Fiduciaries at three of the nation’s most elite universitieshave been sued for imprudently managing retirement assets indefined contribution plans.

|

Related: Top 10 ERISA settlements

|

Participants in New York University’s and Yale University’s403(b) plans, and participants in theMassachusetts Institute of Technology’s 401(k) plan, paid excessiverecordkeeping and fund management fees, among other allegations inthe complaints, which were filed independent of one another inthree separate federal courts.

|

Related: Judge's decision adds to growing confusion on venueselection provisions

New York University

Two separate defined contribution plans are cited in the suitagainst New York University — the Faculty Plan, whoseparticipants are academics, researchers and administrative staff,and the Medical Plan, a separate 403(b) savings platform foremployees of NYU’s School of Medicine.

|

At the end of 2014, the Faculty Plan had $2.4 billion in assetsand about 16,300 participants. At the same time, the Medical Planhad $1.8 billion in assets and more than 7,800 participants.

|

Both plans offered a large selection of investment options,including annuities and mutual funds, offered exclusively by TIAAand Vanguard.

|

The Faculty Plan offered 103 total options, 25 from TIAA and 78from Vanguard, and the Medical Plan offered 84 investment options,11 from TIAA and 73 from Vanguard.

|

Options in each plan included retail and institutional shareclasses of mutual funds, an insurance separate account, andvariable and fixed annuity investments. Neither TIAA nor Vanguardis named in the suit.

|

Both plans offered one TIAA fixed annuity and eight TIAAvariable annuities, as well as TIAA mutual funds. The Vanguardinvestments were mutual funds in both plans. At the end of 2014,TIAA funds accounted for $1.7 billion of the Faculty Plan’s $2.4billion, and $1.1 billion of the Medical plan’s $1.8 billion intotal assets.

|

At some point in each plan, both TIAA and Vanguard were alsorecordkeepers: The Faculty Plan used both providers, and in late2012, the Medical Plan consolidated with one provider.

|

By using more than one recordkeeper, plan fiduciaries causedparticipants to pay excessive and unreasonable administrative fees,“despite the long-recognized benefits of a single recordkeeper fora defined contribution plan,” according to the complaint, whichpresents a series of sources showing sponsors lose bargaining powerby not consolidating service providers.

|

Had NYU fiduciaries consolidated both plans with onerecordkeeper, plaintiffs allege a reasonable recordkeeping feewould have been roughly $840,000 for participants, or a flat annualfee of $35 for each participant.

|

But between 2010 and 2014, the Faculty Plan paid between $3.1million and $3.8 million to the providers, or $230 to $270 perparticipant annually, including revenue-sharing payments to bothTIAA and Vanguard, according to court papers.

|

And the Medical Plan paid between $2.1 million and $2.6 million,or $220 to $340 per participant, between 2010 and 2014.

|

In not monitoring the fees both providers were capturing, and infailing to conduct a competitive bidding process for recordkeepingservices, plan fiduciaries allegedly cost participants in bothplans $43 million in retirement savings, the complaint says.

|

Both plans offered retail shares of 69 Vanguard funds wheninstitutional shares were available, and retail or retirementshares of 15 TIAA mutual funds and lifecycle funds when identicaloptions were available in cheaper institutional shares.

|

The plaintiffs argue that even if minimum investmentrequirements for individual funds in the lineup were not met, thosethresholds are “routinely waived” by investment providers in lightof a plan’s total asset investment on a provider’s platform.

|

That the plans’ fiduciaries did not select lower cost shareclasses shows a failure “to engage in a prudent process for theselection, monitoring, and retention of those mutual funds,” claimattorneys for the plaintiffs.

|

The complaint also alleges that duplicate investment offeringsin the plans and the retention of poor performing funds costparticipants millions in retirement savings.

|

Photo: Getty

The suit against Yale University alleges, in part, that itsfiduciaries cost participants $20 million in retirement savingsover the past six years. (Photo: Getty)

Yale University

The complaint against the Yale University Retirement Accountplan largely mirrors the complaint against NYU. The $3.6 billionplan, servicing nearly 16,500 participants, also had tworecordkeepers, TIAA and Vanguard, until the plan was consolidatedin 2015.

|

Yale’s plan is also notable for the number of investmentsoffered — 115 in 2014, 36 from TIAA, which held $2.7 billion inplan assets, and 79 from Vanguard, which collectively held $824million.

