NYU Excessive Fee Suit Gets Failing Grade

Another 403(b) excessive fee suit has had its day in court — and walked away empty-handed.

This time it was a suit brought by participants in plans of New York University (NYU). It was one of the first excessive fee suits filed against university 403(b) plans by the law firm of Schlichter, Bogard & Denton in August 2016.

Case Background

The plaintiffs here alleged that the university, as employee retirement plan sponsors, breached their duties of loyalty and prudence under ERISA by “… causing plan participants to pay millions of dollars in unreasonable and excessive fees for recordkeeping, administrative, and investment services of the plans.” Moreover, that they breached their fiduciary duties by selecting and retaining numerous high-cost and poor-performing investment options compared to available alternatives, which they claim “substantially reduced the retirement assets of the employees and retirees.” They also charged that employees paid excessive recordkeeping fees in addition to selecting and imprudently retaining funds which the plaintiffs claim have historically underperformed for years, and raised a claim unique to the 403(b) suits that the use of multiple recordkeepers, rather than a single recordkeeper “… caused plan participants to pay duplicative, excessive, and unreasonable fees for plan recordkeeping services.”

The plaintiffs alleged that NYU’s imprudence resulted in losses totaling more than $358 million to the plans, which had over $4.6 billion in combined assets.

The ruling (Sacerdote v. N.Y. Univ., S.D.N.Y., No. 1:16-cv-06284-KBF, judgment 7/31/18), issued July 31 by Judge Katherine B. Forrest of the U.S. District Court for the Southern District of New York, found for the plan fiduciaries on every claim in the case, which went to trial in April for eight days.

Judge Forrest began by noting that to prove a breach of the duty of prudence, plaintiffs bear the burden of showing:

(1) that NYU failed to engage in a prudent process (here, with specific regard to how it monitored recordkeeping fees and certain investment options); and

(2) that, on an objective basis, such breaches led to plan losses.

That said, she concluded that the plaintiffs have “failed to carry their burden.”

‘Loss’ Leaning

In language that would be repeated throughout the ruling, she noted that “even if plaintiffs had established that NYU did not follow a prudent process in monitoring administrative fees and investments (which, as discussed below, they have failed to do), in order to be entitled to recover damages, the Plan(s) must have also suffered a causally related loss.”

On the issue of fees, she noted that ERISA does not dictate “any particular course of action” with regard to fees, but it does require a “fiduciary … to exercise care prudently and with diligence under the circumstances then prevailing.” But, she noted that, as with other ERISA claims, plaintiffs must show that demonstrated imprudence in fact “resulted in monetary loss.”

Not that there weren’t areas of concern. Judge Forrest noted that, during the trial, “certain witnesses testified that they — in effect — assumed that on financial issues (which constituted a significant portion of the Committee’s mandate), they could defer virtually entirely to Cammack for expertise and information and rely on its recommendations,” going on to bluntly state, “This is incorrect.” She explained that the hiring or appointment of a co-fiduciary does not relieve the original fiduciary of its independent duties, and that “no fiduciary may passively rely on information provided by a co-fiduciary,” and that a “fiduciary who delegates fiduciary responsibilities nonetheless retains a duty to exercise prudence” — a process that she likened to a “good old-fashioned ‘kicking the tires’ of the appointed fiduciary’s work…”. She went on to clarify that, “…the role of the advisor here — Cammack — does not now and never has entitled the Committee or its members to unthinkingly defer to Carmack’s expertise — even when Cammack was hired because it possessed expertise Committee members did not.” Rather, she said, in order to fulfill their duties, “…the Committee members must meaningfully probe Cammack’s advice and make informed but independent decisions.”

Judge Forrest also specifically called out Committee Co-Chair Margaret Meager, whose testimony was “concerning” to the court, in that she “…made it clear that she viewed her role as primarily concerned with scheduling, paper movement, and logistics,” and “…displayed a surprising lack of in-depth knowledge concerning the financial aspects of managing a multi-billion-dollar pension portfolio and a lack of true appreciation for the significance of her role as a fiduciary.”

Meagher’s deposition comments had been called out by plaintiffs in an amended complaint, but here the court noted that, “in a number of instances, she appeared to believe it was sufficient for her to have relied rather blindly on Cammack’s expertise,” going on to note, however, that, “As a matter of law, blind reliance is inappropriate.” The court was similarly distressed by the comments of Meagher’s supervisor (the “chief human resource executive for the NYU Langone Health System”) who, perhaps echoing the sentiments of many a human resources official, said that she had a “big job” and that being on the plan committee was just one of her many responsibilities. Moreover, Judge Forrest said that “this under-preparedness was not limited to just these two Committee members.”

That said, she noted that, “While the Court finds the level of involvement and seriousness with which several Committee members treated their fiduciary duty troubling, it does not find that this rose to a level of failure to fulfill fiduciary obligations. Between Cammack’s advice and the guidance of the more well-equipped Committee members (such as CIO Surh), the Court is persuaded that the Committee performed its role adequately.”

