College ‘Intuition’

Much remains unsettled – and, as yet, largely unadjudicated – in the large, and growing series of excessive fee litigation directed at university 403(b) plans. However, certain trends in the litigation have emerged – some very different than 401(k)s, others not. Here’s what to look (out) for.

The list of these so-called university 403(b) suits – the first were filed in August 2016 – now includes plans at Cornell University, Northwestern University, Columbia University and the University of Southern California, as well as Yale. Meanwhile, some of the earlier suits are just getting to hearings on motions to dismiss, specifically Emory University and Duke University – both of which are currently proceeding to trial – and the University of Pennsylvania, which recently prevailed in a similar case. Another – involving Princeton University’s 403(b) plans – is on hold awaiting an appeal in the University of Pennsylvania litigation.

By my reckoning, here are the grounds upon which the university 403(b) plans that have been sued thus far have in common.

They have more than one recordkeeper.

While not every university 403(b) plan against which a lawsuit has been filed employed the services of more than one recordkeeper, they all seem have done so at one point in their history.

Indeed, a couple of lawsuits filed against university plans that have consolidated to a single recordkeeper have pointed to the consolidation decision as proof that the plan fiduciaries knew that the multiple provider approach was inefficient and costly – and should have acted sooner.

They offer a “dizzying array” of funds (generally from each of the aforementioned recordkeepers).

In the 401(k) world, large fund menus have long been considered a nuisance, if not downright unproductive. We’ve even got a behavioral finance study involving jams to back up the sense that, given too many choices (whatever that may be – with jams, it’s apparently more than 6), people tend not to decide.

With university 403(b) plans – certainly the ones that have found themselves sued – the “norm” seems to be in excess of 100. And frequently they approach that number with each recordkeeping provider.

That said, at least one court presented with the issue has said “Having too many options does not hurt the Plans’ participants, but instead provides them opportunities to choose the investments that they prefer.” And a second one has just held that “plaintiffs have neither alleged that any participant experienced confusion nor stated a claim for relief.”

They offer “duplicative” investments.

One of the reasons the fund menus, at least in total, seem to be so large is that each recordkeeping provider seems to put forth their own optimal menu of choices – and if you have more than one recordkeeper – well, you apparently wind up with “duplicates” in what the plaintiffs frequently claim are “in every major asset class and investment style.”

And in numerous of these cases, the only funds offered are the proprietary offerings of those recordkeepers.

Their recordkeeper choice “tethered” them to certain fund options.

Many, though not all, of the lawsuits involve plans that had TIAA-CREF as recordkeeper, and those all cite how the choice of TIAA-CREF as recordkeeper bound (“locked” and “tethered” are other terms employed to describe the arrangement) the plan to include certain (allegedly inferior) TIAA-CREF investment options on the menu, notably the CREF Stock Account and Real Estate Fund. Other issues unique to some TIAA-CREF investments are certain transfer restrictions, and some differences in their loan account processing.

Share ‘Alike’

There are, of course, elements that these programs share with their 401(k) brethren.

They use retail class mutual funds and/or active when passive would “do.”

Yes, not only are those fund options “duplicative,” they are often retail, rather than institutional class. Or actively managed when passive varieties were available. And thus more expensive, so the argument goes.

They pay for those (multiple) recordkeepers via asset-based, rather than per participant fees.

This wasn’t always an issue in excessive fee litigation, but in recent years – well, it’s become something of a regular “feature” of this type litigation – and it’s been part and parcel of the fabric or 403(b) university plan litigation.

The argument, of course, is that recordkeeping is about keeping up with individual records, and whether that individual account balance is $100 or $100,000, the cost of keeping up with the balance is the same. However, not content to argue with the method of calculation, these days the plaintiffs nearly always take the next step – and proffer what they consider to be a reasonable per-participant fee – on their way to alleging that the fees being charged – are not.

They are big plans.

Nearly all of the 401(k) excessive fee lawsuits filed since 2006 (when the St. Louis-based law firm of Schlichter, Bogard & Denton launched the first batch) have been against plans that had close to, or in most cases in excess of, $1 billion in assets. There’s no real mystery here. Willie Sutton robbed banks for the same reason.

And if you’re a class action litigator, that also happens to be where a large number of similarly situated individuals can be found; a.k.a. plaintiffs.

