Title

Understanding University Fee Litigation: A Few Lessons About The Perils of Imprudence for Higher Ed Plan Sponsors

Document Type

Article

Publication Date

2021

ISSN

0026-6280

Publisher

University of Mississippi

Language

en-US

Abstract

Beginning in August 2016, a series of class action lawsuits were filed on behalf of participants and beneficiaries of 403(b) employee retirement plans sponsored by major American colleges and universities. These plans are regulated by the 1974 Employee Retirement Income Security Act (“ERISA”), which sets minimum standards to protect the participants and beneficiaries of voluntarily established retirement and health plans. The allegations in the several lawsuits have centered primarily around breaches of fiduciary duties by those charged with administering the plan.

These cases are all class action lawsuits brought on behalf of the participants and beneficiaries of the plans in question. Generally, the class sizes are between 15,000 and 25,000, and the plaintiffs have not had difficulty getting their classes certified by the courts.

The defendants are 403(b) plan fiduciaries at prominent colleges and universities with large pools of assets held in ERISA covered plans. Each plan ranges in aggregate value from $1.25 billion to $4.7 billion.1 The fiduciaries charged with breach of duty are those explicitly designated as such in plan documents, as well as functional fiduciaries, i.e., those whose ERISA duties arise because they (1) exercise discretionary authority/control over management of a plan, (2) exercise authority/control over management/disposition of plan’s assets, (3) render investment advice for a fee (or has authority to do so), or (4) have any discretionary authority/responsibility in the of administration of plan.2 Most defendants are functional fiduciaries, as plan creation documents usually only explicitly name one person or organizational role.

Apart from the case against MIT, each plan sponsor maintained between two and five recordkeepers. Some recordkeepers in this industry provide only recordkeeping and administrative services, while others provide both recordkeeping services and investment products. This latter type is the kind employed by the defendant institutions subject to these suits. The primary companies whose services/products are at issue in these cases are TIAA-CREF, Vanguard, and Fidelity. Having multiple recordkeepers raises the costs associated with administering the plans and has been alleged by plaintiffs to be de-facto imprudent.

The MIT case is unique among these suits in that Fidelity was the sole recordkeeper and provider of investment options. In this case, the plaintiffs have also brought “prohibited transaction” claims based on the theory that Fidelity and MIT were both “parties in interest.” Plaintiffs assert that the philanthropic generosity showed to MIT by Fidelity, coupled with the presence on the MIT board of multiple Fidelity CEOs, created conflicts of interest and fell under the umbrella of prohibited transactions which create fiduciary conflicts, and which ERISA Section 406 was specifically designed to protect against.

The fiduciary breaches most cited are the “duty of prudence” and “duty of loyalty,” as well as allegations of various prohibited transactions. In almost every instance, the only claims which have survived 12(b)(6) motions to dismiss have been those relating to prudence.

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