In rare move, investment adviser named as defendant in NYU retirement plan case

It's one in a growing list of instances where plan advisers are being named co-defendants alongside their clients.

In an unusual turn of events, the investment adviser to New York University’s retirement plan has been named as a co-defendant in litigation attacking the plan’s allegedly excessive fees.

Plaintiffs contend the adviser, Cammack LaRhette Advisors, provided “imprudent investment advice,” which enabled NYU to breach its fiduciary duty to plan participants, according to an amended complaint filed in the lawsuit Sacerdote et al v. New York University. The adviser’s involvement suggests more retirement plan advisers could find themselves drawn into similar legal battles.

The NYU case was originally filed in August 2016, one of more than a dozen brought that summer against universities for allegedly excessive retirement plan fees. Those lawsuits were noteworthy because they were the first of their kind to target university 403(b) plans. Fee litigation, which has proliferated since an initial tranche in 2006, had previously focused on private-sector 401(k) plans.

NYU was able to beat back parts of the lawsuit in August, when a judge dismissed some allegations, including that the university erred by including too many investment options in the retirement plan. However, some claims were allowed to move forward.

Plaintiffs, represented by Schlichter, Bogard & Denton, the firm that pioneered 401(k) excessive-fee litigation, filed an amended complaint Jan. 10 that, for the first time in the course of the NYU litigation, named Cammack as a co-defendant.

Such a move is noteworthy because advisers to retirement plans had been noticeably absent from the vast majority of 401(k) litigation in the past, but have begun showing up recently.

“We haven’t seen many at all that have named the investment advisory firm as a defendant,” said Duane Thompson, senior policy analyst at fi360 Inc., a fiduciary consulting firm. “This is unusual, because plaintiffs [typically only] go after the plan sponsor and/or the plan sponsor’s investment committee.”

(More: Attorney Jerry Schlichter opens up about 403(b), 401(k) suits)

In one recent example, Cetera Advisor Networks was named as a co-defendant alongside its client, Checksmart, for fiduciary breach. There could be many more similar instances in the future due to the Department of Labor’s fiduciary rule, Mr. Thompson said. The regulation converted thousands of advisers serving retirement plans into first-time fiduciaries.

The NYU suit claims Cammack served in a co-fiduciary role alongside the plan sponsor, advising on matters such as the reasonableness of fees in investment options, selection of service providers and performance of investments for the $2 billion NYU School of Medicine Retirement Plan.

Plaintiffs allege Cammack’s imprudent advice extends to use of weighted averages provided by Morningstar to benchmark plan fees, not recommending removal of the CREF Stock or TIAA Real Estate Accounts from the retirement plan despite “long histories of dramatic underperformance and exorbitant fees,” and failing to account for “float” income when evaluating record-keeper fees.

Cammack spokeswoman Cara McAuley said the firm believes the claims have no merit and will “vigorously defend” against them.

NYU spokesman John Beckman, said, “This seems to be the Schlichter firm’s response to our motion to dismiss their lawsuit. Their case is without merit, and their suit has already largely been dismissed. We will continue to press for the dismissal of the suit in its entirety.”

Plaintiffs in roughly 10 university lawsuits have been successful in getting at least some claims in university retirement-plan lawsuits to move forward.

“Nearly all of these cases that have been filed still have traction, including the class action against New York University,” Mr. Thompson said. “Only one case — against the University of Pennsylvania — has been dismissed in its entirety.”