Duke, Johns Hopkins, UPenn and Vanderbilt latest schools under fire for excessive 403(b) fees

Attorneys, ever present in the 401(k) market, are beginning to target university plans. These lawsuits follow close on the heels of ones against MIT, NYU and Yale.

Aug 11, 2016 @ 1:56 pm

By Greg Iacurci

It's been two days since Yale, MIT and NYU were sued for excessive fees in their retirement plans, and lawyers have already added four more to the pile: Duke University, Johns Hopkins University, the University of Pennsylvania and Vanderbilt University.

The same law firm, Schlichter, Bogard & Denton, is responsible for each of the seven university lawsuits, which allege breach of fiduciary duty under the Employee Retirement Income Security Act of 1974 for allowing the plan to incur excessive investment, record-keeping and administration fees that cost participants millions of dollars in lost retirement savings.

The firm's managing partner, Jerry Schlichter, pioneered excessive-fee litigation in the 401(k) market, where he has been bringing cases for about a decade. It seems he and his firm are broadening their reach to the realm of 403(b) plans, which are defined-contribution plans for nonprofit institutions.

The lawsuits earlier this week were the first to be filed among university 403(b) plans.

“What seems to have happened is plaintiffs' attorneys have discovered there's a whole world of plans in the educational community, and having now discovered them, they're exploring whether or not there are settlements to be extracted,” said Andrew Oringer, partner and co-chair of the employee benefits and executive compensation group at Dechert.

Those settlements have the potential to be hefty. Mr. Schlichter, for example, won the largest-ever sum in cases such as these from Lockheed Martin Corp. last year, to the tune of $62 million. He's won several more, including a $57 million sum from The Boeing Co., earning more than $300 million in aggregate.

Mr. Schlichter didn't return a request for comment.


The Duke, Johns Hopkins, UPenn and Vanderbilt 403(b) plans each have more than $3 billion in assets and tens of thousands of participants. Participants in the plans are bringing suit on behalf of a proposed class.

Allegations among the lawsuits are nearly identical. Over the relevant time periods, plaintiffs claim the university plans used multiple record keepers, imprudently used revenue sharing to pay for record-keeping services and harbored too many investment options, many of which were underperforming funds in a retail share class as opposed to a less-expensive institutional share class.

These factors led participants to pay excessive fees, constituting a breach by fiduciaries to ensure participants incur reasonable fees, plaintiffs claim.

Vanderbilt's and Duke's plans, for example, used four separate record keepers — Fidelity Investments Institutional Operations Co., Vanguard Group Inc., TIAA and the Variable Life Insurance Co.

The inefficiencies of using multiple providers as well as excessive revenue-sharing payments to these providers, contributed to $45 million in lost savings in the last six years for Duke's participants, and $25 million for Vanderbilt's, according to plaintiffs.

Johns Hopkins University used five record keepers, and UPenn two.

Three out of four of the plans offered more than 300 investment options, the vast majority of them proprietary and split between mutual funds, insurance pooled separate accounts and fixed and variable annuities.

Johns Hopkins' plan, for example, offered more than 440 investment options, Duke more than 400, Vanderbilt 340 and UPenn 78. Plaintiffs allege this number of options causes duplicative investment strategies, which is confusing for participants and doesn't allow fiduciaries to take advantage of economies of scale to achieve better pricing.

“Duke provides a range of options that give employees flexibility in designing retirement plans to meet their individual needs,” said Michael Schoenfeld, a spokesman for the university. “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.”

Similarly, UPenn spokeswoman Phyllis Holtzman said the university uses a “rigorous process to review all aspects of the investment options offered to its faculty and staff to ensure they are administered with the highest degree of care and prudence.”

UPenn plans to defend itself vigorously against the lawsuit, she said.

Vanderbilt hasn't yet been served with the complaint, and hasn't had the opportunity to review allegations, spokeswoman Beth Fortune said. Johns Hopkins spokeswoman Jill Rosen said the university offers its employees a “generous and carefully managed benefits program,” and is in the process of reviewing its lawsuit as well as the others filed this week.

The litigation appears to attack traditional aspects of the 403(b) market, according to Michael Hadley, a partner at the law firm Davis & Harman.

“Having lots of options and lifetime income products available is pretty fundamental to university 403(b) plans,” he said. “The 403(b) market has moved closer to how we administer 401(k) plans over time. But it's certainly not the same as a 401(k) plan.”

Mr. Hadley believes it's “way too early” to determine the validity of the suits' arguments.

Mr. Oringer thinks "you'd really have to establish there was material inefficiency in the use of multiple record keepers that cost participants money in a way that was not defensible. And it just seems to me that that's potentially a tough claim to make.”

Further, courts tend to favorably view providing an expansive number of choices, he said.


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