Another day, another university retirement plan charged with imprudently permitting excessive fees to be charged to participants who were also subjected to imprudent investment options. This is not a repeat, though it certainly feels that way.
The suit, Nicolas v. Trs. of Princeton Univ. (D.N.J., No. 2:17-cv-03695, complaint filed 5/23/17), brought by plaintiff Elysee Nicolas individually and as representative of a class of participants and beneficiaries of the Princeton University Retirement Plan and the Princeton University Retirement Savings Plan, charges that the plan fiduciaries “…selected and retained as the Plans’ investment options investment funds and insurance company annuities that caused the Plans to incur far higher administrative fees and expenses relative to the size and complexity of the Plans.” The suit also alleges that the defendant “failed to engage in a prudent process for the evaluation and monitoring of amounts being charged for administrative expense, allowing the Plans to be charged an asset-based fee for recordkeeping calculated in a manner that was completely inconsistent with a reasonable fee for the service and was grossly excessive for the service being provided.”
Familiar Grounds
As have other university suits, this one takes issue with the selection of the Teachers Insurance and Annuity Association of America and College Retirement Equities Fund (TIAA-CREF), TIAA Traditional Annuity as the plan’s principal capital preservation fund, because they allege it prohibits participants from redirecting their investment in the Traditional Annuity into other investment choices during employment except in 10 annual installments, and limiting them from taking a lump sum distribution of the amount invested in the Traditional Annuity unless they pay a 2.5% surrender charge that the plaintiffs claim “bears no relationship to any reasonable risk or expense to which the fund is subject.”
Also, as has been common in such lawsuits, the plaintiffs claim that as a “jumbo” plan, the plan should have been able to negotiate a better deal, including the negotiation for recordkeeping services on a per participant basis rather than on asset-based fees. The plaintiff here claims, as have numerous other suits over the past 12 months, that the cost of recordkeeping and administrative services depends on the number of participants, not the asset balance of the plan or the amount of savings held in a participant’s account – and that otherwise “…as plan assets increase through participant contributions or investment gains, the recordkeeping revenue increases without any change in the services provided.”
This suit also mirrors common charges in the suits against these university plans that the defendants imprudently chose to use multiple recordkeepers (here TIAA-CREF and Vanguard), claiming that “the inefficient and costly structure maintained by Defendant has caused Plan participants to pay and continue to pay duplicative, excessive, and unreasonable fees for Plan recordkeeping and administrative services.” Moreover, the plaintiffs allege “there is no loyal or prudent reason for Defendant’s failure to engage in a process to reduce duplicative services and the fees charged to the Plan or to continue with two recordkeepers to the present.”
Recordkeeping Records
The suit claims that benchmarking data indicates that a “reasonable recordkeeping fee for the Plans would have been a fixed amount between $500,000 and $850,000 (approximately $35 per participant with an account balance),” and that the plans “paid at least hundreds of dollars per participant per year from 2010 to 2015 for recordkeeping; much higher than a reasonable fee for these services, resulting in millions of dollars in excessive recordkeeping fees each year.” The suit notes that in 2014 Princeton “finally negotiated an arrangement in which TIAA would credit the Plans with an amount by which revenue sharing payments received in connection with the Plans’ investment options exceeded a negotiated amount for recordkeeping expense” – and that “even after the $1.062 million aggregate “credit’ received by the Plans in 2014, the Plans still paid more than $300 per participant for recordkeeping.”
Indeed, the suit notes that from June 30, 2009 to June 30, 2015, the Plans’ assets increased more than 100%, but that “because revenue sharing payments are asset-based, the already excessive compensation paid to the Plans’ recordkeepers became even more excessive as the Plans’ assets grew, even though the administrative services provided to the Plans remained the same.”
Fund Failings?
The suit also challenges the selection and retention of investments in CREF Stock Account (which comprised more than 20% of the plans’ assets), as well as the TIAA Real Estate Account, which it says “has far greater fees than are reasonable (88.5 bps as of 12/31/15), has historically underperformed, and continues to consistently underperform comparable real estate investment alternatives.”
There was no allegation of a “dizzying array” of fund choices here, though the suit points out that the plans “offer more than forty investment choices managed by The Vanguard Group and/or Vanguard Fiduciary Trust Company.” They do, however, cite incorrect reporting on the participant fee disclosure prepared by TIAA of expense ratios for the available Vanguard funds, “making many of those funds appear more expensive than they really were.”
Still, the plaintiffs allege that, “It is well known in the defined contribution industry that plans with dozens of choices and multiple recordkeepers ‘fail’ based on two primary flaws,” overwhelming choices and that multi-recordkeeper platforms are “inefficient.” The former because people given too many choices lose confidence or make no decision; the latter because “it does not allow sponsors to leverage total plan assets and receive appropriate pricing based on aggregate assets.”
As for the ultimate amount of damages, while the suit alleges that the failure to properly evaluate the reasonableness of amounts being charged to the plans have caused plaintiff and the class millions of dollars in direct economic loss, “the Plans’ total losses will be determined after complete discovery in this case and are continuing.”
This suit – and another one just filed against the University of Chicago — were filed by Schneider Wallace Cottrell Konecky Wotkyns LLP and Berger & Montague PC.
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 University, Duke 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 now proceeding to trial.
