Another day, another lawsuit. With each passing day, Defined Contribution litigation is escalating with rapid fervor. While initially limited to 401(k) plans, that changed just a few weeks ago when a St. Louis-based law firm filed complaints on behalf of plaintiffs in 403(b) plans sponsored by New York University (NYU) and Yale University along with Massachusetts Institute of Technology’s (MIT) 401(k) Plan. Additional lawsuits against other schools, including Cornell University, Columbia University, Duke University, Northwestern University and University of Southern California, among others, ensued. At the heart of each of these suits resides a shared element: excessive fees.
Plaintiffs contend that the fiduciaries for these University plans breached their fiduciary duties by offering too many investment options, (over 100 in NYU’s case) some with poor performance records and high expense ratios. According to the most recent Plan Sponsor Council of America’s 403(b) and 401(k) Plan Surveys, 403(b) plans on average offer 27 investment options for participant contributions compared to 19 for 401(k) plans1. 26% of 403(b) plans offer 26 to 50 funds while 8.5% offer over 50 funds. Additionally, the lawsuits allege that multiple recordkeeping vendor arrangements have resulted in higher expenses for participants. While many universities have consolidated the number of vendors used for plan administration in recent years, this multi-vendor environment still remains a common practice across 403(b) plans.
To date, have participants benefitted from these lawsuits? Within the 401(k) space, lawsuits have led to settlements in excess of $300 million. Companies such as Boeing, Fidelity and Lockheed Martin have ultimately settled outside of court rather than proceed with a lengthy and costly legal battle. For example, Lockheed Martin Corporation, a $5 billion Plan, paid a $62 million settlement in February 2015 for a lawsuit that initially sought $1.3 billion in damages and was filed almost a decade earlier in September 2006. As part of the settlement, the company also agreed to the following: sharing with the court on an ongoing basis their annual Form 5500 filed with the Department of Labor that details plan fees, seeking at least three bids from third party recordkeepers that have experience administering a plan of their size and reviewing the lowest cost version of current funds while considering the usage of collective investment trusts or separately managed accounts where appropriate.
Boeing agreed to a $57 million settlement in November 2015 for a suit filed against its 401(k) Plan. Similar to Lockheed Martin, Boeing has taken steps to reduce Plan costs which include moving to funds with lower expense ratios and conducting pricing due diligence on its Plan’s service providers. While $57 million might seem like a generous and victorious settlement, after accounting for attorney fees and litigation costs of over $20 million, the sum roughly equates to an average settlement amount of only $190 per plaintiff. Of course, the actual allocation for the settlement is much more complex. However, one can contend that these lawsuits have cast a necessary spotlight on opaque practices such as revenue sharing and 12b-1 fees in defined contribution plans and have forced Plan Sponsors to be proactive and engaged in reviewing investment menu design, fund options and expenses.
DiMeo Schneider & Associates recommends periodic and ongoing analysis of the current investment menu, fund structures and all fees to reduce gaps and streamline the menu of offerings. Fund performance should also be reviewed and documented on a regular basis. Additionally, Plan Sponsors should consider investment options with lower costs, where applicable, including collective trusts and separately managed accounts. Understanding recordkeeping fees and the mechanism for how those are paid is also critical. We recommend evaluating and benchmarking these fees on at least an annual basis with a more robust and formal survey of the market every several years.
For assistance with the review of your Plan’s investment line-up and associated expenses, please contact any of the professionals at DiMeo Schneider & Associates, L.L.C.
