The parties in one of the first university 403(b) excessive fee suits—by participant-plaintiffs represented by the Schlichter law firm—have unveiled the terms of a big settlement.
The suit, filed way back in August 2016, involved two plans sponsored by the University of Southern California (the University of Southern California Defined Contribution Retirement Plan and the University of Southern California Tax-Deferred Annuity Plan). The plans’ investments options were offered by four separate recordkeepers to the plans: TIAA-CREF, Vanguard, Fidelity and Prudential. With the exception of approximately 14 investment options, all investments were proprietary investments of these four recordkeepers.
Why the Suit
Prior to March 2016, the suit alleged that the plans offered more than 340 investment options, which included mutual funds, insurance pooled separate accounts, and insurance company fixed and variable annuity products. In March 2016, the USC plans made some changes, removing one of the recordkeepers for future contributions (Prudential), eliminating hundreds of mutual funds (cutting the menu to 34 funds), removing certain fixed and variable annuity investment options, and freezing contributions to certain other fixed and variable annuity investment options.
That said, the complaint notes that the defendants “continue to include high-priced investment options in the Plans, retain three recordkeepers, and continue to allow excessive recordkeeping fees to be charged to the Plans.” At the same time the plaintiffs claimed that as part of the communications about the changes to participants, “Defendants expressly acknowledged that the Plans’ multiple recordkeeper structure and hundreds of investment options caused the Plans to pay unreasonable recordkeeping and investment fees.”
The parties announced having come to terms about a month ago[i]. Now we know the terms of that agreement (though it still must be approved by the court):
First and perhaps foremost, the cash aspect of the settlement is $13,050,000 which, once certain fees and expenses are deducted, will be allocated to participant (including eligible former participant) accounts (Allen L. Munro et al. v. University of Southern California et al., case number 2:16-cv-06191, in the U.S. District Court for the Central District of California).
As for those fees and expenses, here the Class Counsel (the law firm of Schlichter Bogard & Denton LLP) “agree that they will not seek more than one-third of the Gross Settlement Amount (or $4,350,000). They also note that they “will seek reimbursement for all litigation costs and expenses advanced and carried by Class Counsel for the duration of this litigation, including the pre-litigation investigation period, not to exceed $1,500,000… (“which also shall be recovered from the Gross Settlement Amount”).
Also taken from the settlement amount—“an amount to be determined by the Court, but not to exceed $25,000 for each Class Representative (Allen Munro, Daniel Wheeler, Edward E. Vaynman, Jane Singleton, Sarah Wohlgemuth (neé Gleason) and Rebecca Snyder—with Dion Dickman, Corey Clark, and Steven Olson later added).
Beyond those cash terms, the settlement also calls for some changes in plan administration during a “settlement period” that “will extend for three years from the Settlement Effective Date…” Those terms include:
USC will instruct the then-current recordkeeper(s) of the Plans in writing within 60 calendar days of the Settlement Effective Date[ii] that, in performing contracted recordkeeping services with respect to the Plans, the recordkeeper shall not use information received as a result of providing the contracted services to the Plans and/or the Plans’ participants, to solicit the Plans’ current participants for the purpose of cross-selling non-Plan products and services,[iii] including but not limited to, Individual Retirement Accounts, non-Plan managed account services, life or disability insurance, investment products, and wealth management services, unless in response to a request by a Plan participant.
However, the agreement also states that “nothing in this provision shall preclude USC from authorizing a Plan vendor to provide retirement planning services related to the participant’s investments within the Plans and other assets identified by the participant.”
Within 180 days of the Settlement Effective Date, USC agrees to conduct a request for proposals for recordkeeping and administrative services, to be managed by its investment consultant. Those RFPs are to be extended to “at least three qualified service providers for administrative and recordkeeping services for the Plans, each of which should have experience providing recordkeeping and administrative services to plans of similar size and complexity.” The settlement further specifies that those requests for proposals “shall request that the service providers respond on the basis of different alternative recordkeeping structures, including (but need not be limited to) that of a single recordkeeping structure.”
The agreement continues that those RFPs “shall request that any proposal provided by a service provider for recordkeeping services to the Plans include (but need not be limited to) an expression of fees in a manner that is not based on a percentage of the Plans’ assets but on a total fixed fee and on a per-participant basis.”
And lest we forget a concern behind the suit, it goes on to note that “proposals regarding additional services beyond recordkeeping and administrative services need not be included within the responses to the requests for proposals described above.”
Finally, USC will agree to provide notice to Class Counsel of its decision resulting from the requests for proposals with 30 days of that decision. And—“if USC maintains the current three recordkeeper structure, it shall ask for each current recordkeeper to provide a per-participant fee or fee cap to evaluate against any asset-based fee arrangement.”
Beyond that, the settlement acknowledges that “USC will continue to provide annual training to the Plans’ fiduciaries regarding their fiduciary duties under ERISA,” will continue using a qualified investment consultant; and that the USC Retirement Plan Oversight Committee “will continue to meet consistent with the terms established in the Retirement Plan Oversight Committee Charter dated March 2, 2016.”
We’ll see what the court has to say on the subject(s).
[i] A lot happened between those two points in time. The USC defendants had argued that the workers had signed employment agreements that required them to first pursue arbitration—but U.S. District Judge Virginia A. Phillips held that the plans themselves needed to be party to those agreements to force that result. The Ninth Circuit subsequently affirmed that decision (July 2018), and though the USC defendants had petitioned for a hearing by the U.S. Supreme Court—that was declined early in 2019. Later that same year, Judge Phillips dismissed claims that the school failed to be loyal to plan participants, and that USC had violated ERISA's prohibited transactions provision by continuing to work with certain companies on retirement plan management. However, remaining claims were approved. The USC defendants unsuccessfully tried to challenge the class status (arguing that since all participants hadn’t been injured in the same way), but the court was not persuaded since the plans were centrally managed by USC—even if they invested in different funds, paid different recordkeeping fees or used the same recordkeeping services.
[ii] The agreement defines “Settlement Effective Date” as the date on which the Final Order has become final.