Arguments that plan design changes could result in “class conflicts” weren’t enough to brush aside the plaintiffs’ petition for class action status in an excessive fee case.
The suit – filed on behalf of plaintiffs against New York University in August 2016 by the law firm of Schlichter, Bogard & Denton – had sought, and has now been granted, class action status by federal Judge Katherine B. Forrest. It’s the first of its kind in the recent series of litigation challenging the retirement plans of prominent universities.
As has been the case in a long and growing list of university 403(b) plan lawsuits, here the plaintiffs alleged that employees paid excessive recordkeeping fees in addition to selecting and imprudently retaining funds which the plaintiffs claim have historically underperformed for years. Moreover, the complaints challenge the use of multiple recordkeepers, rather than a single recordkeeper — a practice that they claim “… caused plan participants to pay duplicative, excessive, and unreasonable fees for plan recordkeeping services.”
A little more than a year ago, the NYU fiduciaries were able to persuade the court to reject some allegations, notably that there were too many investment options in the plan. But claims regarding excessive recordkeeping fees and failure to prudently monitor plan investment options by continuing to offer funds with high fees and poor performance remained. Then in November came a new filing, expanded to include the university’s hospital system, school of medicine, the retirement plan committee and 21 named individuals. And then in January, a new, amended complaint was filed in the U.S. District Court for the Southern District of New York, with new grounds that include naming as a defendant Cammack LaRhette, which, according to the plaintiffs, has served as the plans’ investment advisor since 2009.
Under consideration here from the initial suit were claims related to an alleged breach of defendant's duty of prudence relating to:
- procedural deficiencies with regard to recordkeeping, administrative fees and revenue-sharing, and
- the defendant's decision-making process as to certain plan options.
Class Actions
In evaluating and ultimately accepting the plaintiffs’ petition as a class, District Judge Katherine B. Forrest noted (Sacerdote v. N.Y. Univ., 2018 BL 48095, S.D.N.Y., No. 1:16-cv-06284-KBF, order granting class certification 2/13/18) that the defendants put forth three arguments in support of their assertion that the named plaintiffs are not adequate representatives. First, NYU argued that the plaintiffs’ proposal of a per-participant recordkeeping fee rather than the asset-based/revenue-sharing system utilized would result in “class conflicts,” specifically that members of the class with lower salaries than the named plaintiffs might not benefit from this type of payment structure, since “$30 (or some other flat fee) might be more than they would pay in a revenue-sharing arrangement.” However, Judge Forrest said that the proposed structure didn’t have to result in every participant paying the same fee. “Instead, the fiduciary could implement a ‘proportional asset-based charge,’ for which each participant pays the same percentage of his or her account balance,” she wrote, concluding that the proposal “…as one of several ways to bring the Plans into compliance with ERISA does not, in and of itself, create a conflict between the named plaintiffs and other class members…” More than that, she concluded that “…in any case, this speculation on the part of NYU does not defeat adequacy, as it does not present a ‘fundamental’ conflict.”
The defendants also argued that removing the allegedly imprudent CREF Stock and TIAA Real Estate Accounts from the plans would create class conflicts because some participants would be hurt by the funds’ removal. Judge Forrest wrote that NYU argued that: (1) those funds are important for diversification, as they offer some features that other funds do not; and (2) the CREF Stock and TIAA Real Estate Accounts had strong returns at different points in time, and the variance in performance was beneficial for some participants. “That may well be the case,” she wrote, “but those arguments go to the merits of the funds’ inclusion in the Plans and whether or not they were prudent inclusions. If, in fact, plaintiffs are correct that the inclusion of these funds was a breach of the duty of prudence, then no plan participant would have a legal interest in continuing to invest in a plan that was adjudged imprudent.”
Finally, she that wrote NYU’s claims that the named plaintiffs are inadequate representatives because they are unaware of the facts underlying the dispute. Judge Forrest said that NYU relied on deposition testimony to demonstrate that a number of the named plaintiffs do not know what their investments are or how they have performed, what revenue sharing is and whether NYU attempted to negotiate fees – relying instead on counsel for information.
Adequacy Arguments
She then turned to an examination of the requirements for adequacy of representation, specifically a determination as to whether: (1) plaintiff's interests are antagonistic to the interest of other members of the class; and (2) plaintiff's attorneys “are qualified, experienced and able to conduct the litigation.” Moreover, she noted that the U.S. Supreme Court has “expressly disapproved of attacks on the adequacy of a class representative based on the representative's ignorance,” going on to state that plaintiffs are entitled to rely on their counsel for advice, and that “as long as the class representatives ‘fairly and adequately protect the interests of the class,’ adequacy is satisfied.”
Judge Forrest concluded by noting that the defendant had not alleged that class counsel are unqualified or are subject to a conflict of interest, nor had they claimed that the named plaintiffs' interests are antagonistic to those of other class members. “They rely merely on an allegation that the named plaintiffs are uninformed,” she wrote, going on to state “This is not enough to defeat class certification.”
“Plaintiffs here are similarly reliant on their attorneys for advice, but they have shown the necessary comprehension of their role and willingness to pursue litigation vigorously. This is all that Rule 23(a) requires,” Forrest wrote.
Standing Told
With regard to the issue of standing, while NYU had argued that the plaintiffs had not established standing for the individuals in the proposed class “because not every member of the class invested in those funds.” However, Forrest noted that “the class does not have to be limited to only those who invested in these options,” and that an injury to the plans was sufficient.
Finally, on the issue of a statute of limitations, NYU had argued that if any plaintiff had actual knowledge of the facts giving rise to the alleged breach three years before the complaint was filed that claim would be barred – a claim that Judge Forrest said rests on the proposition that because quarterly performance summaries disclosed the fees and expenses associated with the investment alternatives, some class members may have had actual knowledge of the underlying facts.
“However, this claim is speculative,” she wrote, going on to explain that “no evidence is put forth of even one instance of a class member having knowledge three years prior to August 9, 2013,” and that “mere receipt of the quarterly performance summaries does not demonstrate actual knowledge.” She went on to distinguish “plan-wide communications required by ERISA” from “individualized conversations or notifications.”
Judge Forrest explained that a common question to the class is whether the facts in those documents are sufficient to establish actual knowledge of the breach. “It will not be an individualized inquiry,” she wrote. “As such, this defense is not sufficient to defeat the motion for class certification.”
The list of these lawsuits now includes plans at Cornell University, Northwestern University, Columbia University and the University of Southern California, as well as Yale. 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.
