‘Friends’ File Briefs Backing University of Pennsylvania in Excessive Fee Appeal

The University of Pennsylvania defendants have gotten a lot of support from “friends” in the appeal of the first 403(b) excessive fee suit to come to trial.

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, had alleged three main things, specifically that:

  • the defendants breached their fiduciary duty by “locking in” plan investment options into two investment companies (Vanguard and TIAA);
  • 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.

That suit, one of 17 filed against university 403(b) plans since August 2016, was, however, dismissed by Judge Gene E.K. Pratter last September.

With an appeal pending, a number of organizations have filed “friend of the court” briefs (Sweda v. Univ. of Penn., 3d Cir., No. 17-03244, amicus briefs filed 4/12/18) in support of the University of Pennsylvania defendants in the case. Those briefs were recently filed by the U.S. Chamber of Commerce and the American Benefits Council, TIAA, and a consortium1 of higher education organizations, led by the American Council on Education “and other higher education associations,” though that hardly seems to do justice to the breadth of support. An amicus curiae is someone (not a party to the suit) who acts as a friend of the court by offering information, expertise or insight that has a bearing on the issues in the case.

The three filings largely take different perspectives on why the appeal of the district court’s decision should be dismissed. The education consortium mostly argues that the standards applied to 401(k) plans are inappropriate for 403(b)s, and that to do so is an “apples-to-oranges” comparison. The Chamber of Commerce/ABC largely challenges the appropriateness of holding fiduciaries responsible, with the benefits of 20/20 hindsight, for decisions that might later turn out to be more profitable, while the TIAA brief takes issue with the claims made about its products, service structure, and the reasonableness of the fees associated with both.

Education ‘Precedents’

Arguing that “the retirement system for higher education has always looked different than the system for industrial, corporate America,” a consortium of associations representing various aspects of the higher education system have lent their support to University of Pennsylvania defendants who are defending an appeal of the decision in their favor in an excessive fee case.

“Plaintiffs make no secret that they want to change the 403(b) market, to make it look more like the 401(k) market. But a claim for breach of fiduciary duty is not the right mechanism for their quest. For purposes of ERISA, Plaintiffs cannot state a claim for fiduciary breach by comparing apples and oranges,” argues the brief filed on behalf of a number of higher education-affiliated organizations.

The institutions noted that while corporate America preferred a system (the pension system) that incentivized a lifelong relationship between employers and their workers, “colleges and universities implemented a system of annuities that achieved a similar guarantee of lifelong income without hampering the movement of personnel that is essential to academic life.” Moreover, while companies embraced 401(k)s “to supplement weakened pensions” … they argue that “institutions of higher education had no reason to abandon the system that has, for generations, sustained academics after their teaching days have ended.”

“Plaintiffs’ expressed intent — to penalize universities for not offering 401(k) plans that typify the for-profit market — is sharply at odds with the obligations that underlie ERISA,” a standard that they argue in the university context, “…requires 403(b) fiduciaries to measure themselves by the conduct of fiduciaries to similar plans, not to measure themselves by the conduct of the cohort of 401(k) fiduciaries overseeing different types of plans,” they write.

Nor, they argue, is this an isolated case; “Plaintiffs did not file this lawsuit because the University of Pennsylvania is an outlier; they filed this lawsuit because the University of Pennsylvania acted in accordance with industry norms. Given that, similar lawsuits could no doubt be filed against a large number of institutions of higher education.”

Moreover, the friends here argued that “the copycat lawsuits that have been filed against other institutions of higher education have targeted individual faculty and staff members — sometimes more than a dozen of them — serving voluntarily on their university’s fiduciary committee,” and that, as a result of these suits, “…faculty members volunteering to serve on university committees to represent the interests of their cohort are being subjected to claims for hundreds of millions of dollars.”

“A system of freewheeling litigation — in which even standard industry practices can be challenged through years of onerous litigation — is anathema to the recruitment of a sound fiduciary committee.”

“In their efforts to state a claim, Plaintiffs-Appellants try comparing the investment options offered in the University of Pennsylvania’s 403(b) plan to the investments offered by the “average defined contribution” plan,” though “…a typical 403(b) plan for higher-education employees will bear little resemblance to the average defined contribution plan.”

“Plaintiffs’ challenge to the use of two recordkeepers — TIAA handled the plan participants’ annuities and Vanguard oversaw the plan participants’ investments in mutual funds — is a challenge to a practice that dominates the market for 403(b) retirement plans in higher education.”

The organizations articulate four reasons in support of the prevalence of annuities in 403(b) plans (68% of 403(b) retirement plans offer annuities among the plan investment options — and likely an even greater percentage of university 403(b) plans — only 6% of 401(k) plans do), going on to state that “…because annuities bring administrative and contractual complexities, the differences between 403(b) and 401(k) plans are pervasive.”

Citing the dozen or so cases that have been filed against university plans since 2016, the consortium’s brief notes that “the thrust of those nearly identical cases is that university 403(b) plans should look just like corporate 401(k) plans — and that the universities have violated ERISA by failing to offer plans following corporate norms.” However, the institutions argue that “retirement norms in higher education are quite different from the corporate world…”, by “providing generous employer contributions and investment arrays offering ample opportunities for long-term stability,” while “corporations have tended to favor systems that prioritize personal autonomy.” But, they allege, “ERISA does not require a one-size-fits-all approach to retirement.”