Less cynically, the plaintiffs generally charge that, despite the plan’s large (“jumbo”) size, rather than “leveraging the Plans’ substantial bargaining power to benefit participants and beneficiaries, Defendant caused the Plans to pay unreasonable and excessive fees for investment and administrative services.”

Where does this leave your “average” multibillion dollar 403(b) university plan? Well, they say that forewarned is forearmed. However, the reality is that corrective actions now may not be enough to keep the plan out of “cite” – but it might be enough to keep your plan out of court.

- Nevin E. Adams, JD
 
Note: It bears acknowledging that the reason that so many of these suits allege the same things is not only that the plans have similar structures and characteristics, but that many of the suits have been filed by the same firm (Schlichter Bogard & Denton) – or by firms that have taken pages (literally in some cases) from the suits filed by that firm.

Boiling Points

One could hardly read the headlines this past week without experiencing a certain sense of déjà vu.

After all, it’s been not quite 10 years since the then relatively obscure St. Louis-based law firm of Schlichter, Bogard & Denton launched about a dozen of what have come to be referred to as “excessive fee” lawsuits.

Not that the recent batch of suits targeting multi-billion dollar university plans are a mere recounting of the charges leveled against their private sector counterparts. No, in the years since then the Schlichter law firm has sharpened their pencils, and their criticism. Those early suits focused on what, in comparison to the most recent waves, seem almost quaintly simplistic: allegedly undisclosed revenue-sharing practices, the use of non-institutional class shares by large 401(k) plans, the apparent lack of participant disclosure of hard-dollar fees (which even then were disclosed to regulators), and even the presentation of ostensibly passive funds as actively managed.

In the lawsuits that have been filed in recent months, it’s no longer enough to offer institutional class shares — one must now consider the (potentially) even less expensive alternatives of separately managed accounts and collective trusts. Actively managed fund options are routinely disparaged, while the only reasonable fee structure for recordkeeping fees is declared to be a per participant charge. The use of proprietary fund options, rather than being viewed as a testament to the organization’s confidence in its investment management acumen, is portrayed as a de facto fiduciary violation since the investment management fees associated with those options inure to the benefit of the firm sponsoring the plan.

The most recent suits targeting university plans add to the standard charges leveled against 401(k) plans some that are peculiar to that universe — notably providing a “dizzying” array of fund options that plaintiffs claim results not only in participant paralysis, but in the obfuscation of fees and the decision to employ multiple recordkeepers. The proof statement that these practices are inappropriate? Comparisons with the standards and averages of 401(k) plans.

Overlooked in the burst of headlines and allegations is that we know very little about these plans other than what the plaintiffs allege. We aren’t told anything about the employer match, for instance, not to mention participant rates, nor is the subject of outcomes mentioned. We know nothing of the services rendered for these fees, only that, of the investment funds on the menu, cheaper and ostensibly comparable alternatives were available. The plaintiffs’ argument seems to be, if there were cheaper alternatives available, the ones chosen were, by definition, unreasonable, regardless of the services provided.

One other thing overlooked in the burst of lawsuits is that precious few of these cases have actually made their way to trial, and that among those that have, on the issues of fund choices and fund pricing, the courts seemed inclined to give the plan fiduciaries the benefit of the doubt. The Schlichter firm’s own press releases now not only tout the 20 such complaints the firm had filed as of early August, but that in 2009 they “won the only full trial of an 401(k) excessive fee case.” A case in which the attorney fees turned out to be more than triple that of the recovery won by plaintiffs. But if the record at trial is more checkered than many appreciate, plan fiduciaries can’t ignore the fact that in the lawsuits it has brought, the Schlichter firm has succeeded in securing nine settlements.

A popular aphorism holds that if you put a frog in a pot of boiling water, it will immediately hop out, recognizing the peril that that water represents. But if you put the same frog in a pot of cold water and then slowly bring it to a boil, the frog will stay put, since the danger creeps up on it in a less noticeable fashion.

Perhaps that explains why, 10 years after the first claims were filed, so many multi-billion dollar retirement plans still remain vulnerable.

Though by now, that fiduciary pot is surely boiling — and has been for some time.

- Nevin E. Adams, JD