August 11, 2016
Three lawsuits filed in early August suggest that plaintiffs’ law firms, representing employees of colleges and universities, are looking at higher education retirement plans as potential targets for lawsuits seeking millions of dollars in damages. The New York Times reported that class action lawsuits were commenced on August 9, 2016 against three prominent universities – New York University, Yale, and the Massachusetts Institute of Technology – alleging that the schools had allowed their employees to be charged excessive fees on their retirement savings. The law firm bringing the lawsuits – Schlichter Bogard & Denton – has already brought and settled many similar lawsuits against companies such as Lockheed Martin, Boeing, and Novant Health, for amounts in the tens of millions of dollars. The Lockheed Martin settlement, for example, was for $62 million. The new lawsuits suggest that Schlichter, and potentially other plaintiffs’ law firms, are now looking at college and university plans as potential targets for similar kinds of claims. The new lawsuits are putative class actions, which means that the law firm represents certain named employees who are participants in the universities’ retirement plans, and purports to represent all other similarly situated employee participants – plaintiff classes that may have thousands of members each. Once a handful of the college or university’s employees agree to be part of the lawsuit, it can be brought on behalf of all the employees in the retirement plan. The claims against NYU, MIT and Yale are similar to claims made in many of the previous retirement plan lawsuits brought by the Schlichter firm and others: that retirement plan fiduciaries breached their fiduciary duties under the Employee Retirement Income Security Act (ERISA) to prudently select investment vehicles for the plans so as to maximize returns, often by minimizing fees. Under ERISA, the “fiduciaries” of a covered retirement plan – plan fiduciaries can include administrative and investment committees and, frequently, officers and other members of management of the college or university – are subject to strict fiduciary responsibilities and can be held personally liable for any losses caused by a breach of these duties. In short, it means the college or university is obligated to administer the retirement plan funds of employees in a manner that results in the highest possible prudent growth. Beginning about ten years ago, a wave of lawsuits have been brought on behalf of retirement plan participants alleging that fiduciaries had breached their duties by selecting improper investment options, and in particular by allowing excessive fees to be paid from plan assets. If the investment fees paid by a retirement plan are deemed to be excessive, even by a seemingly small margin, the aggregate losses over an employee’s working career can be very large. A frequently cited calculation stated in a U.S. Department of Labor publication more than 10 years ago – and repeated in the Times article – recites that if investment fees are one percentage point higher than a reasonable amount, the participant’s retirement account will be 28 percent lower after a 35 year career. If that is true, then for large plans (like those sponsored by the three universities), the potential losses are enormous – the complaint against MIT alleges that the plan could have saved more than $8 million in fees in a single year by selecting investments prudently. (The complaint’s damage claim is of course not limited to a single year’s losses.) Significantly, these lawsuits also involve claims against major college and university retirement plan managers, including TIAA-CREF and Fidelity. Accordingly, any college currently using these companies for its employee retirement plans could face some of the same claims. To reduce the risk of liability going forward, retirement plan fiduciaries should, among other things:
- exercise “procedural prudence” in analyzing, vetting, and selecting investment options and advisors for the retirement plan, with a view to the risk, return and cost characteristics of each investment and the plan portfolio as a whole,
- continually monitor the chosen investments and make changes if and when appropriate,
- discuss fees and fee options with retirement plan companies to secure the most favorable arrangements for employees,
- require that retirement plan managers disclose fees and charges so they may be communicated to employees;
- avoid any conflicts of interest in the selection and monitoring processes, and
- consult with third party advisors whenever “in-house” fiduciaries lack necessary expertise.