Another university has been sued by plan participants for excessive fees and failing to fulfill its obligations as a fiduciary under ERISA.
The most recent case, Daugherty v. The University of Chicago (N.D. Ill., No. 1:17-cv-03736, complaint filed 5/18/17), seeks class action status for some 36,000 participants in plans at the University of Chicago (the University of Chicago Contributory Retirement Plan and the University of Chicago Retirement Income Plan for Employees), which have more than $3 billion in assets.
The suit, filed in federal court in Illinois by participants Winifred J. Daugherty, Gloria Jackson and Steven Millard, charges that rather than “leveraging the Plans’ substantial bargaining power to benefit participants and beneficiaries,” the plan fiduciaries “…failed to adequately investigate, examine, and understand the real cost to plan participants for administrative services, thereby causing the Plans and participant investors to pay grossly excessive and unreasonable fees for administrative services.”
The suit also claims that “…rather than negotiating separate, reasonable, and fixed fees for recordkeeping, Defendant continuously retained investment choices and share classes that charged higher fees than other less expensive share classes that were available for the same investment fund,” which resulted in plaintiffs paying “…an asset-based fee for administrative services that continued to increase with the increase in the value of a participant’s account even though no additional services were being provided.”
The plaintiffs also accuse the plan fiduciaries of retaining “certain investment options for the Plans that historically and consistently underperformed their benchmarks and charged excessive fees,” specifically the CREF Stock Account and TIAA Real Estate Account (which the suit claims is more than 10 times more expensive than the institutional share class of the Vanguard REIT Index).
As has been the case in previous university litigation, the suit cites a “dizzying array” of investment choices (here 35 TIAA-CREF and 87 Vanguard investment options, 70 of the latter of which are allegedly “retail” share classes), and challenges the approval of a TIAA loan program that “required excessive collateral as security for repayment of the loan, charged grossly excessive fees for administration of the loan, and violated U.S. Department of Labor rules for participant loan programs.” As has been cited in other university cases, the suit notes that this plan requires a participant to borrow from TIAA’s general account rather than from the participant’s own account, unlike the standard approach in many 401(k) plans.
“There is no rational basis for selecting institutional class shares for 17 of the investment choices and investor class shares for the remaining 70,” the plaintiffs note, going on to observe that, “if a selection of share class was intended to offset the cost of recordkeeping, it was an exceedingly poor decision. Even a cursory analysis of the financial statements for the Plans and the prospectuses for the TIAA-CREF funds would have demonstrated that Plan administrative expense incurred in connection with just the variable annuities, the Traditional Annuity and the Real Estate Account increased from $4.385 million in 2009 to nearly $6 million in 2014; an increase of 37%, despite the fact that participation in the Plans declined by 27% during that period.”
The plaintiffs note that “with an expense ratio of 88.5 bps as of May 1, 2016, the reasonable fact-finder could easily infer from the extraordinary amount assessed against the Plans for recordkeeping expense and distribution fees, the availability of Institutional class shares for all of the included Vanguard funds, and the abysmal performance of the CREF Stock Account and TIAA Real Estate Account together with the Real Estate Account’s exorbitant and unnecessary fees, that something must be wrong with the process by which the Defendant protects the interests of its faculty and employees,” before going on to note that “…there is substantial other evidence of administrative failure that corroborates that inference.”
The law firm of Schlichter, Bogard & Denton has filed several lawsuits against multibillion-dollar plans that have allegedly “allowed unreasonable expenses to be charged to participants for administration of the plans, and retained investments with excessive costs and poor performance compared to available alternatives,” including 403(b) plans at Cornell University, Northwestern University, Columbia University and the University of Southern California, as well as Emory University, Duke University, MIT, New York University and Yale.
However, the complaint against the University of Chicago was filed by Schneider Wallace Cottrell Konecky Wotkyns LLP and Berger & Montague.
