Use of multiple record keepers could hurt defendants in 403(b) lawsuits

Judges in lawsuits targeting the Duke University and Emory University retirement plans have given life to a novel claim against the universities’ use of multiple record keepers, setting the stage for a potential legal blow to a common practice in 403(b) retirement plans.

In recent motion-to-dismiss rulings, district court judges overseeing the cases let claims of fiduciary breach for using multiple record-keeping firms move forward. This was a striking commonality in the judges’ orders, which otherwise delivered mixed results for plaintiffs in other allegations, such as offering too many investment options.

Plaintiffs claim using multiple record keepers results in excessive administrative and record-keeping fees for participants because it doesn’t leverage the plans’ billions of dollars in assets to take advantage of economies of scale to drive lower pricing.

“This is a relatively new, or at least a newly successful, claim,” said Douglas Dahl, counsel at Bass, Berry & Sims. “I think the fact that the claim continued is definitely noteworthy.”

Duke and Emory were among a dozen prominent universities sued last summer for how they operated their university defined-contribution plans, most of which are 403(b) plans. Although the 401(k) market has been rife with excessive-fee lawsuits, these were the first-ever lawsuits to target universities for 403(b) fees.

The Duke and Emory suits — Clark et al v. Duke University et al, and Henderson et al v. Emory University et al, respectively — are the furthest along of university cases, and as such may be a harbinger for rulings in the other university proceedings. While many 403(b) plans have multiple record keepers, the practice rarely if ever occurs in 401(k) plans, which consolidate service under a single vendor.

Duke uses four record keepers: TIAA, Vanguard Group, Fidelity Investments and The Variable Annuity Life Insurance Co., according to court documents. Emory uses three: Fidelity, TIAA and Vanguard.

“I think the allegation that multiple service providers results in actionable inefficiencies is an emerging claim,” said Andrew Oringer, partner and co-chair of the employee benefits and executive compensation group at Dechert.

However, it’s possible use of multiple providers could ultimately make sense, and that the value to the plan and participants outweighs whatever inefficiencies exist, Mr. Oringer added.

“It’s by no means clear to me that there is anything necessarily wrong with the use of multiple service providers,” he said.

The claims that weren’t dismissed will move on to the discovery stage of litigation and then trial, absent any sort of settlement.

Roughly 76% of 403(b) plans use one plan provider, according to the Plan Sponsor Council of America. Around 14% use two, and 9% use between three and five.