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, investment objectives, and risk profiles.
When retaining service providers for the plan, fiduciaries need to assess the fees being charged as compared to the quality and scope of services received.
"Since 2020, over 300 excessive fee class action lawsuits have been filed... including many universities...." -Jose M. Jara, Attorney Fox Rothschild LLP.
Action Plans to Mitigate Risks
By implementing the following strategies, universities can reduce the risk of costly legal challenges:
Ensure there is a proper delegation of the fiduciaries of the plan and consider creating a committee to manage the plan.
Adopt an investment policy statement to formalize the investment selection and monitoring process.
Maintain a systematic approach to select and monitor investments. Recognize that an investment’s short-term underperformance should not solely dictate retention decisions if there is long-term positive return potential. Require independent advisors to provide monthly or quarterly performance reports. Document every step taken during the process from initial review to final decision-making in minutes.
Engage investment consultants to provide unbiased advice, and ensure their independence is verified and documented. Require periodic reviews of the consultant's work.
Continuously evaluate both fees and the quality of services rendered by service providers. Consider conducting a competitive bidding process periodically to ensure that the fees charged are reasonable and reflective of services rendered.
Implement and enforce conflict of interest policies to manage potential conflicts, ensuring that decisions made are solely in the best interest of participants.
Ensure that all fiduciaries participate in regular training and education to keep abreast of responsibilities and best practices.
Regularly assess and update the fiduciary liability insurance policy to ensure adequate coverage for potential claims against fiduciaries.
CALL TO ACTION
The increase in excessive fee class action lawsuits against retirement plan sponsors showcases the importance of proactive fiduciary oversight and strategic risk management. Regardless of which party wins the lawsuit, the time and expense is an administrative and financial burden that detracts from the institution’s mission. Mitigating fiduciary liability risks is also not a one-time effort but a continuous process. By implementing comprehensive strategies, colleges and universities can reduce their legal liabilities. But most importantly, they can fulfill the moral and fiduciary obligation to plan participants, ensuring that their retirement investments are managed prudently and transparently.