Appeals court says university cannot force ERISA lawsuits into arbitration

Decision involves two lawsuits related to University of Southern California retirement plans

Jul 25, 2018 @ 12:02 pm

By Robert Steyer

A federal appeals court ruled Tuesday that the University of Southern California cannot compel participants in two retirement plans to accept arbitration rather than proceed with a trial to address ERISA complaints against university fiduciaries.

The decision by the three-judge panel of the U.S. 9th Circuit Court of Appeals upheld a ruling in March 2017 by a Los Angeles U.S. District Court judge supporting the plaintiffs against the Los Angeles-based university in the case of Munro et al. vs. University of Southern California.

Nine current and former employees of the university sued in August 2016, alleging assorted violations of ERISA in the management of the two university retirement plans — the University of Southern California Defined Contribution Retirement Plan and the University of Southern California Tax-Deferred Annuity Plan. Each plan had $2.5 billion in assets as of Dec. 31, 2016, according to the most recent Form 5500s.

Although university employees were required to sign arbitration agreements as a condition of employment, the appeals court said the argument by the university and other defendants "fall outside the scope of the arbitration clauses in individual employees' general employment contracts," the appeals court wrote. "The District Court properly denied the motion to compel arbitration."

In the original suit, the plaintiffs criticized the university fiduciaries for employing four record keepers because "prudent fiduciaries of similarly sized defined contribution plans use a single record keeper rather than hiring multiple record keepers and custodians or trustees."

The plaintiffs said the university should have used its plans' asset size "to provide economies of scale," enable the payment of "reasonable record-keeping fees," and avoid "duplication of services when one record keeper is used."

The participants also claimed the defendants "failed to conduct a competitive bidding process for the plans' record-keeping services," adding that such a process would have led to the hiring of "a record keeper charging reasonable fees."

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

The suit also argued that university fiduciaries didn't take full advantage of lower-cost investment options, maintaining that they selected and continue to provide plan investment options with far higher costs than were and are available for the plans based on their size.

USC officials declined to comment on the ruling.

(More: In a first, University of Chicago settles 403(b) lawsuit for $6.5 million)

Robert Steyer is a reporter at InvestmentNews' sister publication Pensions & Investments.


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