The terms of a 403(b) excessive fee suit have come to light—and it includes some “therapeutic or structural relief.”
The proposed settlement (it must still be approved by the court) has been struck between the fiduciaries of the Princeton University based on a suit filed nearly three years ago by plaintiff Elysee Nicolas individually and as representative of a class of participants and beneficiaries of the Princeton University Retirement Plan and the Princeton University Retirement Savings Plan. The suit alleged that the plan fiduciaries “…selected and retained as the Plans’ investment options investment funds and insurance company annuities that caused the Plans to incur far higher administrative fees and expenses relative to the size and complexity of the Plans.”
The suit also alleged that the defendant “failed to engage in a prudent process for the evaluation and monitoring of amounts being charged for administrative expense, allowing the Plans to be charged an asset-based fee for recordkeeping calculated in a manner that was completely inconsistent with a reasonable fee for the service and was grossly excessive for the service being provided,” as well as other issues.[i]
As for that settlement, the university agreed to pay $5.8 million in cash. More specifically, under the terms of the Settlement Agreement (Nicolas v. Trs. of Princeton Univ., D.N.J., No. 3:17-cv-03695, motion for preliminary settlement approval 7/28/20), within fifteen (15) business days after the Court enters a Preliminary Approval Order, the University will pay $100,000 of the Settlement Amount to an account identified by Class Counsel to cover the initial Settlement Administrative Expenses, including the costs of sending Notice to the Settlement Class, and within 15 business days after complete settlement approval to deposit the rest into that Settlement Account.
Therapeutic Relief
As for that “therapeutic” relief, under the terms of the settlement, Princeton agrees:
- that it will not increase the Plans’ recordkeeping fees for a period three (3) years from the date of entry of the signing of the Settlement Agreement, and will use “commercially reasonable best efforts” to continue to attempt to reduce recordkeeping fees;
- to conduct a Request for Proposal process for recordkeeping-administrative services and outside independent investment consulting services to the Plans;
- by the date of the Complete Settlement Approval, Defendant’s Benefits Committee and Investment Committee will amend their respective charter and/or operating documents, to the extent necessary, to adopt and follow best practices for 403(b) plans, as described by the Plans’ current independent investment consultant;
- for a period of five years following Complete Settlement Approval, Defendant’s Investment Committee will meet not less than four times per year with the Plans’ current independent investment consultant to evaluate expense and performance of each investment option in the Plans, to review and consider changes to the investment option line-up, to review Plan costs and expenses, and to investigate and pursue further strategies to reduce Plan costs, and report results to the Benefits Committee;
- for a period of five years following Complete Settlement Approval, Princeton’s Benefits Committee will meet with the Investment Committee and the independent investment consultant once a year to evaluate the expense and performance of each investment option in the Plans, to review and consider changes to the investment option line-up, to review administrative and recordkeeping costs of the Plans, and to investigate and pursue further strategies to reduce Plan costs;
- by July 2020, Princeton will review the TIAA collateralized loan program with, but not limited to, its independent investment consultant and Plans’ counsel, terminating and replacing that loan program by March 2021, if not sooner, if it is found that it should be replaced based on that review or if TIAA ceases to offer it;
- Princeton’s current independent investment consultant will continue to evaluate the CREF Stock Account and the TIAA Real Estate Account to determine whether they continue to be appropriate investment options in the Plans; and
- Princeton will “correct the Plans’ disclosures to Plan participants and beneficiaries to identify the CREF Stock Account as an investment that invests in U.S. and non-U.S. equities following Complete Settlement Approval.”
Other Elements
The settlement agreement also calls for:
- a Plaintiff’s incentive/service award (to be paid from the settlement amount) not to exceed $7,500; and
- Class Counsel to “petition the Court for an award of attorney’s fees not to exceed one-third (1/3) of the Settlement Amount, plus costs.”
Finally, in an interesting development, for the members of the Settlement Class who no longer have an account in the plans as of the time of distribution, the distribution will be made via a tax-qualified distribution process, which will transfer those funds to Retirement Clearinghouse LLC[ii]—to be deposited into safe-harbor automatic rollover individual retirement accounts. It was the second of these excessive fee suits that Retirement Clearinghouse LLC supported, following Brown University.
College ‘Courses’
For those tracking these suits, of the roughly 20 universities that have been sued over the fees and investment options in their retirement plans since 2016, there have been eight (now nine with Princeton) announced settlements; the largest to date with MIT, for $18.1 million, and prior to that 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, as with the MIT settlement, also to be monitored over a three-year period.
Nearly a year ago Johns Hopkins 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.
[i]Consistent with similar suits, the plaintiffs here also took issue with the selection of the Teachers Insurance and Annuity Association of America and College Retirement Equities Fund (TIAA-CREF), TIAA Traditional Annuity as the plan’s principal capital preservation fund, as well as the CREF Stock Account (which comprised more than 20% of the plans’ assets), and the TIAA Real Estate Account, asserts that as a “jumbo” plan, the plan should have been able to negotiate a better deal, including the negotiation for recordkeeping services on a per participant basis rather than on asset-based fees, and their decision to use multiple recordkeepers (here TIAA-CREF and Vanguard), claiming that “the inefficient and costly structure maintained by Defendant has caused Plan participants to pay and continue to pay duplicative, excessive, and unreasonable fees for Plan recordkeeping and administrative services.”
[ii]A year ago, the Department of Labor approved the Retirement Clearinghouse’s request for relief from ERISA’s prohibited transaction restrictions to receive fees in relation to its pioneering auto-portability program. Their auto-portability program was recently adopted by Alight.
