By now, Jerry Schlichter is practically a household name among those in the retirement industry.
Mr. Schlichter, the founding and managing partner of St. Louis-based law firm Schlichter Bogard & Denton, owes this fame — or notoriety, depending on your point of view — to his pioneering lawsuits challenging major corporations such as Boeing and General Dynamics over excessive fees in their retirement plans.
Since 2006, when Mr. Schlichter began filing these lawsuits on behalf of 401(k) plan participants, he has won more than $300 million in settlements, including a record $62 million from Lockheed Martin Corp. last year, which critics point out has made his firm a handsome amount of money in the process. He also won a judgment last year in the only 401(k) fee suit to go to the U.S. Supreme Court, Tibble v. Edison.
Within the last week and a half, though, the Lone Ranger of the 401(k)'s, as the New York Times has labeled him, hit yet another milestone — he became the first lawyer to bring suit against universities for fees in their 403(b) plans. And he entered the market with a vengeance not seen since his initial volley of lawsuits a decade ago, targeting prestigious schools such as Yale University, Duke University, Massachusetts Institute of Technology, New York University, Johns Hopkins University, University of Pennsylvania, Vanderbilt University and Emory University.
Since our interview the afternoon of Aug. 16, he's filed four more, against Columbia University, Cornell University, Northwestern University and University of Southern California, bringing the tally to at least 12 to date.
InvestmentNews spoke with Mr. Schlichter about his newest litigation efforts, why it's appropriate to sue over Vanguard fund fees, and how fund share classes relate to Enterprise Rent-A-Car.
InvestmentNews: Why have you and your firm decided to target the university 403(b) market?
Mr. Schlichter: We've had more and more people inquiring about their retirement plans as there has been more and more interest and media coverage of what's going on with fees in retirement plans. And that group of inquiries includes people from universities who've asked us to look at their plans.
InvestmentNews: Those inquiries have increasingly come from university employees?
Mr. Schlichter: I don't want to characterize the frequency, but there are inquiries from people from a variety of plans, including university plans.
InvestmentNews: In the past, you've advertised for participants in specific plans to represent a class of plaintiffs. Has it become easier to identify plaintiffs over the years?
Mr. Schlichter: We've been in the space for a decade now, and obviously people in retirement plans are aware of our work in a way they weren't 10 years ago when we started this. People in all kinds of plans have been in touch with us about their own plans as the focus on fees has heightened. As the issue of fees has come out of a dark closet, which is where it was when we started, we now have much more scrutiny and transparency.
InvestmentNews: How do the 403(b) lawsuits differ from ones you've brought in the 401(k) market?
Mr. Schlichter: Some university plans have large numbers of options in them, hundreds in fact. What we have is numerous options for the same investment style that are duplicative. For example, in the NYU plan, under large-cap domestic equities, there are 19-20 options.
That means you dilute the ability of the plan to get low fees by spreading the assets around in the same investment style, thereby resulting in higher fees than if you selected one large-cap option, as is typical of most 401(k) plans. And you pay fees that, inevitably, if you're in all those large-cap options, you're going to get an index return while paying fees for active management.
InvestmentNews: And you also allege using multiple record keepers dilutes fiduciaries' pricing power.
Mr. Schlichter: Yes, that's right.
InvestmentNews: How are the university lawsuits similar to the 401(k) suits you've brought? The issue of excessive revenue-sharing fees comes up pretty frequently, for example.
Mr. Schlichter: They're similar in that the fiduciary duty is the same, the duty to make sure fees are reasonable and investments are prudent. And there are similarities in some of the allegations — excessive record-keeping fees, paid for by revenue sharing; excessive investment management fees, such as having retail mutual funds in these multibillion-dollar plans; in some cases, imprudent investments with a historical track record of poor performance.
InvestmentNews: Some critics of the 401(k) litigation that's occurred say these lawsuits promote the idea of lowest-cost being best, when ERISA says fees only need be reasonable. How would you respond to that criticism?
