Fiduciaries at three of the nation’s most elite universities have been sued for imprudently managing retirement assets in defined contribution plans.

Related: Top 10 ERISA settlements

Participants in New York University’s and Yale University’s 403(b) plans, and participants in the Massachusetts Institute of Technology’s 401(k) plan, paid excessive recordkeeping and fund management fees, among other allegations in the complaints, which were filed independent of one another in three separate federal courts.

New York University

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

At the end of 2014, the Faculty Plan had $2.4 billion in assets and about 16,300 participants. At the same time, the Medical Plan had $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 TIAA and Vanguard.

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

Options in each plan included retail and institutional share classes of mutual funds, an insurance separate account, and variable and fixed annuity investments. Neither TIAA nor Vanguard is named in the suit.

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

At some point in each plan, both TIAA and Vanguard were also recordkeepers: The Faculty Plan used both providers, and in late 2012, the Medical Plan consolidated with one provider.

By using more than one recordkeeper, plan fiduciaries caused participants to pay excessive and unreasonable administrative fees, “despite the long-recognized benefits of a single recordkeeper for a defined contribution plan,” according to the complaint, which presents a series of sources showing sponsors lose bargaining power by not consolidating service providers.

Had NYU fiduciaries consolidated both plans with one recordkeeper, plaintiffs allege a reasonable recordkeeping fee would have been roughly $840,000 for participants, or a flat annual fee of $35 for each participant.

But between 2010 and 2014, the Faculty Plan paid between $3.1 million and $3.8 million to the providers, or $230 to $270 per participant annually, including revenue-sharing payments to both TIAA 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 in failing to conduct a competitive bidding process for recordkeeping services, plan fiduciaries allegedly cost participants in both plans $43 million in retirement savings, the complaint says.

Both plans offered retail shares of 69 Vanguard funds when institutional shares were available, and retail or retirement shares of 15 TIAA mutual funds and lifecycle funds when identical options were available in cheaper institutional shares.

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

That the plans’ fiduciaries did not select lower cost share classes shows a failure “to engage in a prudent process for the selection, monitoring, and retention of those mutual funds,” claim attorneys for the plaintiffs.

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

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

Yale University

The complaint against the Yale University Retirement Account plan largely mirrors the complaint against NYU. The $3.6 billion plan, servicing nearly 16,500 participants, also had two recordkeepers, TIAA and Vanguard, until the plan was consolidated in 2015.

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

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

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

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

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

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

The suit enumerates nearly 90 fund offerings from both providers that were offered as retail or retirement shares when cheaper institutional shares were available.

Yale’s plan was also allegedly built with duplicative investment options, including equity index funds, which ultimately caused participants to pay excessive fees, because assets were not polled in a single, lowest-cost option, according to court papers.

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

Photo: Getty

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

Massachusetts Institute of Technology

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

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

In July 2015 the plan’s investment menu was fundamentally altered. Previously, the menu included approximately 340 investment options, 180 of which were Fidelity funds, according to the complaint.

Over 300 mutual funds were offered across 40 fund families before July 2015. After the menu’s redesign, the options were winnowed 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 only created “decision paralysis” for participants, but also limited bargaining power in not consolidating assets in comparable investments, according to court documents.

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

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

In failing to pool assets in duplicate investment options before 2015, participants lost in excess of $40 million in unreasonable investment expenses, and another $40 million in investment performance losses, allege attorneys for the plaintiffs.

For years, MIT fiduciaries failed to conduct a competitive bidding process for recordkeeping services, which the complaint alleges was a direct result of Fidelity’s “beneficial” relationship with 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 the firm’s charitable trust to MIT, the complaint alleges.

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

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

Fidelity Investments is not named in the suit.

Instant Insights /

3 elite universities sued over defined contribution plans

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