Recently, 17 large, higher-educational institutions have been sued by participants in their retirement plans for failure to properly provide oversight over the administration of those plans. The University of Chicago, one of the universities sued over retirement plans oversight, entered into a class action settlement for $6.5 million and changes to the University’s $3 billion plan.
Major Universities Sued Over Retirement Plans Oversight and Lack Of Fiduciary Oversight
The suit alleged that the University of Chicago fiduciaries violated ERISA by imprudently selecting and maintaining certain investment options, and they breached the ERISA fiduciary duties of prudence and loyalty by failing to monitor the performance of those investment choices. It was also alleged that the University paid excessive administrative and recordkeeping fees by hiring two recordkeeping companies when one would have been sufficient and less expensive; as well as raising issues that the plan’s participant loan program violated the prohibited transaction rules of ERISA.
The University also agreed to make structural changes to their plans including not increasing per-participant recordkeeping fees from the date of the final approval of the settlement and to use commercially reasonable best efforts to reduce recordkeeping fees.
Why Were Major Universities Sued Over Retirement Plans Oversight?
As we have seen with the University of Chicago, many major universities are defending themselves in lawsuits due to a number of reasons, listed below. Because of this, higher educational institutions should consider retaining plan fiduciary oversight experts to help them monitor issues involving the administration of their retirement plans.
Too Many Investment Choices Offered
Many of the complaints included in the lawsuits stated that the retirement plan offered too many investment choices because they had multiple recordkeepers who offered a wide selection of investment choices, which, in some cases, led to investment options exceeding over a few hundred choices. The complaints alleged that having too many investment choices caused participant confusion, often causing them not to participate in the plan because they could not decide how to invest.
These lawsuits have also charged that certain funds require minimum asset amounts to gain access to cheaper share classes. Because these plans contained so may choices and assets were spread out, these investments could not meet the minimum asset threshold amounts and plan participants paid higher fees, reducing their investment return.
No Recordkeeper Search Conducted to Reduce Fees
In many of the lawsuits filed, plaintiffs argued that the university had not conducted a comparative search for recordkeeper services, such as through a request for proposal (RFP) process. The complaints claim that RFPs should be conducted every five years, or in some of the claims, every three years.
Even though nothing in ERISA requires that an RFP must be conducted, it dictates that the fees in the plan must be reasonable and competitive for the services being provided. If the university can prove that the expenses paid meet the ERISA fiduciary requirements without conducting an RFP and can prove that their plan fees meet this standard, they can defend themselves against this charge. However, an RFP or benchmark analysis is a good process and procedure to implement periodically.
Universities should maintain the results from this study to help demonstrate that their fiduciaries have satisfied their due diligence requirements.
Less Expensive Share Classes Were Available
Most of the lawsuits filed claimed that the university had included more expensive share classes of investments as investment choices instead of lower fee options. It is not unusual for mutual fund providers to offer multiple shares classes of the same mutual fund, including separate share classes for retail investors and small plans and another class for larger plans. The underlying investments and allocations are nearly identical, but they differ in the amount of fees charged. As a plan’s assets grow larger, the fiduciaries of those plans should be able to negotiate to use the less expensive share class. Many of the complaints alleged that the university did not ask if less expensive share classes were available as the plan size grew. They accepted the fees charged without questioning them.
It is essential that universities demonstrate that they requested lower share classes be made available from their recordkeeper and document the request, the recordkeeper’s response and any actions taken by their fiduciaries.
Use of Asset-Based Fee Rather than Flat Dollar Amount
Several of these lawsuits have alleged that the plan’s fiduciaries breached their duties by allowing the university’s retirement plan to pay asset-based fees for recordkeeping services, rather than flat dollar fees. As plan assets have grown, the total fees grew exponentially, whereas the utilization of flat dollar fees would have meant that fees would increase as the number of plan participants increased.
It is important for a university to consider conducting an annual benchmarking of plan fees to help them determine if they are paying market value for plan services whether or not they are paying asset-based or flat-dollar fees. Universities should request that their recordkeeper provide fee proposals under both options, so they can determine which model would work best for their organization and document their final decision.
Multiple Recordkeepers Involved with Their Plan
A number of the complaints contained in the lawsuits filed charges that the plan used multiple recordkeepers. Consolidating to one recordkeeper would lead to a greater economy of scale. By utilizing more than one recordkeeper, fees will be split among all of the providers and cause a duplication of efforts leading to higher costs.
Independent Administrator Offers Protection from Massive Litigation Costs
With so many universities sued over retirement plans oversight and under attack, they should consider hiring an independent administrator that offers them advice and protection to best insulate them and their fiduciaries from massive litigation costs, settlements and adverse judgments. As an ERISA 3(16) Plan Administrator, NPPG Fiduciary Services, LLC offers these organizations great expertise in this area.
Please consider contacting NPPG Fiduciary Services at 855-760-0129 so we can help you establish and monitor the processes and procedures necessary to meet your ERISA fiduciary obligations.