On March 11, 2019, Brown University announced that the school had reached a $3.5 million class action settlement in an ERISA matter brought by participants in Brown’s 403(b) retirement plan over allegations related to the school’s administration of that plan. This most recent settlement marks the latest in a veritable flurry of recent 403(b) excessive fee settlements.
While these may not seem particularly noteworthy on their own, taken together, these settlements highlight the peculiar staying power of 403(b) ERISA cases even in uncharted waters. Whether or not there are more 403(b) settlements on the near horizon remains to be seen, but one thing is clear: Excessive fee ERISA litigation is here to stay and retirement plan fiduciaries of all stripes overseeing plans of all sizes would do well to come to terms with this reality and act accordingly.
These 403(b) settlements are also notable because they are the first of the institutional defendants to settle out of the initial wave of 403(b) ERISA cases which were filed against 12 prominent national universities regarding the administration of their retirement plans. This wave of ERISA class actions against private non-profit institutions of higher education resembled the original wave of excessive fee ERISA class actions brought in 2006 and subsequent years against for-profit employers, involving these companies’ 401(k) retirement plans.
Echoes from the past
The first series of 401(k) excessive fee cases beginning in 2006 challenged long-established industry practices such as uncapped revenue sharing, and operationalized ERISA’s statutory requirements that the assets of a plan must “be held for the exclusive purpose of providing benefits to participants . . . and defraying reasonable expenses of administering the plan.” 29 U.S.C. §1103(c)(1) (emphasis added).
Not surprisingly, this first generation of excessive fee ERISA cases faced enormous opposition from a number of fronts, including from many operators in the retirement plan industry. These cases also faced hostility from the bench. Three of the first 401(k) cases to be filed were dismissed on their pleadings — with these dismissals being upheld on appeal. Many other judges granted summary judgment against these 401(k) plaintiffs in whole or in part.
Despite these initial setbacks, the 401(k) excessive fee cases persisted and eventually the plaintiffs in these matters were able to attain a number of meaningful milestones beginning with three eight-figure settlements in 2010, followed by successes at trial, and on numerous appeals thereafter, including to the Supreme Court.
The staying power of these first excessive cases undoubtedly contributed to the advancement of ERISA 401(k) fiduciary practices. In doing so these cases (and those that followed in their wake), helped develop a robust landscape of ERISA precedent to guide fiduciary decision-making and contributed to the dramatic decline of retirement fees industry-wide.
As with the 401(k) cases that came before them, the 403(b) cases that were launched a decade later in 2016 faced significant skepticism and a unified opposition from the outset. Over time, however — like the 401(k) cases — the 403(b) ERISA excessive fee cases have, on the whole, demonstrated their own kind of staying power, with the vast majority of these cases surviving motions to dismiss and proceeding into discovery and beyond.
In this uncertain and costly environment, non-profit defendants are faced with a difficult “business” decision between litigating these matters through trial (and likely appeal) — while incurring millions of dollars in expenses along the way and still risking the potential exposure of an adverse judgment — or engaging in substantive mediation with the aim of achieving resolution through settlement.
Where do we go from here?
If history is to repeat itself, this recent swell of 403(b) settlements may represent a turning point for the next generation of excessive fee retirement plan suits brought against non-profit institutions.
If the 403(b) excessive fee litigation continues along a trajectory similar to its 401(k) predecessors, then we can expect the recent 403(b) settlements to usher in a new volley of suits brought against institutions overseeing slightly smaller retirement plans than the billion-dollar-plus plans at issue in the first wave of 403(b) cases.
Also, because these follow-on cases will challenge the asset-based fees of retirement plans with smaller assets and fewer participants (i.e, less potential damages), expect the plaintiffs in these suits to buttress their familiar stable of core claims with additional causes of action introducing new theories of fund underperformance, challenging the use of unmonitored “tiers” of funds, and examining all manner of payments that might constitute prohibited transactions under ERISA. Legal adaptations and permutations like these have proven critical to sustaining the viability of these cases for over a decade and are likely to factor even more prominently in the decade to come.