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Aug. 10 — Schlichter Bogard & Denton's coordinated attack on the retirement plans of prominent universities hit another school when the firm filed an ERISA class action against Duke University ( Clark v. Duke Univ., M.D.N.C., No. 1:16-cv-01044, complaint filed 8/10/16 ).
The law firm, which has led the decade-long litigation effort against 401(k) plan fees, filed lawsuits on Aug. 9 against Yale University, New York University and Massachusetts Institute of Technology. On Aug. 10, the firm targeted Duke's $4.7 billion retirement plan, which the firm says charged excessive fees and included too many investment options—allegedly more than 400—which drove up fees and caused investors to suffer from “decision paralysis.”
Lawsuits over retirement plan fees have come at a rapid-fire pace since 2015, when the U.S. Supreme Court affirmed the duty of plan fiduciaries to monitor investments on an ongoing basis and largely eliminated a key defense to these types of lawsuits. That year also saw several high-profile settlements in plan fee cases brought by Schlichter, including a $57 million deal with Boeing Co., a $62 million settlement with Lockheed Martin Corp. and a $32 million agreement with Novant Health Inc.
In recent months, new lawsuits challenging 401(k) fees have targeted companies like Chevron Corp., American Airlines Inc., Safeway Inc., American Century and Anthem Inc. While these plans—and indeed most plans targeted by fee litigation—hold billions or hundreds of millions of dollars in assets, plans with as little as $25 million or $9 million have been targeted, as well.
This new series of lawsuits against major American universities presents an interesting twist, because most of the targeted universities sponsor 403(b) plans, rather than the traditional 401(k)s available at many companies. Only certain entities, like public education organizations or non-profit groups, can sponsor 403(b) plans.
“We contend that these universities, as fiduciaries, have breached their duties under the law to protect the retirement assets of their employees and retirees,” Jerry Schlichter of Schlichter Bogard & Denton said in an Aug. 9 press release announcing the first three lawsuits. “These university employees deserve the same right to build meaningful retirement assets as employees of for-profit companies.”
A spokesman for Duke defended the retirement plan.
“Duke provides a range of options that give employees flexibility in designing retirement plans to meet their individual needs,” Michael Schoenfeld, vice president of public affairs and government relations for Duke, told Bloomberg BNA in an Aug. 10 e-mail. “These investments are reviewed and carefully managed in accord with federal law to provide low costs and good outcomes for our employees. We will continue to commit to these guiding principles.”
The lawsuits are noteworthy for making the novel argument that plan fiduciaries can breach their duties by including too many investment options in a plan. According to the complaints, by spreading plan assets out over many different investments, plan fiduciaries undermine their ability to negotiate lower fees for any particular investment. The complaints also cite research suggesting that investors become confused and paralyzed when confronted with too many options.
On that point, the complaints argue that having many actively managed funds within the same investment style causes plans to effectively have “an index fund return, while paying much higher fees for active management than the fees of a passive index fund.”
According to the complaints, a reasonable number of investment options in a large retirement plan is about 15. Duke's plan allegedly contained more than 400, and MIT's plan is said to have had 340 at one point.
Like the lawsuits against Yale and NYU, the complaint against Duke also takes issue with the university's decision to use multiple retirement plan record keepers—in Duke's case, four. According to the complaint, this led to “duplicative, excessive, and unreasonable” record-keeping fees of about $280 per participant, per year. A reasonable fee would have been closer to $30, the complaint alleges.
The lawsuit against Duke was in the U.S. District Court for the Middle District of North Carolina.
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Text of the complaint against Duke is at http://www.bloomberglaw.com/public/document/CLARK_et_al_v_DUKE_UNIVERSITY_et_al_Docket_No_116cv01044_MDNC_Aug.
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