The terms of an excessive fee settlement are not only the largest to date – once again, they’re about more than money.
The suit – brought by five employees of Massachusetts Institute of Technology (MIT) and participants in the MIT Supplemental 401(k) Plan – was filed back in August 2016 as one of the first to hit the university 403(b) sector. The suit followed grounds common to this litigation – alleging that the plan fiduciaries made decisions that cost participants more than was prudent. Here, however, there was a different element, and one that has not been made to date.
Specifically that those “excessive” payments to the plan recordkeeper (Fidelity) not only occurred because MIT never engaged in a competitive bidding process for those services – but that this was, in effect, 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 (the allegations regarding Johnson’s ties to MIT and the potential influence were rejected by the court in 2017).
Cash Cache
The cash component of the settlement – $18,100,000 – is the largest to date of the university 403(b) excessive fee suits, and from that amount will be paid:
- $100,000 to Analytics Consulting LLC to provide notices electronically for those class members for whom a current e-mail address is available and by first-class mail to the current or last known address of all class members for whom there is no current email address;
- $25,000 each for each of the named plaintiffs in the case; and
- $6,032,730, as well as reimbursement for costs incurred of no more than $525,000 for plaintiffs’ counsel.
More Than Money
But, as been the case in other 403(b) university suits (notably one involving Vanderbilt University earlier this year), the settlement includes a number of non-monetary components as well, including:
- Annual training for the plan fiduciaries on prudent practices under ERISA, loyal practices under ERISA, and proper decision making in the exclusive best interests of plan participants.
- A request for proposal (RFP) for recordkeeping and administrative services for the plan – to be issued no later than 120 days from the settlement effective date, subject to the following conditions: made to “at least three qualified service providers for administrative and recordkeeping services for the investment options in the Plan, each of which has experience providing recordkeeping and administrative services to plans of similar size and complexity.” The RFP is to solicit recordkeeping services which does not “express fees based on percentage of Plan assets and be on a per-participant basis.”
- Deposit revenue sharing related to plan investments (if any) to the plan trust, and – to the extent not seasonably used to defray lawful plan expenses – be “returned to Plan participants according to a method of allocation approved by Plan fiduciaries and permitted by ERISA no less frequently than on an annual basis.”
- Determine a method of allocating recordkeeping and administrative expenses that the plan fiduciaries determine is “fair, equitable, and appropriate for Plan participants” – separate from the flat fee negotiated with the recordkeeper, and “based on the number of Plan participants.”
Other Terms
Now, during the Settlement Period, the agreement states that MIT and the Plan’s fiduciaries “shall continue their current practice of allowing the Plan’s recordkeeper to communicate with current Plan participants (in their capacities as such) only at the direction or with the authorization of Plan officials,” prohibiting “any communications to Plan participants (in their capacities as such) concerning non-Plan products and services (those services include, but are not limited to, Individual Retirement Accounts, life or disability insurance, non-Plan investment products, and wealth management services).” However, the settlement also acknowledges that “the Plan’s recordkeeper may address non-Plan products and services in response to a request for information initiated by a Plan participant.”
Once MIT has picked a recordkeeper based on the RFP process, MIT is to provide to plaintiffs’ counsel the final bid amounts that were submitted in response to the request for proposal (without identifying the recordkeepers who submitted those bids), shall identify the selected recordkeeper, and shall (if then available) disclose the final agreed-upon contract for recordkeeping services (and if not available to forward within 30 days of execution). The settlement also says that MIT “shall provide Class Counsel the current recordkeeping contract for the Plan, to the extent not previously furnished in discovery,” though all such materials are to be kept confidential.
While they have opted to settle, the MIT defendants “dispute these allegations, deny liability for any alleged fiduciary breach, and contend that the Plan has been managed, operated, and administered at all relevant times in compliance with ERISA and applicable regulations.” That said, “after extensive arm’s length negotiations with assistance of a nationally recognized ERISA mediator, the parties reached a settlement that provides meaningful monetary and non-monetary relief to class members.” In light of the litigation risks further prosecution of the actions would inevitably entail,” the settlement requests that the Court: (1) preliminarily approve the proposed settlement, (2) approve the proposed form and method of notice to the Settlement Class; and (3) schedule a hearing at which the Court will consider final approval of the Settlement.
Other Cases
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 prior to this was with 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.
What This Means
This is the second of these settlements to not only impose specific requirement with regard to the selection of a recordkeeper, but with regard to how that provider quotes its services (per participant, rather than asset-based) – and also with regard to its interactions with participants on matters outside the operation of the plan itself. Thus far, we’ve only seen that be part of settlement with the Schlichter law firm. But considering how recordkeepers have long aspired to be able to leverage their position with participants to expand the relationship, it will be interesting to see how – or if – these kind of terms take root as part of general practice.
