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Excessive Fee Suit Makes Landfall Against Hurricanes

Another excessive fee suit has been filed against a billion dollar university 403(b) plan, though it treads familiar ground(s). 
The latest (Santiago v. Univ. of Miami, S.D. Fla., No. 1:20-cv-21784, complaint filed 4/29/20) was brought by plaintiffs Augustino Santiago, Lilly Leyva, Guillermo Creamer, and Maria Aceituno “individually and as representatives of a class of participants and beneficiaries of the University of Miami Retirement Savings Plan,” with approximately $1 billion in assets.
Copy ‘Catch’
The suit’s allegations adhered to the customary “script” for such litigation; that rather than “leveraging the Plan’s massive bargaining power to benefit participants and beneficiaries, Defendants:
  • “failed to investigate, examine, and understand the real cost to Plan’s participants for administrative services, thereby causing the Plan to pay unreasonable and excessive fees for investment and administrative services;
  • “caused Plaintiffs to pay an asset-based fee for administrative services that increased as the value of participant accounts rose, even though no additional services were being provided; and 
  • “selected and retained investment options for the Plan that historically and consistently underperformed their benchmarks and charged excessive investment management fees, as well as share classes that were more expensive than other share classes readily available to qualified retirement plans that provided Plan investors with the identical investment at a lower cost.” Indeed, the plaintiffs say the defendants “freighted the Plan’s investment lineup with imprudent investments.”
Fund Focus
As has been the case in other 403(b) university suits, the defendants here were charged with selecting the Teachers Insurance and Annuity Association of America and College Retirement Equities Fund (TIAA-CREF), TIAA Traditional Annuity, “that prohibits participants from re-directing their investment in the Traditional Annuity into other investment choices during employment except in ten annual installments, effectively denying participants the ability to invest in equity funds and other investments as market conditions or participants’ investment objectives change.” Oh, not to mention the restriction on lump sum distributions without a 2.5% surrender charge. Also taken to task (again, not new ground for this type of litigation) was the inclusion of the CREF Stock Account, and TIAA Real Estate Account, the performance of which they allege “falls completely outside the guidelines of any reasonable investment policy.”
Another common allegation—also found here—was a criticism of the use of multiple recordkeepers, though admittedly the six recordkeepers employed by the plan is well above what has normally been found in these cases. Claiming that It is “well known in the defined contribution industry that plans with dozens of choices and multiple recordkeepers ‘fail,’” the suit cites issues with an “overwhelming” number of choices (the suit calls it a “haphazard lineup of over 390 duplicative investments that are proprietary to the recordkeeper”[1]), according to the plaintiffs, that hinder participant choice, and the inefficiency of a multi-recordkeeper platform that they claims “does not allow sponsors to leverage total plan assets and receive appropriate pricing based on aggregate assets.”
‘Reasonable’ Conclusion
Here, as in other suits, citing “information currently available to Plaintiff regarding the Plan’s features, the nature of the administrative services provided by the Plan’s recordkeepers, the Plan’s participant level, and the recordkeeping market, benchmarking data,” the plaintiffs conclude that a “reasonable recordkeeping fee for the Plan would have been a fixed amount between of approximately $35 per participant with an account balance,” though they claim that instead, plan participants paid over $100 per year from 2013 to 2018 for recordkeeping, “much higher than a reasonable fee for these services, resulting in millions of dollars in excessive recordkeeping fees each year.”
All in all, “Considering the level of fees being paid by the Plan for recordkeeping, and the number of recordkeepers (six), a reasonable person could conclude that the University did not employ a competitive bidding process, or if it did, did not act in a manner consistent with the results of that process,” they argue.
They also—as other suits have—take issue with the way that the plan administers loans, contrasting the approach employed here with that often used in 401(k) plans.
So similar, in fact, that the suit acknowledges that this one is “similar (but narrower in scope) to a lawsuit filed against Duke University,” in which Judge Catherine C. Eagles “recently approved a final class action settlement in the Duke case,” noting that these plaintiffs “seek similar remedies that were court approved in the Duke case.”
A relatively unusual element in this type litigation was a claim based on “substantial additional evidence of a flawed process, such as incorrect reporting on mandatory Department of Labor disclosures about the amount of administrative fees paid by Retirement Plan participants.” Specifically, the suit notes that “none of the Plan’s 5500’s filed since 2012 disclose any amount of indirect compensation being received by the Plan’s recordkeepers. In fact, all of the 5500’s for the Plan affirmatively indicate that recordkeepers receive indirect compensation for recordkeeping services but in a contradiction state the amount received is ‘$0’”—a result they describe as “patently false.”
Plaintiffs and proposed class are represented by Wenzel Fenton Cabassa PA, Justice for Justice LLC, and Michael C. McKay of Scottsdale, AZ. The former was one of the firms representing the plaintiffs in recent litigation involving Trader Joes’ 401(k), just dismissed. 
Score Call
Of the roughly 20 universities that have been sued over the fees and investment options in their retirement plans since 2016, there have been eight announced settlements; the largest to date with MIT, for $18.1 million, and prior to that Vanderbilt University, which in April 2019 announced a $14,500,000 cash settlement, as well as a long list of process/procedural changes that were, as with the MIT settlement, also to be monitored over a three-year period, and the most recent was a little more than a month ago with Johns Hopkins, which settled for $14,000,000, also alongside a number of plan design/procedural changes. In March, Brown University settled for $3.5 million, as well as “other, structural relief.” In May 2018, the University of Chicago entered into a class action settlement for a $6.5 million cash payment and changes to the university’s $3 billion plan, while earlier that year Duke University announced a $10.65 million settlement. Princeton University announced a settlement just last month, as did Emory University, those the terms of those settlements are not yet known. 
On the other hand, St. Louis-based Washington University, New York University and Northwestern University have thus far prevailed in making their cases in court. The University of Pennsylvania, which in 2017 won at the district court level, in 2019 had that decision partially overturned by an appellate court, though the plan fiduciaries’ motion for an en banc review of that decision was rebuffed.
In which category will this suit fall? Time will tell.
[1] The suit notes that among the 390 options available are the Fidelity Freedom Index funds, and that “for these funds alone, the prospectus spans almost 800 pages. If a Plan participant were to review the prospectuses of all of the 390+ investment options in the Plan investment lineup, this would require reading thousands if not tens of thousands of pages of documents. This is a virtually impossible burden. Even for the University, it is inconceivable that it has read the prospectuses and supporting materials for the investments it selected for the Plan.”