When it comes to ERISA litigation, we often only get to hear one side of the story – the plaintiffs’. But one of the defendants in an excessive fee case is fighting back.
The plaintiffs in this case are five employees of the Massachusetts Institute of Technology (MIT) and participants in the MIT Supplemental 401(k) Plan. The suit – filed in August 2016 as one of the first wave of university 403(b) suits by Schlichter Bogard & Denton LLP – alleged breaches of the ERISA duties of loyalty and prudence based on the plan's inclusion of retail class options, rather than institutional class options in the funds provided by Fidelity.
Moreover, the plaintiffs alleged that Fidelity was paid excessive compensation for its recordkeeping services, and that MIT never engaged in a competitive bidding process for those services – and, in a claim unique to these 403(b) excessive fee cases, the plaintiffs alleged that this amounted to an illicit kickback scheme whereby Fidelity received inflated fees at the expense of the plan’s participants in exchange for: (1) making donations to the MIT endowment, and (2) Fidelity CEO Abigail Johnson’s seat on MIT’s board of trustees.
How We Got Here
In response to the lawsuit, defendants had filed a motion to dismiss for failure to state a claim upon which relief can be granted, and on Aug. 31, 2017, Magistrate Judge Marianne B. Bowler entered a “Report and Recommendation” to dismiss, in part, aspects of that complaint – to which both parties filed objections.
In their most recent motion in support of a motion for summary judgment (a decision from the court without a trial), the MIT defendants explained that while the case was at the pleadings stage, the court “dismissed some of Plaintiffs’ central theories but allowed their attack on the Plan’s investment structure to go forward based on the allegation that the Plan include[d] higher fee options when identical lower fee options were available.”
Where Things Stand
This, the defendants claim, has “largely fallen by the wayside in discovery,” with the plaintiffs instead focusing their “investment claims principally on a theory already rejected by the Court – that it was improper to offer participants a wide range of investment choices through the Plan’s 'Investment Window,'” one of four tiers of investment options included in the Plan before 2015. This, they say, relies on the “assertion of arbitrary, categorical rules that are contradicted not only by case law and common fiduciary practice, but also by the practices of one of Plaintiffs’ own experts.”
As for allegations about administrative fees, the defendants claim that is it “also unsustainable on the undisputed facts.” The defendants note that during the time frame in which the plaintiffs “allege the Plan’s fees were allowed to increase unchecked, Defendants undertook an expert-advised process to secure lower fees and moved to the very type of per-participant fee arrangement Plaintiffs favor.”
On claims that they failed to seek competitive bids as part of that process, the MIT defendants note that “ERISA does not inflexibly require competitive bidding, and the Plan’s fiduciaries made a reasoned decision that it was unwarranted in the particular circumstances here.” Moreover, the defendants note that “the only probative evidence shows that Defendants’ actual processes produced reasonable fees during the class period,” and thus – “Defendants are entitled to summary judgment on all of Plaintiffs’ claims.”
That Was Then…
Specifically, the MIT defendants explain that, since 2010, “the Plan has undergone two significant changes: (1) a restructuring of the Plan’s investment lineup, and (2) a shift from a model in which the Plan recordkeeper’s compensation was defrayed through revenue sharing from Plan investments to one specifying flat annual per-participant recordkeeping fees” – both, they note, “preceded by careful study by the Plan’s fiduciaries, aided by professional advice and input from the MIT community.
“The undisputed record in this case clearly demonstrates that Defendants made reasonable decisions concerning the Plan’s investment lineup and administrative-fee arrangements, and arrived at those decisions through a reasoned investigatory process.”
A number of the university 403(b) suits (including this one) have alleged that the plan fiduciaries offered too many investment choices – that not only were the sheer number of choices duplicative and unduly expensive, but that this “dizzying array” of choices also served to confuse participants. Here the MIT defendants said those claims centered around the decision to offer an “investment window.” They note that “on multiple occasions” they sought professional advice on its fiduciary duties with respect to selection and monitoring of the Plan’s various investment options, including the Investment Window, and subsequently “received legal advice – confirmed with the Department of Labor – stating that it was simply required to monitor the Investment Window funds to identify any performance problems and, in turn, supply participants with information about funds that were trailing peers and benchmarks over sustained periods, and to generally ensure that the Investment Window menu was competitive with similar mutual-fund-window offerings from other vendors” – and their motion says they did “exactly that” – collecting data on the performance of Investment Window options and maintaining a “watch list” of funds with outlying performance, which it "regularly shared with participants.”
