403(b) sponsors finding success beating back lawsuits

With 20 cases filed against them in court, many have obtained dismissals

Sep 1, 2018 @ 6:00 am

By Jason C. Roberts and Dean Scoular

Sweeping claims began stacking up over a decade ago in federal courts alleging that some of the nation's largest employers breached their fiduciary duties to 401(k) participants under ERISA. These class-action cases contained almost identical allegations, including excessive fees associated with plan investment options, improper use of revenue sharing and the failure to negotiate lower record-keeping fees.​

At the time, most courts were reluctant to grant the defendants' motions to dismiss, given that the reasonableness or prudence of their decisions was inherently based on facts and circumstances unique to each plan. Rather than rolling the dice on a successful defense while continuing to generate unfavorable headlines, many plan sponsors elected to settle, and hundreds of millions of dollars began flowing into the coffers of the plaintiffs' bar.

Ten years later, beginning in August 2016, law firms took aim at the ERISA 403(b) market. With a couple of notable exceptions, the claims were very similar to those filed against 401(k) plan sponsors. Those that were unique to the nonprofit sector included the use of multiple record keepers and alleged failures to limit the number of investment options to obtain more favorable institutional pricing.

Many observers expected an even less favorable outcome for 403(b) sponsors — particularly given their seemingly ad hoc or patchwork plan design and largely unexamined practices of both sponsors and service providers.​

The early results, however, have been markedly less successful for the 403(b) plaintiffs. Out of the 20 cases filed, the University of Pennsylvania and Northwestern University were able to obtain complete dismissals prior to going to trial. While the University of Chicago offered to settle its case for $6.5 million, many of the other defendants have been successful in obtaining partial dismissals pre-hearing.​

In late July, New York University successfully fought its remaining claims in a full evidentiary hearing on the merits. Given that NYU was the first of the 403(b) cases to go all the way to trial, the court's rationale is being closely tracked and mapped to the remaining cases.

The favorable ruling for NYU can be loosely broken down into two buckets: structural differences unique to 403(b) plans and prudent processes employed by the plan's fiduciaries.

Unlike many 401(k) plans, which typically contain 10 to 20 core investment options through a single record keeper, it's standard practice for 403(b) plans to offer dozens or hundreds of fund choices and multiple record keepers. Plaintiffs claimed they were injured because the plan could have consolidated its assets with a single record keeper to realize lower administrative and investment-related expenses.

From a structural perspective, because 403(b) plans were historically funded with individual annuities, most sponsors offered access to a number of annuity providers. Proprietary limitations on record-keeping annuity products and the grandfathering of legacy contracts with more favorable terms or to avoid penalties naturally resulted in duplication of record keepers and investment options. Many 403(b) plans now offer access to traditional custodians with even more investment options. Based upon these factors, and some that were unique to the NYU plan, the judge ruled that there was insufficient evidence to conclude that defendants acted imprudently by failing to consolidate the plan's record keepers or limit investment options.

From a process perspective, while Judge Katherine B. Forrest of U.S. District Court for the Southern District of New York did take the opportunity to admonish a couple of plan committee members for not taking their duties seriously, she held that the committee as a whole acted prudently. Noting that "over a period of several years, the Committee issued several RFPs regarding record-keeping services," which resulted in "consistently decreased [record-keeping fees]," she held the evidence supported the committee's prudence in managing its record keepers.

To the extent this case is a harbinger of what's to come, recognizing that defense verdicts are subject to appeal, plan sponsors and service providers should take comfort in Ms. Forrest's recognition of the value of "collateral services offered to participants." She aptly pointed out to the plaintiffs that "a fiduciary needs to examine both fees, the services offered, and total value [to participants]."​

Jason C. Roberts is the founder and CEO of the Pension Resource Institute and managing partner of Retirement Law Group. Dean Scoular is senior counsel at Retirement Law Group.


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