|

As with the NYU suit, the claim against Yale notes data fromCallan Investments Institute showing defined contribution plansoffered an average of 15 fund options, excluding target-date funds,in 2014.

|

In 2015, plan fiduciaries replaced some retail-class investmentswith cheaper institutional shares of allegedly identicalinvestments, but not before participants lost “millions of dollars”in retirement savings.

|

The plaintiffs claim a reasonable annual recordkeeping fee forsuch a plan would have been between $500,000 and $575,000, orapproximately $35 annually per participant.

|

From 2010 to 2014, the plan paid between $3.8 million and $4.3million in recordkeeping fees, or between $200 and $300 perparticipant, compensation in part derived from revenue-sharingagreements in some of the plan’s investment options.

|

In not prudently monitoring TIAA and Vanguard’s compensation,Yale fiduciaries cost participants $20 million in retirementsavings over the past six years, according to the complaint.

|

The suit enumerates nearly 90 fund offerings from both providersthat were offered as retail or retirement shares when cheaperinstitutional shares were available.

|

Yale’s plan was also allegedly built with duplicative investmentoptions, including equity index funds, which ultimately causedparticipants to pay excessive fees, because assets were not polledin a single, lowest-cost option, according to court papers.

|

As in the suit against NYU, neither TIAA nor Vanguard are namedas defendants.

|

|
Photo: Getty
|

The suit against the Massachusetts Institute of Technologyalleges in part that its fiduciaries failed to conduct acompetitive bidding process for recordkeeping services. (Photo:Getty)

Massachusetts Institute of Technology

The claim against the Massachusetts Institute of Technology’sSupplemental 401(k) Plan alleges not only imprudent management ofthe plan’s $3.6 billion in assets, but also allegations of animproper relationship between Abigail Johnson, CEO of FidelityInvestments, and MIT, where Johnson has served on MIT’s Board ofTrustees since 2007.

|

Fidelity took over recordkeeping responsibilities for MIT inApril of 1999, and has retained that role since.

|

In July 2015 the plan’s investment menu was fundamentallyaltered. Previously, the menu included approximately 340 investmentoptions, 180 of which were Fidelity funds, according to thecomplaint.

|

Over 300 mutual funds were offered across 40 fund familiesbefore July 2015. After the menu’s redesign, the options werewinnowed to 37, 19 of which were previously offered.

|

Prior to the 2015 restructuring, MIT fiduciaries offered a“dizzying array” of duplicative fund options, which not onlycreated “decision paralysis” for participants, but also limitedbargaining power in not consolidating assets in comparableinvestments, according to court documents.

|

As part of the restructuring, fiduciaries removed over 180Fidelity funds from the plan — only the Fidelity Growth Fundremained in the lineup. Most of the plan’s assets were mapped toVanguard target-date funds, 12 other Vanguard mutual funds, andnine actively managed options by other fund families.

|

The plan’s unwieldy design allegedly cost participants tens ofmillions in lost retirement savings before 2015.

|

In failing to pool assets in duplicate investment options before2015, participants lost in excess of $40 million in unreasonableinvestment expenses, and another $40 million in investmentperformance losses, allege attorneys for the plaintiffs.

|

For years, MIT fiduciaries failed to conduct a competitivebidding process for recordkeeping services, which the complaintalleges was a direct result of Fidelity’s “beneficial” relationshipwith MIT, outside of its role as recordkeeper.

|

Since becoming the plan’s sole service provider in 1999,Fidelity has donated hundreds of thousands of dollars from thefirm’s charitable trust to MIT, the complaint alleges.

|

And as a trustee to MIT, Johnson, Fidelity’s CEO, wore “multiplehats,” responsible for both “maximizing revenue” to the University,as well as driving donations for Fidelity trusts to various MITinitiatives.

|

Moreover, plaintiffs allege Johnson stood to “personally benefither family and her company” from MIT’s use of Fidelity funds andrecordkeeping services.

|

Fidelity Investments is not named in the suit.

Complete your profile to continue reading and get FREE access to BenefitsPRO, part of your ALM digital membership.

  • Critical BenefitsPRO information including cutting edge post-reform success strategies, access to educational webcasts and videos, resources from industry leaders, and informative Newsletters.
  • Exclusive discounts on ALM, BenefitsPRO magazine and BenefitsPRO.com events
  • Access to other award-winning ALM websites including ThinkAdvisor.com and Law.com
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.

Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.