Another 403(b) Plan Slapped with Excessive Fee Suit

You might think that all the multi-billion plans in America had been sued – and you’d be wrong.

This time the target is the University of Vermont Medical Center – more specifically the practices alleged regarding its $1.76 billion 403(b) retirement plan. The suit was filed by participant-plaintiff Tyler Baker against the plan fiduciaries; the University of Vermont Medical Center, the Board of Trustees of The University of Vermont Medical Center during the Class Period and its members, and the DC Fiduciary Investment Committee. 

The suit (Baker v. The University of Vermont Medical Center Inc. et al., case number 2:23-cv-00087, in the U.S. District Court for the District of Vermont) claims that the fiduciary defendants “breached their duties by failing to: (1) calculate the amount the Plan was paying for recordkeeping through revenue sharing, (2) determine whether the recordkeeper's pricing was competitive, or (3) adequately leverage the Plan's size to reduce fees, among other things.”

Moreover, the suit alleges that, "As a direct and proximate result of the breaches of fiduciary duties alleged herein, the plan suffered millions of dollars of losses due to excessive costs and lower net investment returns. Had [UVMC] complied with their fiduciary obligations, the plan would not have suffered these losses, and the plan's participants would have had more money available to them for their retirement."

The law firms representing the plaintiff may be relatively new to our coverage (Russell Barr of Barr Law Group, Eric Lechtzin and Marc H. Edelson of Edelson Lechtzin LLP[i] and Michael C. McKay of McKay Law LLC), but the suit filed borrows liberally from the arguments made by many in this class of excessive fee litigation. One way it is different; it cites a 2023 Morningstar report as its basis for reasonable fees – claiming that plans with assets of $25 million on average pay 84 basis points, while plans with more than $500 million (like the plan in question) on average pay 40 basis points. 

Comparison ‘Shuns’

That is, however, not their sole point of comparison – they cite statements in a series of cases involving 403(b) plans, claiming that “numerous courts have upheld claims against fiduciaries of similar university

403(b) plans that a per-participant recordkeeping fee should be no more than $35 annually” – and then cite cases involving, among others NYU (mixed result), Brown University (settled, not adjudicated), Vanderbilt (settled, not adjudicated), University of Miami (settled, not adjudicated), Yale, California Institute of Technology, and USC (settled, not adjudicated) – though the citations don’t consistently represent an acknowledgement that the $35/participant is reasonable (in several cases their citation is simply to a different plaintiffs’ assertion of that standard, not a judicial acknowledgement).

Not that that was the only source – they also turned to the 2019 survey by NEPC (average $40/participant or less), the 2020 experience of the University of Chicago plan ($21-$44/participant), and Fidelity itself (which in litigation involving its own plan was said to have paid $14-$21/share).

This is all, of course, meant to stand in contrast to what the plaintiff here asserts are fees of “$54 per participant, and combined recordkeeping and other administrative fees of $108 per participant per year for all accounts with assets of $10,000 or more.” Though the suit cautions that this does NOT include “undisclosed indirect compensation Fidelity received from revenue sharing payments. Nor did the amounts disclosed in the Participant Fee Disclosures include compensation Fidelity obtained through Brokeragelink or float income, among other revenue streams.”

Speaking of Brokeragelink, the suit states that – as of December 3l, 2017 – “more than $47 million in Plan assets was invested in self-directed funds through Brokeragelink and an additional $4.2 million was held in Fidelity Brokeragelink's Money Market Fund. By December 31, 2021, more than $66 million in Plan assets was invested in self-directed funds through Brokeragelink and an additional $4 million was held in Fidelity Brokeragelink's Money Market Fund.” That plays into allegations that “Fidelity has received and continues to receive substantial additional compensation from Brokeragelink, but Defendants have failed to require that the Plan receive a credit for that compensation as an offset to Fidelity's recordkeeping fees.” Moreover, the suit asserts that “defendants imprudently failed to design or implement a process to evaluate or control the administrative expenses that the Plan's participants paid to Fidelity, and imprudently failed to analyze and evaluate compensation paid to Fidelity from investments through Brokeragelink.”

‘Outdated Legacy’

The suit also takes issue with the plan’s “outdated legacy” investment options, which it claims “were more expensive than comparable investments offered by the Plan,” specifically:

• The TIAA Traditional Annuity – which the suit says “has severe restrictions and penalties for withdrawal if participants wish to change their investments in the Plan.”
• The expense ratio of the CREF variable annuity accounts – which the suit says is “made up of multiple layers of expense charges” (which wind up looking like the same kind of expense ratios found in most mutual funds).
• The TIAA Real Estate Account – which the suit says also “is made up of multiple layers of expense charges.”

The suit goes on to state that the remaining TIAA-CREF funds – well, mutual funds – that, yes, charge varying amounts for investment management, “but also charge distribution, marketing, and other expenses, depending on the type of investment and share class.” Though how that differs from your typical expense ratio format isn’t clear – but the phrasing is almost certainly designed to create an inference of unreasonable fee “layering” – a focus that arises in other areas as well.

‘Reasonable Inferences?’

Now this plaintiff – as is typical for this litigation genre admits that he “did not have and does not have actual knowledge of the specifics of Defendants' decision-making process with respect to the Plan, including Defendants' processes (and execution of such) for selecting and monitoring the Plan's recordkeeper, because this information is solely within the possession of Defendants prior to discovery.”  However – again as is common – they assert that he “has drawn reasonable inferences regarding these processes…”

Among those “reasonable inferences – “while the Plan has stayed with the same recordkeeper over the course of the Class Period and paid the same relative amount in recordkeeping fees, there is nothing to suggest that Defendants conducted a RFP at reasonable intervals – or certainly at any time from 2016 through the present – to determine whether the Plan could obtain better recordkeeping and administrative fee pricing from other service providers given that the market for recordkeeping is highly competitive, with numerous vendors equally capable of providing a high-level service.”

The suit also hits the “usual suspects,” citing issues with:

• revenue-sharing (“although utilizing a revenue sharing approach is not per se imprudent, unchecked, it is extremely costly for Plan participants”); and
• practices with regard to float (“in 2021, roughly $340,000,000 was deposited or withdrawn from the Plan. Fidelity earned float income estimated to be at least $ 1 million in 2021 alone”).

Will the claims be sufficient to persuade the court to accept the (inevitable) motion to dismiss by the fiduciary defendants? 

Stay tuned.