‘Window’ Addressing
In 2010, the motion explains that “new outside counsel offered a different opinion, advising that the Committee should curate the individual Investment Window funds,” and that they “decided to credit this more conservative advice, despite the conflict with earlier guidance,” though they “declined to jettison it without a well-considered plan for what structure should take its place.” Instead they say that they “commenced a careful process that included discussions with participants, appointment of a subcommittee of investment experts, and scrutiny of candidate funds with the assistance of the Plan’s outside investment consultant, Mercer,” a process that they note “culminated in an expansion of the core menu to include 37 options and consolidation of the Plan’s expanded-choice menus in BrokerageLink.”
The defendants write that the “Plaintiffs complain that this process was too deliberative, and that the transition should have occurred more quickly. But ERISA does not impose rigid timelines or require rash decision-making,” and that the Committee “acted reasonably in thoroughly considering its options before making significant changes to the Plan’s lineup, and in continuing to monitor the Investment Window as its prior counsel had advised while that deliberative process was underway,” and that, ultimately, “the Committee performed exactly the type of thoughtful investigation that ERISA requires.”
Bright ‘Lines’
“What Plaintiffs really object to,” they write, “is not the Committee’s monitoring protocol, but rather its decision to retain the full Investment Window menu in light of the information it received. Neither ERISA nor industry practice required Defendants to reflexively remove funds from the Investment Window according to any of the four bright-line rules Plaintiffs espouse.”
Those bright line rules, the plaintiffs outline apparently include offering sector funds that were allegedly “overly-concentrated,” not removing funds whose “trailing three-year performance fell below its benchmark at any point in the prior ten years,” that “no defined-contribution menu should ever include funds with less than five years of performance” (which the defendants note, contradicts the plaintiffs’ own position in this case with regard to their preference for collective trusts and separate accounts, rather than mutual funds), and that the plan offered “duplicative” options by offering an actively managed target-date fund series (the Fidelity Freedom Funds) in the Investment Window while designating another target-date suite – the Vanguard Retirement Trusts – as the Plan’s default investment option.
“Plaintiffs offer no evidence that these fund series were 'duplicative' beyond the fact that they are both sets of target-date funds,” the motion states. “Undisputed evidence shows that the two target-date series at issue here differ across multiple dimensions, including investment objective, portfolio composition, the inclusion of actively managed options as underlying funds, and the aggressiveness of their glide paths,” and that in light of those differences “…and the broad popularity of the Fidelity Freedom Funds in the retirement plan market, it was entirely reasonable for the Committee to allow participants to select the actively managed Freedom Funds if those funds best served their needs.”
Fee Plane
“Contrary to Plaintiffs’ claim that the Plan’s fiduciaries did not act to monitor and reduce Plan administrative fees, the record demonstrates a pattern of prudent engagement on the topic,” the motion states. The defendants note that at the beginning of the class period, the plan had a “fully bundled arrangement in which revenue sharing from the Investment Window funds was the sole source of compensation for the administrative services performed by the Plan’s recordkeeper, Fidelity,” but that, working with a consultant (Mercer), they obtained information regarding fees borne by comparable plans. While they were examining that information, “Fidelity began to offer substantial revenue credits (essentially, rebates of revenue sharing amounts to the Plan) that reduced effective fees,” while at the same time they were “exploring a possible restructuring of the Plan’s investment lineup, which would require close coordination with the Plan’s recordkeeper and have potentially significant implications for the Plan’s administrative pricing arrangements depending on which investments remained in the lineup,” and that – “in light of those potential changes, Fidelity’s revenue-credit concessions, and MIT’s overall satisfaction with Fidelity’s services in that period, the Plan’s fiduciaries reasonably decided not to proceed with any formal competitive process at that time.”
The defendants go on to note that “an RFP can certainly be one means of prudently evaluating recordkeeping fees, but ERISA does not require Plan fiduciaries to undertake an RFP, RFI, or other formal benchmarking measures in any and all circumstances,” and that “administrative fees are commonly monitored by other means that are at least as effective and often much more efficient.” They also note that the plaintiffs’ expert “did not conduct an RFP to determine expected fees for the Plan, contradicting his assertion that an RFP is the only way to identify what is reasonable.” The MIT defendants “had sound reasons for taking a different approach, and that approach allowed MIT to secure a concededly reasonable rate of $33 per participant in 2014 and obtain millions in revenue credits before then.”
What This Means
Until a judge rules (this case is pending before Judge Nathaniel M. Gorton of the U.S. District Court for the District of Massachusetts), perhaps not much. However, and as noted above, the allegations of plaintiffs are often instructive in highlighting questionable practices, or ways in which plan fiduciaries may fall short in fulfilling their obligations. That is, in fact, why we cover these lawsuits – and probably why they are one of our most-visited news items.
That said, they are only one side of the story – and responses such as those by the MIT defendants (it should be noted that they are represented by Goodwin Procter LLP (and O’Melveny & Myers LLP) - and those in cases such as the decision earlier this year regarding American Century remind us that prudence is a process, and that well-documented, reasonable, prudent rationales for plan decisions can ultimately win the day.
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