Indeed, one thing this committee did seem to have was process; Judge Forrest cited a series of meeting dates, and minutes, noting that Cammack’s reports were typically distributed to all Committee members one week before a meeting, and that the evidence at trial supported receipt and review of these reports by Committee members. Moreover, she noted that at those meetings, and prior to making final decisions, Committee members asked questions about the information Cammack provided and its recommendations. She also noted that those meetings “included discussions on topics that included review of investment options and performance, recordkeeping and other fees, overviews of fiduciary responsibility, streamlining the fund lineup, converting to lower-cost share classes, amendments to the Committee charter, reviews of the differences between certain annuity contracts and more recently available annuity offerings” — suggesting that the committee had reviewed and considered, even if they had not made changes that the plaintiffs alleged constituted a breach of their fiduciary duties.

Recordkeeper Review

Judge Forrest also found that the “evidence supports that during the Class Period, the Committee prudently managed its recordkeepers: it ran prudent RFP processes, was able to obtain lower fees for the Faculty Plan when consolidation was impractical, and it consolidated recordkeepers for the Medical Plan (and, in 2018, the Faculty Plan). In addition, plaintiffs have not proven that the allegedly imprudent actions/inactions resulted in losses.” Forrest explained that early on, “the Committee began discussing whether to consolidate recordkeepers, so that each Plan would have only one,” noting that, “consolidation may lead to lower recordkeeping fees. However, recordkeepers may offer a variety of collateral services to participants which also have value. Thus, any examination of fees needs to account for total value — that is, both recordkeeping and collateral services. Finally, when reviewing a recordkeeping vendor’s RFP response, a fiduciary needs to examine both fees, the services offered, and total value,” and in her determination, “the Committee performed this holistic review appropriately.”

With regard to the RFP process, Judge Forrest noted that, “over a period of several years, the Committee issued several RFPs regarding recordkeeping services,” and that while “plaintiffs have argued that the RFP process was generally and specifically infirm and inadequate. The Court finds otherwise.” Judge Forrest found good reasons for bidding out only part of plans’ asset bases at a time (TIAA had a majority of the plan’s assets, and there was evidence that only TIAA could recordkeep those particular annuity holdings). “The evidence at trial supports defendant’s contention that technical and other requirements prevented immediate consolidation of the Faculty Plan,” she wrote, and “under the circumstances, the Committee ran an appropriate RFP process both in terms of number and with regard to the asset base up for bid.”

Cammack Considerations

Judge Forrest was “not persuaded that the Committee was imprudent for failing to consolidate the Plans sooner” (Cammack had recommended doing so), and thus “does not view the existence of the Cammack recommendations, and any failure to follow those recommendations, as strong evidence of imprudence. Indeed, it demonstrates Committee decisionmaking independent of Cammack.” She went on to note that a “change in recordkeepers would entail significant coordination with and changes to the new systems being implemented; NYU believed any recordkeeper switch could not be completed without risk of significant errors or additional changes prior to completion of this global update of NYU’s systems and technology,” and that the record at trial “persuasively demonstrated that NYU had particular needs, a particular technological environment, and infrastructure that made the frequency of its RFP process during the Class Period adequate.” Moreover, she said that “plaintiffs ignore that over the course of several years, NYU’s recordkeeping fees consistently decreased as NYU obtained repeated rate reductions.

“While plaintiffs assert that the Committee did not negotiate fee reductions zealously enough, the record reflects a number of serious — and successful — efforts by the Committee to reduce recordkeeping fees,” Judge Forrest observed.

As for allegations that revenue-sharing was imprudent vis-à-vis a flat per-participant charge, here again she wrote that “the Court is also not persuaded, on the record here, that a flat rate would have been a more prudent way to collect fees than through revenue-sharing.” The plaintiffs’ expert witness acknowledged that as recently as 2010, 40-60% of big plans still used revenue-sharing models. “In all events, the trial record here reflects due consideration of the appropriate pros and cons and rejection of using a flat per-participant model,” she wrote, noting that “the Committee considered a number of issues related to paying for services on a flat per-participant basis, including whether they thought the arrangement would be fair, given that a participant with a large account balance might pay the same as a participant with a relatively small account.”

Judge Forrest also noted that while the plaintiffs asserted “that the Committee did not analyze fund performance on a regular basis and did not timely remove two funds in particular that allegedly underperformed,” and that “the Committee acted imprudently by allowing the Plans to include too many investment options,” she concluded that, “The evidence does not support these claims.” She noted that, “this acceptance of Cammack’s recommendations does not mean the Committee improperly deferred to Cammack; it could just as easily mean (and the Court views it as such) that Cammack’s recommendations also happened to be appropriate.”

Judge Forrest concluded, “For the reasons stated above, the Court finds in favor of defendant NYU on all claims. The Clerk of Court is directed to enter judgment for NYU, close all open motions in 16-cv-6284, and terminate the case.”

Add Your Comments

One Comment

  1. Marielle Moore
    Posted August 2, 2018 at 10:49 am | Permalink

    There is so much focus on fees on these university suits. What’s ignored is the generous contribution the plan sponsors make on behalf of their participants. Thats what really matters for retirement readiness.

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