“If the flimsy allegations of Plaintiffs’ complaint — which rest on apples-to-oranges comparisons between 403(b) and 401(k) plans — are sufficient to state a claim for breach of fiduciary duty under ERISA, then there is no meaningful way for fiduciaries to protect themselves from being sued,” an outcome they say “…would discourage thoughtful individuals from serving as fiduciaries in the first instance, which would undermine the good governance that these Plaintiffs claim to be pursuing.”

However, the friends here argue that “University 403(b) plans do not present the same “circumstances” as corporate 401(k) plans — and they are not “enterprise[s] of a like character and with like aims.” Plaintiffs cannot paper over the historical and present-day differences between corporate and educational retirement plans to require that they all look alike.”

TIAA’s ‘Craft’

Although TIAA is not a party to this litigation, its amicus filing on April 12 noted that “…many of Plaintiffs’ claims rest on a misguided depiction of TIAA’s offerings and services,” and that it was filing “…to provide an accurate understanding about TIAA, its distinctive mission, and the nature of the products and services it offers. TIAA said it had a “vital interest in ensuring that the Court evaluate those claims in the proper context” – according to the filing, one that “contrary to Plaintiffs’ assertions, does not reduce the prudence of an investment option to a single factor, such as cost.”

The TIAA filing took issue with the plaintiff’s notions that the pairing of CREF Stock (which they claim offers the potential for higher returns) with TIAA Traditional (which they claim offers guaranteed stability) was a restriction, claiming instead that it was designed to provide participants with a choice – that no participant is required to invest in either or both, and that the “pairing arrangement” is part of TIAA’s integrated approach to secure lifetime income. Moreover, that “for academics who — more than other members of the universities’ defined contribution plans — move frequently among different institutions, having a choice in the annuity products is critical.”

TIAA also maintained that CREF Stock has a “track record of strong performance,” and that its fees were “reasonable.” TIAA also disputed the notion that recordkeeping was a “commodity service,” while asserting that the fees it paid for those services were, in fact, reasonable as well. They also challenged the claims regarding the Real Estate Account, claiming that the plaintiff compared it to an “inappropriate benchmarks,” and explaining that the expense ratios of the eight mutual funds of TIAA’s were “well within the range that this Court and others have deemed reasonable.”

As for the issue of asset-based versus per participant fees, the amicus filing notes that “It is not the case that per-participant fees are categorically more prudent for larger plans with sizable assets,” explaining that these are “simply different ways of paying for the services that participants receive,” and that “different arrangements may be suitable depending on the circumstances of the plan.” Citing the conclusion of the district court, TIAA notes that “a per-participant fee disproportionately disadvantages lower-income, lower-investment individuals.”

Chamber ‘Made’

The amicus brief filed by the U.S. Chamber of Commerce and the American Benefits Council begins by noting that in recent years, “…plaintiffs’ attorneys have filed dozens of ERISA class actions containing no allegations about the fiduciaries’ decision-making process and instead asking courts to infer an inadequate process from allegations that a plan underperformed for some (arbitrarily chosen) period of time.”

They note that the district court “…examined each of the factual allegations that Plaintiffs contend imply an imprudent fiduciary process, and concluded that Plaintiffs’ allegations did not plausibly suggest imprudence by the Plan.” Rather, the brief notes that that district court “…recognized that the inferences Plaintiffs asked it to draw were undermined by other allegations in Plaintiffs’ own complaint or documents incorporated by reference in the complaint.”

“At bottom,” they write, “Plaintiffs suggest that they should be able to unlock the doors to discovery simply by proffering, with the benefit of 20/20 hindsight, alternative fiduciary decisions that they believe could have been more profitable. Plaintiffs’ standard could be met in virtually any case, as a plan fiduciary always could have made some decision that would have proved more profitable; it is not possible to beat the market every time.” And allowing plaintiffs to plead claims against an ERISA fiduciary merely by alleging poor performance or by second-guessing a fiduciary’s discretionary choice among several reasonable options (citing Mertens v. Hewitt) “would impose high [fiduciary] costs upon persons who regularly deal with and offer advice to ERISA plans, and hence upon ERISA plans themselves.”

Will the appellate court consider these points in its determination? The plaintiffs in the case – represented by the law firm of Schlichter Bogard & Denton – has already responded.

  1. That consortium includes not only the American Council on Education (ACE) (which described itself as the major coordinating body for American higher education), and the American Association of State Colleges and Universities (AASCU) (which includes as members more than 400 public colleges), the Association of American Universities (AAU) (its members include 62 public and private research universities), the Association of Community College Trustees (ACCT) (a non-profit educational organization of governing boards, representing more than 6,500 elected and appointed trustees who govern over 1,100 community, technical, and junior colleges in the United States), the Association of Public and Land-grant Universities (a membership of 236 public research universities, land-grant institutions, state university systems, and affiliated organizations), the College and University Professional Association for Human Resources (which describes itself as “the voice of human resources in higher education,” representing more than 23,000 HR professionals at over 2,000 colleges and universities), the Council of Independent Colleges (CIC) (which represents 684 private, nonprofit liberal arts colleges and universities and 83 state councils and other higher education organizations), and the National Association of Independent Colleges and Universities (NAICU) (“the unified national voice of private, nonprofit higher education in the United States”).

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