The excessive fee suit involving MIT has survived another round of summary judgment motions – and is headed to trial – but it will do so without testimony from Fidelity CEO Abby Johnson.
The plaintiffs in this case are five employees of Massachusetts Institute of Technology (MIT) and participants in the MIT Supplemental 401(k) Plan. The suit – filed back in August 2016 as one of the first to hit the university 403(b) sector– alleged that Fidelity was paid excessive compensation for its recordkeeping services, and that MIT never engaged in a competitive bidding process for those services – and, in a claim unique to these 403(b) excessive fee cases, the plaintiffs alleged that this amounted to an illicit kickback scheme whereby Fidelity received inflated fees at the expense of the plan’s participants in exchange for: (1) making donations to the MIT endowment, and (2) Fidelity CEO Abigail Johnson’s seat on MIT’s board of trustees.
In response to the original lawsuit, defendants had filed a motion to dismiss for failure to state a claim upon which relief can be granted, and on Aug. 31, 2017, Magistrate Judge Marianne B. Bowler entered a “Report and Recommendation” to dismiss, in part, aspects of that complaint – to which both parties filed objections. Roughly two months later District Court Judge Nathaniel M. Gorton decided to accept and adopt Magistrate Judge Bowler’s recommendation to dismiss the duty of loyalty claim but not the duty of prudence claim. He noted that while defendants had argued that ERISA does not require fiduciaries to seek competitive bids and that plaintiffs’ loyalty claim was “mere speculation.”
Fidelity ‘Bond’?
Then on August 5 of this year, the law firm of Schlichter Bogard & Denton, LLP, which represents the plaintiffs, filed papers opposing a motion by fiduciary defendants of the MIT Supplemental 401(k) Plan for a summary judgment in the suit initiated in 2016 as one of the first university excessive fee cases. Not only did they file papers, they also issued a press release drawing attention not only to the filing, but also to an allegation made in the initial suit – one that distinguishes it from the nearly two dozen such cases filed and fought over the past three years – that there was a quid pro quo between MIT and Fidelity, the plan’s recordkeeper, drawing a connection between the presence of Abigail Johnson, CEO of Fidelity, on MIT’s board of trustees, the retention of Fidelity as recordkeeper for the retirement plan, and a $5 million donation to MIT by Fidelity.
Following that release – and remembering that Fidelity is not a party to the suit – on August 19, Johnson and Fidelity filed a motion requesting a protective order “prohibiting Ms. Johnson from being subpoenaed because (i) Ms. Johnson has no relevant testimony to offer in this case, (ii) Plaintiffs’ effort to obtain Ms. Johnson’s trial testimony is a transparent attempt to harass Ms. Johnson and to attract media attention, and (iii) a Fidelity employee who does have broad knowledge regarding the facts at issue in this case is also listed on Plaintiffs’ witness list and will testify.”
In response, on August 29, the plaintiffs filed a motion opposing the motion for the protective order, claiming that Johnson’s motion was “illogically and incorrectly premised on unsupported allegations that Plaintiffs’ preliminary witness list shared only with Defendants was “a transparent attempt to harass [] Johnson and to attract media attention” – because, apparently, they haven’t yet issued a trial subpoena – “…so their intent could not have been to ‘harass’ Johnson.
With regard to the latter issue, a joint stipulation by the parties indicates that “to streamline the presentation of testimony and evidence to the Court,” and “after extensive negotiations, the matter has been resolved” – basically to “stipulate to certain facts that may be presented to the Court during trial,” and – as a result, have agreed to “remove Ms. Abigail P. Johnson from their witness list.”
(Another) Motion for Summary Judgment
Judge Nathaniel M. Gorton once again (Tracey v. Mass. Inst. of Tech., D. Mass., No. 1:16-cv-11620-NMG, 9/4/19) considered motions from the MIT defendants to grant summary judgment on the case. He noted that the plaintiffs assert that MIT’s process for evaluating investments was deficient and lacked due diligence in that defendants: (1) ignored relevant advice from consultants and outside counsel; (2) failed to institute a robust policy to monitor investment alternatives; and (3) before July, 2015, failed to make necessary changes to the Investment Window. On the other hand, Gorton stated that the defendants’ response was that their Investment Committee was “composed of a variety of MIT-affiliated economic experts who diligently executed their duties by 1) collecting data on the performance of the Investment Window, 2) maintaining a “watch-list” of potentially underperforming funds and 3) soliciting and duly considering independent advice.” Moreover, they claimed that the 2015 reorganization of the plan constituted “clear evidence of the Committee’s robust deliberative process and ability to implement logical adjustments.”
