Schlichter, Bogard & Denton, in an article in the New York Times (NYT). “They shouldn’t be penalized.”

In its statement, NYU said the university took the welfare of its faculty and employees seriously, including a dignified retirement. “The retirement plans offered to them are chosen and administered carefully and prudently. We will litigate this case vigorously and expect to prevail,” said John Beckman, a university spokesman.  A spokeswoman for MIT told the NYT it did not comment on pending litigation, while Yale said it was “cautious and careful” in administering its plans and would defend itself vigorously.

Emory University Lawsuit

The class-action suit filed against Emory University alleges the institution breached its fiduciary duties to more than 41,000 employees by incurring excessive fees and retaining poor investments in retirement plans. The suit alleges the University like the other schools failed to consider low-cost, high-performing alternative investment options and that its use of multiple record keepers resulted in excessive administrative fees. Schlichter, Bogard & Denton also filed the suit against Emory on behalf of the plaintiffs. The defendants are Emory University, Emory Healthcare, Inc., Emory Pension Board, Emory Investment Management and the Vice President of Investments and Chief Investment Officer.

Emory like its university counterparts also offers a 403(b) plans, with over $3.5 billion in investments as of Dec. 31, 2014. The plans use three independent vendors for recordkeeping: Fidelity, TIAA-CREF and Vanguard. Both University and Healthcare retirement plans offer employees 110 investment options: 43 from Fidelity, 23 from TIAA-CREF and 44 from Vanguard.

According to the Emory Wheel, by offering three record keepers and failing to take advantage of its multi-billion dollar endowment — which hit a record high of $6.7 billion last year — Emory lost negotiating power when determining recordkeeping fees, said the suit. This cost participants millions of dollars in administrative fees. In 2011, TIAA-CREF received $5.69 million from Emory in recordkeeping fees. In 2012, the amount increased to $6.16 million.

“The Emory plan is excessively priced,” said Mr. Schlichter. “Under the law [ERISA] that applies to the University, [Emory] must make sure fees are reasonable and … that the investments are prudent.” The University has failed to uphold these obligations, he added.

The surge in retirement plan litigation in these cases reflects increased employee knowledge and media coverage of retirement plans. In addition, the Labor Department put the spotlight on retirement plans when it introduced new rules in April, requiring a broader group of financial professionals to act in customers’ best interest when handling their retirement money. The aim, according to the Labor Department, is to reduce conflicts of interest and the fees consumers pay.

Fiduciary Liability Insurance

Critical in protecting educational institutions and others from the potential of such lawsuits is reviewing not only your current practices to ensure the investor’s interest is protected but also assessing your Fiduciary Liability insurance program.  Fiduciary Liability insurance protects fiduciaries against legal liability for claims arising out of their roles. Fiduciaries are those individuals or organizations that exercise authority or control over the management of an employee benefit plan – specifically, those responsible for investing, controlling or disposing of assets held by the plan. They also include entities that service pension plans, such as consulting firms, law firms, accounting firms, professional administrative firms, investment advisors, investment management companies and trust departments of financial institutions.

A fiduciary’s responsibility includes:

  • Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them
  • Carrying out their duties prudently
  • Following the plan documents (unless inconsistent with ERISA)
  • Diversifying plan investments
  • Paying only reasonable plan expenses
  • Monitoring investments
  • Avoiding prohibited transactions

The duty to act prudently is one of a fiduciary’s central responsibilities under ERISA.

Axis Insurance Services specializes in Fiduciary Liability insurance and is available to review your program and go over what is and isn’t covered under a plan. Give one of our professionals a call at (877) 787-5258.

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Blogged on: September 8, 2016 by Mike Smith
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