Skip to main content

You are here


University of Pennsylvania Prevails in 403(b) Excessive Fee Suit

An excessive fee suit that had challenged the number of funds on the menu, the use of multiple recordkeepers, and the embrace of asset-based, rather than per-participant fees (among other things) has been dismissed.

The suit, brought by participants in the $3.8 billion University of Pennsylvania Matching Plan against the University of Pennsylvania and its Vice President of Human Resources a little more than a year ago for breach of their fiduciary obligations under ERISA, alleges three main things, specifically that:

  • the defendants breached their fiduciary duty by “locking in” plan investment options into two investment companies;

  • the administrative services and fees were unreasonably high due to the defendants’ failure to seek competitive bids to decrease administrative costs; and

  • the fiduciaries charged unnecessary fees while the portfolio underperformed.

In her ruling (Sweda v. Univ. of Penn., E.D. Pa., No. 2:16-cv-04329-GEKP, 9/21/17), Judge Gene E.K. Pratter started by outlining the historic differences in structure and approach in 403(b) plans and 401(k)s, noting that those “…salient differences resulted in different management and fiduciary requirements, since the duties by a fiduciary to an annuity contract differs dramatically from the duties of a fiduciary managing mutual funds,” but that “today, the fiduciary requirements by § 403(b) plan administrators are nearly identical to those requirements for § 401(k) administrators, especially with respect to their duties to plan beneficiaries.”

‘Locking’ Levers

After outlining the way that plan administration is structured, Judge Pratter examined the challenge that plan fiduciaries breached their fiduciary duties by the restrictive nature of the contract with the plan providers, TIAA CREF (now TIAA) and Vanguard. The “only fact that the plaintiffs have pled is that the defendants ‘locked in’ the Plan to TIAA CREF,” Judge Pratter wrote, but noted that this, “standing alone, is insufficient to create a plausible inference that this was a breach of fiduciary duty,” since “locking in rates and plans is a common practice used across the business and personal world.” Indeed, Judge Pratter noted that “often times, locking in a plan for a stated period is better for all sides because customers save money with the discount offered by the company, and companies save money by eliminating the costs associated with customer acquisition while having an arguably reliable income stream to rely on.”

Judge Pratter then turned to the plaintiffs’ claim that the defendants “allowed TIAA-CREF and Vanguard to charge unreasonable administrative fees,” by both allowing them to operate as their own recordkeepers, and by charging a flat per-person fee rather than an “asset-based” fee.

Here again, Judge Pratter cited the logic of bundling as a rational decision – but rather than applying it to the decision to hire two recordkeepers (rather than one), she wrote that “it is rational to comply with Vanguard’s requirement that they serve as recordkeeper if that is required to gain access to the desired Vanguard portfolio.” Even if that were not true, she wrote, “the argument also fails as a factual matter because there is a reasonable range of investment options with a variety of risk profiles and fee rates.” And even if there were cheaper options available, he noted that “ERISA mandates that fiduciaries consider options besides cost.”

Cheap, ‘Shot’

As for the asset-based versus per-participant charges, Judge Pratter described this as “a pure question of where the burden of recordkeeping costs should be placed – a question open to the discretion of a reasonable plan administrator.” She went on to note that “plan administrators are fiduciaries to every plan member, whether she invests $10 or $10 million,” and that it was “…not up to courts to second-guess how fiduciaries allocate that cost, only that the fiduciary discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries as a whole.” Ultimately, she noted that “plaintiffs need something more than a claim that there may be (or even are) cheaper options available.”

Judge Pratter then proceeded to narrow what she described as “a litany of costly measures that they (the plaintiffs) claim amount to a breach of fiduciary duty, including unnecessary fees, duplicative investments, retention of higher cost funds, retention of underperforming funds, and poor performance relative to the market” to three: (1) unnecessary fees, (2) participant confusion, and (3) poor market performance.

Once again, Pratter looked at the full range of investments in the plan, and said that the “majority of these ‘excessive fee’ arguments fail to state a claim because the mix and range of fee options included fees as low as 0.04%, which neither side claims is excessive.” She acknowledged that the strongest argument advanced was that the plan contained “retail class” shares, rather than institutional – but once again looked at the whole menu, noting that nearly half of the shares (37 of 78) are “already these lower-fee funds,” and that “plaintiffs’ argument also ignores that these institutional class shares would only be available if significantly more money were funneled into each of them.”

Instead, Pratter cautioned that “switching from retail to institutional shares is not a matter of checking a different box,” noting that sometimes institutional shares are unavailable as an option because investment levels are too low in that fund, and that sometimes while retail funds allow daily transfers, where participants can withdraw money without fees, “[i]nstitutional trusts and pools do not offer that choice.” She noted that “…plaintiffs here have not pled that these reductions in expenses could be achieved without changing the variety of benefits to participants,” that they have “…only pled that the failure to replace these shares was a breach of fiduciary duty, which is insufficient…”

Regarding claims of a breach of fiduciary duty, Judge Pratter turned to the decision in Renfro v. Unisys Corp. where the court concluded that in light of the available options (73 investments with fees ranging from 0.10% to 1.21%), the plaintiffs had “provided nothing more than conclusory assertions” of fiduciary breach and affirmed dismissal. “This standard stops plan participants from second-guessing a plan fiduciary’s investment decisions just because they lose money, while allowing plan participants latitude to bring suit for improper management,” Pratter wrote. “They must show systemic mismanagement such that individuals are presented with a Hobson’s choice between a poorly-performing § 401(k) portfolio or no § 401(k) at all,” she said. Not that she saw that as precluding a suit by either “alleging insufficient choice, that all (or the vast majority of) options breach the fiduciary duty, an insufficient variety among the range of options, or a kickback scheme where the fiduciaries directly benefit at the expense of plan participants.”

‘Dizzying’ Denied

As to the “dizzying array” of investment options having contributed to some kind of decision paralysis, Judge Pratter was similarly unsympathetic. “The plaintiffs have not alleged any participant who was confused by the different options, an omission that on its own causes the amended complaint to fail to state a factual basis for the claim,” Pratter wrote. She also cited the plan’s segregation of options into four categories based on the participants’ investment acumen as a helpful step. “Offering 78 different choices is not an unreasonably high number, especially with the tiered descriptive guidance given to participants,” she said, concluding that “providing 78 different investment options satisfies the ‘reasonable mix and range of investment options’ required by Renfro without being unduly overwhelming.” Those “duplicative” fund offerings? Pratter said they were “necessary based on the structure of the Plan.” Indeed, she said that if there were no overlap, “there could be greater cause for criticism or frustration.”

As for the notion that “select funds were outperformed by the rest of the market,” Pratter said that the “Plan administrator deserves discretion to the extent its ex ante investment choices were reasonable given what it knew at the time,” and that “chagrin does not inexorably become a cause of action.”

Finally, the theory that the contractual arrangement with TIAA-CREF and Vanguard constituted a prohibited transaction, “This cannot be correct,” Pratter said. “The transactions at issue here were not done ‘to benefit other parties at the expense of the plans’ participants and beneficiaries’ but were simply operating expenses necessary to operate the plan on behalf of the plan.” Pratter said that there must be a “subjective intent to benefit a party in interest,” describing the plaintiffs’ arguments here as constituting an attempt to “shoehorn their fiduciary duty claims into the prohibited transaction provision.”

And granted the university’s motion to dismiss.