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Another University 403(b) Suit Filed


The fiduciaries of yet another university 403(b) plan have been targeted with litigation—and while the allegations are familiar, the plaintiff’s attorney is new.

The suit—filed against both the fiduciaries (and those that appointed them) of the $1.9 billion Northeastern[i] University 403(b) plan for “…repeated failure to administer the Plan prudently or monitor fiduciaries and service providers to the Plan.”

The Allegations

The suit—brought by participant-plaintiff Oscar T. Brookins—claims that “defendants’ mismanagement of the Plan has cost participants millions of dollars, leading to their paying excess fees and losing out on retirement income.” They did that by limiting “…the Plan’s participants to low-performing, high-cost investment options such as the consistently underperforming CREF Stock Account (which by itself accounts for over 10% of the Plan’s assets invested) or the costly TIAA Real Estate Account. They also subjected participants to dramatically high recordkeeping costs over several years in the class period, well higher than similar plans. Moreover, many of these options were flagged as imprudent in prior ERISA litigation of which Defendants could and should have been aware,” the suit concludes—commenting (in case the judge hearing the case wasn’t aware) that “courts have frequently concluded that such conduct is sufficient to state a claim for breach of fiduciary duty.”

The suit (Brookins v. Northeastern University et al., case number 1:22-cv-11053, in the U.S. District Court for the District of Massachusetts) notes that, overall, “the Plan includes over 60 options, of which 13 are Fidelity ‘Freedom’ Target Date Funds and 11 are TIAA’s ‘Lifecycle’ Target Date Funds,” and that “the vast majority of options are either Fidelity or TIAA funds, variable annuities, or investment contracts, with only 11 funds from outside of the two families”—and also a self-directed brokerage account option.

Citing the recent decision in Hughes v. Northwestern, the suit—here the plaintiff was represented by Stephen Churchill and Osvaldo Vazquez of Fair Work PC—states that “a fiduciary must ensure that each investment option is and remains prudent, and cannot defend by arguing that it has offered some prudent investments along with imprudent investments.” Though it didn’t seem to have much application to the allegations here, the suit notes that “ERISA also requires Plan fiduciaries to act in accordance with Plan documents,” and that “any violation of the terms of plan documents constitutes a fiduciary breach.”

Once again, revenue sharing was a target, though here (as in many other cases), it’s acknowledged that “…while courts have recognized that fiduciaries’ use of revenue sharing is not per se imprudent, they have noted that revenue sharing may hide the true scope of fees from participants and even from fiduciaries themselves,” going on to claim that, “here, revenue sharing harmed the Plan’s participants because it resulted in their being forced to pay above-market recordkeeping and administrative fees, which was hidden from their view. Indeed, the Plan’s Form 5500 reports negative compensation to Fidelity, which obviously is not the case. In 2020, the Plan’s Form 5500 filed with the DOL reported direct recordkeeping compensation to Fidelity of -$348,656,” and had “…no entry for direct compensation to TIAA at all.”

Reference ‘Points’

As a frame of reference, the suit invokes a report by NEPC,[ii] and its conclusions as to the fees paid by the 137 DC plans that responded to that survey—plans that the suit sees as “similar to the Plan’s asset and participant counts.” Drawing on that reference, the suit claims that the NEPC survey found that larger plans paid lower recordkeeping fees per participant, and that “half of surveyed plans with between 5,000 and 15,000 participants paid $40 to $55 per participant in recordkeeping fees, and that no such plans in the survey paid above $70.”

That said, this particular suit doesn’t allege how much the plan paid in recordkeeping fees, instead arguing that he expects that the plan’s recordkeeping costs—once he has access to that information via discovery—will reflect imprudence by the fiduciaries. The suit argues that the true costs of the plan have been obscured by revenue sharing practices and the plan’s lack of clear fee reporting.

Moreover, the suit alleges that, based on the “facts available to Plaintiff—including that the Plan has retained the same recordkeepers over the course of the Class Period and does not clearly report fees—support an inference that Defendants failed to conduct RFPs at reasonable periods and otherwise failed adequately to explore whether the Plan could obtain more favorable rates in the recordkeeping marketplace, which is highly competitive and includes many firms capable of offering the same levels of service.”

‘Red Flags’?

The suit also claims that the defendants “ignored multiple red flags[iii] specific to TIAA and Fidelity, as detailed herein, further indicating they failed to monitor these service providers.” Indeed, they cite a “Senate Faculty committee composed of Northeastern professors” that they claim “recognized this very issue in early 2021, recommending action to replace several funds in the Plan, zeroing in on the Fidelity Freedom and TIAA Lifecycle funds.” A report that the suit claims “contains a detailed, sophisticated analysis of how Plan participants are shortchanged by the high-cost options made available to them.” The suit also claims that the report says that “plan participants are subject to expense ratios that are too high,” concluding, “the fact that we are not using the lowest expense ratio funds in the class, and in particular in the lifecycle/target date fund investments is problematic. It essentially means a good portion of our investments are going to these fund managers somewhat needlessly in a quiet hidden way.”

‘Replace’ Meants

As further anecdotal evidence, the suit notes that during the period in question, “…no options in the Plan saw a change in share classes, and only three (the Templeton Global Fund, TIAA-CREF Large Value Institutional, and TIAA-CREF Mid-Cap Growth Institutional) were removed and replaced.” That’s three funds out of nearly 70. 

The suit also said that, “Defendants failed to move the Plan into less expensive versions of options already in the Plan,” more specifically that “the Plan was invested in the ‘K’ share class for different Fidelity options, including the Fidelity Freedom Target Date Funds—the very funds identified in the 2021 faculty report,” though the plaintiff pointed to Fidelity’s own materials that he said established that the Plan qualified for K6 shares. “Defendants’ failure to make these funds available resulted in participants paying expense ratios over 30% higher in some instances.

“Defendants’ failure to take action had a profound impact on Plan participants,” the suit concludes, explaining that “the CREF Stock Account is the second-largest investment in the Plan, under either custodian, after the TIAA Traditional Annuity,” and that “nearly an eighth of the Plan’s total assets are invested in the CREF Stock Account. If any investment option merited close scrutiny, this was it.”

Ultimately, the suit claims that the Northeastern University defendants “failed to prudently and objectively monitor the Plan’s investments to ensure that each of the investments was and remained appropriate for the Plan. Defendants failed to remove those investments that were no longer appropriate. Defendants retained imprudent funds as Plan investments despite the availability of superior alternative investments that would have cost Plan participants significantly less and performed significantly better. Defendants failed to remove TIAA and Fidelity funds, and to investigate alternatives to them as recordkeepers, despite multiple, public red flags associated with each company.”

Will the court see these arguments as sufficiently “plausible” to go to the next level? We’ll see.

[i] The university’s mascot is a Siberian husky.

[ii] While the survey has been cited repeatedly in this type of lawsuit, some recent rulings have been critical of the limited sampling size and the lack of comparative plan data.

[iii] These include a 2019 decision in the Third Circuit that a suit “plausibly alleged” that the fiduciaries of the University of Pennsylvania’s retirement plans breached their fiduciary duties in part because their plan offered the TIAA Real Estate Account and the CREF Stock Account, and that a year earlier the District of Rhode Island “similarly concluded” that participants in Brown University’s retirement plan “stated a claim based on the underperformance and costly nature of the TIAA Real Estate Account and the CREF Stock Account.” Also cited were “a joint investigation by the Securities and Exchange Commission and New York’s Attorney General brought to light disturbing information about a TIAA subsidiary’s marketing practices” and a suit involving MIT’s retirement plan, which also held the Fidelity funds at issue in this filing.