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By David W. Powell and Mark Bieter
Georgetown University’s defeat of a lawsuit challenging the fees and investment options in its retirement plan seems to have shifted the answer of whether its plan and other similar plans should have the same fiduciary standards as 401(k) plans from “yes” to “no.”
When they first appeared in 2016, the Employee Retirement Income Security Act (ERISA) lawsuits targeting certain university retirement plans, called 403(b) plans, immediately raised some novel questions.
One was whether the fiduciary standards developing in the dozens of similar lawsuits nationwide against 401(k) plan sponsors would be applied in the context of the university plans in more or less the same way.
Until recently, the answer to that question seemed to be trending, for the most part, to “yes.” Plaintiffs have had only mixed success, mainly due to the difficulty of having fiduciary breach claims knocked out at the motion to dismiss stage. But courts often seemed to be looking at the 403(b) plan and its investments in the same way as a 401(k).
That changed early this year, when the District of Columbia federal court dismissed such a lawsuit against Georgetown University.
The court acknowledged that because the backgrounds and structures of 403(b) and 401(k) plans are different, the application of ERISA’s fiduciary standards should also be different.
“It may be that Plaintiffs want to force Georgetown to reconsider its entire strategy behind the plans and to have them become more like” 401(k) plans, the court wrote. “However, it is not a breach of fiduciary duty to maintain the Plans as established tax-deferred vehicles under the particular protections of § 403(b).” (Wilcox v. Georgetown Univ., No. 18-422, 2019 BL 5946 (D.D.C. Jan. 8, 2019))
This was a departure from the view of other courts addressing the university lawsuits thus far, most of which have not delved deeply into differences between the two types of plans. As the cases move to the appellate courts, the universities may rely on this minority view to argue that the differences matter.
The results of the approximately 20 university cases filed over the past two and a half years can best be described as mixed.
The initial signs suggested that defendants would face an uphill battle prevailing early in the litigation. In total, nine of the lawsuits have survived motions to dismiss with their most significant claims intact, and two of those have been settled—by University of Chicago for $6.5 million and Duke University for $10.5 million.
But the decisions have evened out, with the University of Pennsylvania, Northwestern University, and Washington University prevailing on motions to dismiss, and, in the first trial of a university case, the Southern District of New York ruling for New York University on all outstanding claims.
While their conclusions have differed, however, the courts generally shared one view: 403(b) and 401(k) fiduciaries should be held to the same standard. As the court in the University of Pennsylvania case wrote: “While § 401(k) and § 403(b) plans have different historical roots and historical structures that demand different fiduciary duties for administrators, those differences have largely eroded over time. Today, the obligation of beneficiaries and fiduciaries in § 401(k) and § 403(b) plans are nearly identical.” (Sweda v. Univ. of Pa., No. 16-4329, 2017 BL 334297 (E.D. Pa. Sept. 21, 2017))
Judge Rosemary M. Collyer made it clear from the first paragraph of her opinion that she viewed things differently: “If a cat were a dog, it would bark. If a retirement plan were not based on long-term investments in annuities, its assets would be more immediately accessed by plan participants. These two truisms can be summarized: cats don’t bark and annuities don’t pay out immediately.” (Wilcox, 2019 BL 5946)
Judge Collyer recognized that § 403(b) “predates ERISA and speaks directly to the heritage of the collegiate retirement system,” including its historical reliance on annuity contracts as investment options. (Id.)
She found it was not a breach for the plans to operate “under the particular protections of § 403(b),” and “[t]herefore the question is whether the Complaint alleges fiduciary breaches in the context of the § 403 Plans in question.” (Id.)
One such breach alleged by the plaintiffs was Georgetown’s use of three recordkeepers, which they claimed led to duplicative, overpriced services that could have been avoided by consolidating to one provider.
Judge Collyer disagreed. “When it comes to recordkeeping, the relevant difference between Georgetown’s § 403(b) plans and corporate § 401(k) plans is not the nature of their defined contributions but the nature of the retirement investment programs offered to their employers, i.e., long-term annuities and short term investments.” (Id.)
Judge Collyer found the plaintiffs had failed to provide a single example of a university plan that found a recordkeeper willing to service a competitor’s investments.
The plaintiffs’ claims, she concluded, “challenge the fundamental structures of the Georgetown Plans, not the fiduciary attentions or prudence of its Trustees.” (Id. ) That reasoning will likely be raised before the circuit courts, with four of the cases on appeal and at least two more likely to follow.
It appears that it will be some time until there is any clarity on the larger ERISA issues or on whether, as Judge Collyer described, these cases will continue to “take higher education by storm.” (Id.)
David Powell is a principal at the Groom Law Group in Washington, D.C. His expertise covers tax and ERISA issues relating to all types of employee pension and welfare benefit plans. He specializes in qualified plans of public companies including 401(k), profit sharing, pension and cash balance plans, and international benefits issues.
Mark Bieter is a principal at the Groom Law Group in Washington, D.C. He represents clients in complex commercial litigation in federal courts throughout the country. His practice focuses on representing financial institutions, retirement plans, and trustees in litigation concerning fiduciary duty, employee stock ownership plans, and 401(k) plan investment options and fees, among other matters.
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