Excessive Fee Suit Targets TIAA Arrangement

A new excessive fee suit claims that participants in a university 403(b) plan have paid fees “close to 10 times what they should be.”

The latest in a series of suits brought against university 403(b) plans was brought against the University of Rochester Retirement Program by Christopher D’Amore on behalf of the more than 36,000 employees of the University of Rochester.

As all of the previous litigation has claimed, here the defendant university fiduciaries are alleged to have failed to take advantage of their size and clout as a “jumbo” plan to negotiate for “low-cost high-quality administrative services.” The plaintiff here notes that in addition, the defendants failed to “properly inform participants of the fees they were paying to TIAA as required by law, and most importantly, to act prudently with such information.”

‘Hit’ Mien

However, in language unusually personal for these actions, the suit (The case is D’Amore v. Univ. of Rochester, W.D.N.Y., No. 6:18-cv-06357, complaint filed 5/11/18) notes that plaintiff D’Amore was “hit especially hard” by the imprudent practices alleged, in that “it appears he has been paying more than $500 per year to TIAA in service fees when a reasonable fee for administrative services is no more than $50 per year.”

That, of course, is one participant’s experience. But the suit alleges that, “over the past six years, Plan participants have paid an estimated $72 million in in recordkeeping, distribution, and mortality risk fees” – an amount they claim is “…close to ten times what they should be.” Instead, the plaintiff alleges that a “reasonable” recordkeeping fee for the $4.2 billion, 36,000 participant Rochester plan would have been a fixed amount between $1.5 million and $1.9 million annually, but the suit claims that TIAA allegedly charged $10 million per year.

Asset ‘Biased’ Fees?

As for those fees, the plaintiff alleges that the reason “TIAA has been able to extract such grossly excessive fees is because TIAA’s fees are tethered not to any actual services it provides to the Plan, but rather, to a percentage of assets in the plan.” As have other similar lawsuits, this one takes issue with asset-based fees (the suit cites a commentator who likened this kind of fee arrangement to “hiring a plumber to fix a leaky gasket, but paying the plumber not on actual work provided but based on the amount of water that flows through the pipe”), but – while it embraces the notion of a reasonable fee for recordkeeping calculated on a per-participant fee – doesn’t insist on the fees being allocated to participants on that basis.

“The plan could reasonably determine that assessing the same fee to all participants would discourage participants with relatively small accounts from participating in the plan,” the suit notes, “and that, once the aggregate flat fee for the plan has been determined, a proportional asset-based charge would be best. In that case, the flat per-participant rate of $30 per participant multiplied by the number of participants would simply be converted to an asset-based charge, such that every participant pays the same percentage.”

The suit does take issue with revenue sharing, noting that “while not a per se violation of ERISA, can lead to massively excessive fees if not properly understood, monitored, and capped, as graphically demonstrated by the University’s Plan.” As for the reasonableness of the fee, the suit notes that “the only way to determine the true market price at a given time is to obtain competitive bids,” and proceeds to cite as examples the experience of “…several universities acting as prudent 403(b) fiduciaries have engaged in a comprehensive review of TIAA fees and made substantial changes to their 403(b) plans for the benefit of plan participants,” specifically, Loyola Marymount University (LMU), Pepperdine University, Purdue University, Notre Dame – all of which terminated their relationship with TIAA, and moved recordkeeping to other providers.

‘Just Ask’

In fact, the suit claims to be similar (but narrower in scope) to 18 separate lawsuits pending in federal district courts around the country. The plaintiff says that it “…appears TIAA exploited its rich heritage of being a non-profit low-cost financial service provider and duped universities into excessive fee arrangements,” but that now “university plan participants are fighting back and demanding TIAA reduce its fees.” Moreover the plaintiff states that TIAA appears “willing to meaningfully reduce its fees if universities will just ask,” noting that “shortly after the University of Chicago was sued, it announced to its plan participants that it renegotiated TIAA’s fees, and successfully reduced fees on an annual basis by several million dollars.”

The suit takes issue with how TIAA’s compensation is reflected on the plan’s Form 5500 (the firm’s “indirect compensation” was shown as “0” or “none”). The suit also alleged that TIAA’s “Plan Servicing Credit” – a return of administrative and recordkeeping fees charged by TIAA to participant accounts – was not only “troubling,” but “…tantamount to an admission that the amount TIAA receives for administrative services is excessive.” The plaintiff also took issue with the act that those Plan Servicing Credits are allocated based on participant account balances – because that meant that “…money will be credited to participants who did not actually pay fees,” a result that the suit claimed was “yet another glaring ERISA failure of prudence and process.”

Loan ‘Arranger’?

The plaintiff also took issue with TIAA’s loan process as operating “in clear violation of the prohibited transaction rules and the conditions for the regulatory exemption from those prohibited transaction rules regarding plan loans,” in that it required a participant to borrow from TIAA’s general account rather than from the participant’s own account. “In order to obtain the proceeds to make such a loan, TIAA requires each participant to transfer 110% of the amount of the loan from the participant’s chosen investments—in our example, Fund A, Fund B, and Fund C—to one of TIAA’s general account products as collateral securing repayment of the loan. The general account product pays a fixed rate of interest, currently guaranteed to be 3%.” Other suits have also challenged this approach, stating – as this one does – that TIAA’s “general account earns all of the interest paid on the loan, in contrast to the loan programs for virtually every other retirement plan in the country, where the loan is made from and repaid to the participant’s account and the participant earns all of the interest paid on the loan.”

The list of these 403(b) university lawsuits now includes plans at Cornell University, Northwestern University, Columbia University and the University of Southern California, as well as Yale and more recently Georgetown. Meanwhile, some of the earlier suits are just getting to hearings on motions to dismiss, specifically Emory University and Duke University — both of which are currently proceeding to trial – and the University of Pennsylvania, which recently prevailed in a similar case. Another – involving Princeton University’s 403(b) plans – is on hold awaiting an appeal in the University of Pennsylvania litigation.

While most have been filed to date on behalf of plaintiffs by Schlichter Bogard & Denton LLP – a variety of firms have entered this arena of litigation. Representing the plaintiffs in the Rochester suit is the Pittsburgh, Pennsylvania-based law firm of Carlson, Lynch Sweet Kilpela & Carpenter LLP.

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