Higher educational institutions find themselves having to deal with multiple, seemingly conflicting priorities as they balance the best interests of students, staff, faculty, rising costs, enrollment challenges and compliance fatigue. In light of the recent flurry of lawsuits and the new DOL Fiduciary Rule, colleges and universities are now also being forced to take a closer look at their fiduciary responsibilities as it relates to their 401(k) or 403(b) plans. And with good reason.
Eight private universities (Emory, New York University, Yale, Duke, Johns Hopkins, the University of Pennsylvania, Vanderbilt, and MIT) were sued last week by a number of their employees seeking class-action status over fiduciary violations of the Employee Retirement Income Security Act (ERISA) due to excessive fees and other alleged fiduciary breaches.
Plan participants claim that the universities failed to monitor fees paid to recordkeepers and other service providers that were responsible for administering the plans, which allegedly caused participants to pay millions of dollars in excessive fees for recordkeeping, administrative, and investment services, thereby allegedly reducing their investment returns.
There have been similar lawsuits in the for-profit world, but these are noteworthy because they are the first to target 403(b) plans in the not-for-profit space.
Some of the failures cited in the suits include:
- Revenue sharing: Compensation for the recordkeepers was allegedly high in light of services rendered.
- Number of funds: Too many funds were offered to participants, thereby encumbering them with too many choices and not enough guidance.
- Share class of funds: The plan did not use its critical mass to vet the funds or offer less expensive institutional share classes of funds versus the retail share class.
- Proprietary funds: Too many proprietary funds were used instead of accessing funds from an open architecture fund platform.
- Performance of funds: Underperforming funds were left in place when they should have been regularly monitored and potentially eliminated.
- Cost of Investments: Expensive funds were left in the plan, subsequently lessening returns when more prudent fiduciary practices would have put processes in place to continually address these issues.
In this litigious environment, it is your fiduciary responsibility to stay informed and know that your organization has the processes in place to help mitigate risk and satisfy the high standards that ERISA places on fiduciaries. If you should have any questions, please don’t hesitate to contact us.
