After nearly a decade of retirement plan fee litigation involving 401(k) plans, plaintiff firms are focusing on a new class of potential defendants. Recently, 403(b) plans sponsored by universities have become the targets in the ongoing barrage of retirement plan fee litigation. The first wave of coordinated class action lawsuits were filed against twelve of the country’s largest and prestigious universities.
As in many of the 401(k) plan fee cases, the participant plaintiffs are alleging that the 403(b) plan fiduciaries failed to prudently select, monitor, and replace underperforming investment managers. A common strategy by the plaintiffs in these cases is to allege that the plan fiduciaries failed to properly use their bargaining power to negotiate lower fees and failed to solicit sufficient proposals from competing providers. Additional theories have also been advanced by these plaintiffs such as the argument that the plan fiduciaries made participant choices too hard by offering too many investment options. Some of these cases are starting to emerge from the initial pleadings phase of litigation.
Recently, in Henderson v. Emory University, 403(b) plan participants alleged that it was imprudent for the plan fiduciaries to provide more than 100 investment options to the participants. In May, the U.S. District Court for the Northern District of Georgia disagreed and ruled that participant confusion based solely on the number investment options available under the plan was not a failure on the part of plan fiduciaries. This was a partial win for Emory, but all of the other claims relating to the alleged failure of the plan fiduciaries survived Emory’s motion to dismiss. The surviving claims include allegations that Emory imprudently offered retail-class shares, selected managers affiliated with record keepers, chose investment options with higher fees than similar products, engaged multiple or duplicative record keepers and paid excessive fees to plan professionals. These allegations are fact intensive, which will likely result in protracted and costly litigation.
Also, in May, the U.S. District Court for the Middle District of North Carolina denied Duke’s motion to dismiss the class action plaintiffs’ claim that its 403(b) plan fiduciaries failed to prudently select record keepers. Unlike the district court’s decision in Henderson v. Emory University, the plaintiffs in the Duke case were permitted to proceed on their claim that the plan fiduciaries acted imprudently by offering too many investment options. Also in contrast to the Emory case, in the Duke case the judge dismissed the plaintiffs’ claims that the fiduciaries allowed the “plan to be locked into” certain unreasonable agreements with service providers. The judge in the Duke case ruled that such claims were time barred.
There is really no way for plan fiduciaries to completely prevent retirement plan fee litigation. However, plan fiduciaries can be proactive and forearmed to reduce their risks. Plan fiduciaries should be aware of the recent uptick in litigation involving 403(b) plans because, as these cases gain traction, more are likely to follow. Plan fiduciaries should also be cognizant of the types of arguments that plaintiffs are winning and develop strategies to reduce the risk of being the target of the next class action lawsuit. This will be an ongoing effort, but a necessary one. We will continue to follow and provide updates on the status of these cases.