University Excessive Fee Suit Gets a Hearing

There’s apparently no such thing as too many funds in a plan, at least according to a judge in the first of the university excess fee lawsuits to get a hearing.

This one (Henderson v. Emory Univ., N.D. Ga., No. 1:16-cv-02920-CAP, 5/10/17), brought against the Emory University Retirement Plan and the Emory Healthcare, Inc. Retirement Savings and Matching Plan, accused the Emory trustees of allowing “unreasonable expenses to be charged to participants for administration of the Plans, and retained high cost and poor-performing investments compared to available alternatives.”

For the very most part the defendants’ motion to dismiss was – well, dismissed, either because the judge felt the facts alleged were sufficient to state a claim, or were sufficient because in considering a motion to dismiss the judge “must take the facts alleged in the complaint as true and construe them in the light most favorable to the plaintiff.”

With that in mind, the suit that was brought last August against the $3 billion plans ($2.6 billion in one, $1.06 billion in the other, as of Dec. 31, 2014) with more than 40,000 participants, will proceed largely intact, with Judge Charles A. Pannell, Jr. of the U.S. District Court for the Northern District of Georgia, ruling that facts had been alleged sufficient to “state a claim for relief” on allegations that the trustee/defendants:

  • Used mutual funds – and retail mutual funds at that (“identical in every respect to institutional share class funds, except for much higher fees”) – rather than collective investment funds or separately managed accounts.
  • Offered active management solutions rather than passive ones.
  • Charged fees that were excessive and/or provided a benefit to TIAA but not to the benefit of the participants.
  • Imprudently retained underperforming funds. (“The plaintiffs’ allegations sufficiently state that the defendants failed to remove the CREF Stock Account and TIAA Real Estate Account after periods of underperformance and higher costs compared to similar funds.”)
  • Used revenue-sharing. (“At this point, the plaintiffs’ do not have the burden “to rule out every possible lawful explanation” for the allegedly overcharged recordkeepers’ fees used in the Plan.”)
  • Used three separate recordkeepers: Fidelity, TIAA-CREF and Vanguard. (“The plaintiffs’ allegation that a prudent fiduciary would have chosen one recordkeeper instead of three is sufficient to state a claim for relief.”)
  • Did not use a competitive bidding process for recordkeeping services. (…[T]he defendants argue that nothing in ERISA requires competitive bidding. However, the plaintiffs’ allegation of the absence of competitive bidding for the recordkeeping services was imprudent; therefore, the plaintiffs’ claim is sufficient to state a claim for relief.”)
  • Forced the use of the CREF stock Account and CREF money market account and imposing restrictions on those options (at least to the extent that the challenged actions occurred less than six years prior to the filing of the complaint).

The defendants were successful in rebuffing one of the claims: having (too?) many investment choices in the plan (111). Here plaintiffs charged that the “litany” of funds (rather than the “dizzying” array alleged in other suits) led to “decision paralysis.”

Instead Judge Pannell wrote that, “Having too many options does not hurt the Plans’ participants, but instead provides them opportunities to choose the investments that they prefer.”

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