Mr. Schlichter: The people who say that are erroneously concluding that's what the cases are about. For example, if you had a Bernie Madoff fund in your plan, and he charged very low fees, it still wouldn't be a prudent investment. The issue is whether fees are reasonable for that particular investment or that particular fund, and that involves a comparison with other funds. If there's an investment a fiduciary believes will beat the market after fees over years over performance, then they should be prepared to make that case.
There's no question, none whatsoever, that employees in billion-dollar plans shouldn't be in retail mutual funds that have an institutional share class which is identical to the retail class in manager, stocks, asset allocation, and every other respect except for fees. That's not about fees being everything, but that's about fees being the only difference.
InvestmentNews: In December's suit against Anthem Inc., for example, you point out in the complaint that while the Vanguard Institutional Index Fund cost 4 basis points, an identical lower-cost mutual fund fee is 2 bps. Some people have said that's a little ridiculous, because it's already very low-cost. Do you see that as overreaching?
Mr. Schlichter: In that case, there are other examples of retail mutual funds that are identical except for fees to institutional share classes that have a bigger spread of difference. But, in billion-dollar plans, some small number of basis points compounded year after year makes a significant difference. Two basis points is a small amount, but there is no justification for paying double the rate, even if that is a small increment of difference.
I'd ask the question to people who raise that point: When you have an identical investment in all respects except fees, and you choose to pick the higher-priced fund, how many basis points should people pay out of their retirement assets as a complete waste of money before you believe there should be a lower-priced fund in the plan? It's a violation of the law whether it's a big amount of money or a small amount of money.
An analogy would be Enterprise Rent-A-Car buying fleet vehicles. They may purchase Honda Civics, which are cheap cars, but when they do they still would buy at a fleet rate rather than an individual rate for someone buying one car from the local dealer.
InvestmentNews: Do you think the fiduciary rule will lead to more of these lawsuits being brought?
Mr. Schlichter: These lawsuits we've brought are not directly affected because the fiduciary duty of the plan sponsors and their committee is so clearly established. That exists already.
InvestmentNews: Do you think advisers may be named as co-defendants along with plan sponsors, seeing as so many more advisers will be lumped into the fiduciary label?
Mr. Schlichter: That's a possibility. A lot of that will depend on exactly how those advisory contracts are set up between the sponsor and the adviser. So it's too early to tell whether that will lead to more litigation or not.
InvestmentNews: What does it take for these lawsuits to get off the ground, and what's the process you go through?
Mr. Schlichter: A whole lot of investigation and work goes into bringing any case. For example, before we ever brought the first case for excessive fees in September 2006, we had spent a year and nine months digging into practices in the industry. We've done the same thing with regard to these cases involving universities.
The result of all that is you arrive at a conclusion as to what's going on, and based on all that you decide on whether or not to pursue a case.
InvestmentNews: Which plan sponsor did you sue first in 2006?
Mr. Schlichter: We sued a number of them at or around the same time. Those include Caterpillar, General Dynamics, Boeing, International Paper, and ABB.
InvestmentNews: It struck me that this round of 403(b) lawsuits was similar to '06 because they were all filed within three days of each other. Did you want to make a statement?
Mr. Schlichter: It wasn't to make a statement. It was the culmination of the time we spent for more than a year looking into this. We reached the result that we reached when we reached it in these cases.
InvestmentNews: Would you say you're now more focused on the 403(b) rather than the 401(k) market?
Mr. Schlichter: We're working in both areas, and vigorously pursuing the cases we have pending in both areas. I wouldn't characterize a priority between the two.
InvestmentNews: How big of a staff do you have dedicated to these ERISA lawsuits? Has it grown markedly over the past decade?
Mr. Schlichter: I don't want to get into details of my internal office working. I'll say this – yes, we have a bigger staff dedicated to this work than when we started.