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Hoyas Hit with 403(b) University Excessive Fee Suit

Georgetown University and two of its officers are the latest to find themselves in the crosshairs of an excessive fee suit.

The suit (Wilcox v. Georgetown Univ., D.D.C., No. 1:18-cv-00422), filed Feb. 23 in the U.S. District Court for the District of Columbia, alleges that rather than “…leveraging the Plans’ substantial bargaining power to benefit participants and beneficiaries, Defendants failed adequately to evaluate and monitor the Plans’ expenses and caused the Plans to pay unreasonable and excessive fees for investment and administrative services.”

‘Suit’ Able?

The plaintiffs, represented by Schneider Wallace Cottrell Konecky Wotkyns LLP and Berger & Montague, start by alleging that the defendants’ “first breach of duty here was to fail to select a suitable, single service provider to provide administrative and recordkeeping services to the Plans in exchange for a reasonable amount of compensation.”

They go on to charge that rather than negotiating a “separate, reasonable and fixed fee for recordkeeping with a single administrative provider,” the defendants “continuously retained” three different service providers: TIAA-CREF, Vanguard and Fidelity. The plaintiffs alleged that each “…supplied the Plans with a separate menu of investment choices including mutual fund share classes that charged higher fees than (i) other less expensive investment alternatives that offered the same investment strategies or (ii) less expensive share classes of the exact same investment fund, or (iii) both,” and did so via asset-based fees rather than participant-based fees. As a result, the suit claims, this meant that those fees “continued to increase as the value of their accounts increased through additional contributions and investment returns even though no additional services were being provided to Plaintiffs as their fees went up.”

From Dec. 31, 2009 to Dec. 31, 2014, the plans’ assets increased by 60% (from $1.26 billion to $2.02 billion), and “because revenue sharing payments are asset-based, the already excessive compensation paid to the Plans’ platform providers became even more excessive as the Plans’ assets grew (even though the administrative services provided to the Plans remained the same).”

‘Sheer’ Alike?

Not only that, what the plaintiffs termed the “sheer volume of three hundred total investment choices” (TIAA, approximately 40, Vanguard 90 and Fidelity roughly 190) “…indicates that Defendants failed properly to monitor and evaluate the historical performance and expense of each of these funds, compare that historical performance and expense to a peer group of funds and/or even compare the three segments against one another,” according to the plaintiffs.

Moreover, they went on to claim that making such a large menu of options available reflected an “attempt by Defendants as ERISA plan fiduciaries to insulate themselves from ERISA liability at the expense of participants in the Plans, including Plaintiffs,” since they “…are not likely to have the investment expertise and sophistication to build an appropriate asset allocation from the hundreds of available investment choices.”

The plaintiffs here, as in other 403(b) university suits, alleged that the TIAA loan program “(i) required excessive collateral as security for repayment of these loans, (ii) required an illegal transfer of plan assets to TIAA as collateral for the loan repayment when no such transfer is necessary or permitted, and (iii) violated DOL rules for retirement plan participant loan programs.” The suit also – as other such suits have previously – took issue with the presence of the CREF Stock Account on the plan menu, what they called “restrictive provisions” associated with its presence, and its underperformance. Additionally, the TIAA Real Estate Account came in for criticism for what plaintiffs alleged “has far greater fees than are reasonable, has historically underperformed and continues to consistently underperform comparable real estate investment alternative.”

‘Cavalier Attitude’

The plaintiffs also took issue with the fee disclosures to participants, noting that the reporting for the Vanguard funds did not appear to be accurate, and claimed that they could be off by as much as 12 basis points. “These rather extensive reporting errors demonstrate the cavalier attitude with which Defendants regarded their ERISA duties to give retirement investors like Plaintiffs accurate information about their retirement investments in the Plans,” the plaintiffs said. “But, even worse, if it turns out that the participant fee disclosure is correct, and that someone was padding the bill, and overcharging participants who chose the Vanguard funds or Fidelity funds, the University apparently did not know.”

The list of these lawsuits 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.