By José M. Jara
Since 2020, over 300 excessive fee class action lawsuits have been filed against companies and non-for-profit organizations (including many universities, such as Brown, Cornell, Duke, Emory, Johns Hopkins, M.I.T., NYU, U. Penn., Vanderbilt, Georgetown, and Yale, to name a few) that sponsor retirement plans. Retirement plans are regulated by the Employee Retirement Income Security Act of 1974. These lawsuits allege breaches of ERISA’s fiduciary duties of prudence and loyalty. The legal expense in defending these cases amounts to millions of dollars and years of disruption to a university. Proper governance in managing the retirement plan will mitigate the risks of these class action lawsuits.
ERISA Mandates
Under ERISA, anyone having discretionary authority or control over the administration or management of the assets of the plan is considered a fiduciary. Fiduciaries must act solely for the benefit of plan participants and beneficiaries, with the utmost care and prudence, and must adhere to the plan’s terms. Fiduciaries have a continuing duty to monitor investments by regularly evaluating investment performance and fees. In addition, fiduciaries must avoid entering into a contract with service providers, unless the contract for services and fees is reasonable.
Litigation Landscape
In Hughes v. Northwestern University, 142 S. Ct. 737 (2022), the U.S. Supreme Court underscored the importance of prudent decision-making by fiduciaries and established parameters for assessing excessive fee claims. Below are the main implications for fiduciaries:
The Hughes decision established that fiduciaries conduct regular, independent evaluations of each investment to determine whether it is prudent to be included in the menu of investment options.
Subsequent cases have made it clear that lawsuits alleging excessive fees must provide meaningful benchmarks and “like-for-like” comparisons with similar investment funds, invest