Ultimately Gorton denied the motion for summary judgment “because neither party has demonstrated as a matter of law that MIT did or did not act prudently,” concluding that “there are other genuine issues of material fact which preclude summary judgment,” and that “the debate over whether certain kinds of funds should have been included in the Plan is a material factual dispute that will be preserved for trial.”
Gorton was confronted with similarly contradictory testimony on the issue of fees – the plaintiffs’ alleging that MIT knew that Fidelity’s recordkeeping fees exceeded the industry standard and did nothing to reduce the fees, alongside MIT’s failure to solicit an RFP – the defendants submitting “contrary expert testimony that MIT’s fees were well within industry standard, especially when compared to similar university and corporate plans,” and pointing to a 2014 restructuring of Fidelity’s compensation to a yearly per-participant flat rate of $33 as “clear evidence that MIT took concrete steps to control recordkeeping fees” – not to mention that “ERISA does not rigidly require a fiduciary to submit bids for an RFP periodically because an RFP is just one of many ways to discharge its monitoring duty.”
Here to, Gorton noted that “the opinions of the parties’ experts as to the proper industry protocol and the amount of fees that should be considered reasonable are in stark contrast” and that “both parties also present competing narratives surrounding the decision not to conduct an RFP” – and that “because those disputes are more than superficial, the Court concludes that they are best resolved at trial.”
Ultimately, and “viewing the entire record in the light most favorable to the nonmoving party” (the standard for a summary judgment review), he again found “genuine issues of material fact” as to whether defendants breached their duty of prudence with respect to recordkeeping fees.
The MIT defendants did prevail on one point: the selection of mutual funds rather than a collective investment fund alternative. Judge Gorton wrote that the “plaintiffs have failed to proffer any concrete evidence of self-dealing or disloyal conduct,” and that he was “not convinced that plaintiffs’ non-mutual fund claims are more than conclusory.” In response to MIT’s expert testimony that the expense ratios of the Plan’s non-mutual fund options were comparable to or less expensive than fees of similar investments during the class period, Judge Gorton noted that the plaintiffs “offer no rebuttal and simply rejoin that the fees on the non-mutual fund options add to the already unreasonable recordkeeping and administrative fees alleged in Count II.”
“In short,” he wrote, “plaintiffs have proffered no evidence that the fees specific to the non-mutual fund options were unreasonable or not subject to the exception in § 1108(b)(8). Rather, their sole contention is that the subject non-mutual fund transactions contributed to the excessive administrative charges in Count II.”
That said, the plaintiffs’ claims regarding the failure to monitor other fiduciaries was also “preserved for trial” – now scheduled for September 16.
What This Means
Of the roughly 20 universities that have been sued over the fees and investment options in their retirement plans since 2016, there have been five announced settlements; the largest to date was Vanderbilt University, which in April 2019 announced a $14,500,000 cash settlement, as well as a long list of process/procedural changes that were also to be monitored over a three-year period, and the most recent was about a month ago with Johns Hopkins, which settled for $14,000,000, also alongside a number of plan design/procedural changes. In March, Brown University settled for $3.5 million, as well as “other, structural relief.” In May 2018, the University of Chicago entered into a class action settlement for a $6.5 million cash payment and changes to the university’s $3 billion plan, while earlier that year Duke University announced a $10.65 million settlement.
On the other hand, St. Louis-based Washington University, New York University and Northwestern University have thus far prevailed in making their cases in court. The University of Pennsylvania, which in 2017 won at the district court level, in 2019 had that decision partially overturned by an appellate court. The plan fiduciaries’ motion for an en banc review of that decision was rebuffed earlier this year.
As for this case, MIT’s efforts in pushing to set aside the suit have been consistent and persistent, but the pushback by the Schlichter-represented plaintiffs has arguably been extraordinarily aggressive, particularly on the unique (certainly to this litigation string) issue of the alleged quid pro quo between Fidelity and MIT. Up to this point, the arguments made by both sides appear to be equally compelling to Judge Gorton – it will be interesting to see what happens at trial (though a settlement just ahead of trial would not be uncommon in this arena).
