Excessive Fee Suit Filed Against Another Ivy League 403(b)

Another “mega” university 403(b) plan finds itself in the excessive fee crosshairs of a participant-plaintiff suit.

The latest is a suit (Short v. Brown Univ., D.R.I., No. 1:17-cv-00318, complaint filed 7/6/17) brought by three participants (Diane G. Short, Judith Daviau and Joseph Barboza) individually and as representatives of a class of participants and beneficiaries of the Brown University Deferred Vesting Retirement Plan and the Brown University Legacy Retirement Plan.

The university maintained two 403(b) plans: the Legacy Retirement Plan for those hired before March 1, 2001, and the Deferred Vesting Retirement Plan for those hired after that date. According to the suit, the Legacy Retirement Plan had more than $1 billion in assets and 6,325 participants as of Dec. 31, 2014, and 4,535 participants as of Dec. 31, 2015; and the Deferred Vesting Retirement Plan had more than $244 million in assets as of Dec. 31, 2015, 8,054 participants as of Dec. 31, 2014, and 9,594 participants as of Dec. 31, 2015.

At a high level, the suit alleges – as have the vast majority of these excessive fee cases – that rather than “leveraging the Plans’ substantial bargaining power to benefit participants and beneficiaries, Defendant caused the Plans to pay unreasonable and excessive fees for investment and administrative services.” Also cited were the plan fiduciaries’ decisions to select and retain “investment options for the Plans that historically and consistently underperformed their benchmarks and charged excessive investment management fees.”

Indeed, the plaintiffs here, as have others in similar cases, allege 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 Plans for the same investment funds” – and that “as a result, Plaintiffs paid 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 suit alleges that Brown has contracted, since at least 2012, with two separate record keepers for one of its retirement plans – an “inefficient and costly” structure that plaintiffs say caused participants to pay duplicative, excessive and unreasonable fees for record keeping and administrative services. The suit claims that TIAA has received indirect compensation for record keeping and administrative services of $3.9 million from only three of its investment options, and that means that for the 13,000 participants in both plans, participants were paying an average of $300 annually for record keeping services.

Moreover (though without reference or citation), the plaintiffs state that “prudent fiduciaries of large defined contribution plans solicit competitive bids for the plan’s recordkeeping and administrative services at regular intervals of approximately five years.”

Flawed Process?

It’s not just the claims that are drawn from other lawsuits; this one also borrows language: “One could reasonably infer from these circumstances alone that the Defendant’s fiduciary decision-making process was either flawed or badly executed. However, the weight of the evidence demonstrates that there is a flawed process…”. In fairness, the firms representing the plaintiffs have previously filed similar actions (using similar, if not identical language) against Princeton and the University of Chicago.

That process, according to the plaintiffs, includes offering a “bewildering array” of 175 investment options through Fidelity Investments and offered an additional 24 investment options through TIAA-CREF, which included “numerous duplicative investment choices” (in this case specifically nine target-date retirement date funds offered by Fidelity Investments and nine TDFs offered by TIAA-CREF), while as of Dec. 31, 2015, the Legacy Retirement Plan offered at least 35 investment options through TIAA-CREF and offered at least 26 investment options through Fidelity Investments, which continued to include “numerous duplicative fund choices” (e.g., 12 target retirement date funds offered by Fidelity Investments and 11 target retirement date funds offered by TIAA-CREF, and nearly identical S&P 500 Index funds offered by both Fidelity Investments and Vanguard), while on or before Dec. 31, 2014, the Deferred Vesting Retirement Plan offered “a bewildering array of 177 investment options through Fidelity Investments and offered an additional 26 investment options through TIAA-CREF (including the allegedly duplicative TDFs from Fidelity and TIAA).

The suit also challenges the plan fiduciaries’ 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 loans.” Also cited were the TIAA Traditional Annuity, which the suit says “has severe restrictions and penalties for withdrawal if participants wish to change their investments in the Plans,” and the plans’ CREF Stock Account, CREF Money Market Account, CREF Inflation-Linked Bond Account, CREF Social Choice Account, CREF Bond Market Account, CREF Global Equities Account, CREF Growth Account and CREF Equity Index Account, which are variable annuities that the suit claims charges fees “made up of multiple layers of expense charges.”

The plaintiffs in this case are represented by Schneider Wallace Cottrell Konecky Wotkyns LLP, Berger & Montague P.C., and the Law Offices of Sonja L. Deyoe.

Other University Suits

If you’re having trouble keeping track of these suits, it’s no wonder. The list now includes plans at Cornell University, Northwestern University, Columbia University and the University of Southern California, as well as Emory UniversityDuke University, MIT, New York University and 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.

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