Appeals court reverses dismissal in NYU lawsuit

The first class-action lawsuit over 403(b) plan fees to go to trial is likely heading back to court.

On Monday a panel of judges in the U.S. Court of Appeals for the 2nd Circuit reversed a lower court’s decision to dismiss a claim over alleged fiduciary breaches from the selection of mutual fund share classes within the New York University retirement plans. Under the recent decision, the plaintiffs may also be able to name additional defendants in the case.

The development is a victory for law firm Schlichter Bogard & Denton, which several years ago led a legal crusade against 403(b) plan sponsors, suing numerous elite colleges and universities on the grounds of excessive fees and other fiduciary breaches.

The 2016 case against NYU was the first that went to trial. After the bench trial in 2018, the district court found in favor of the school on all claims that it had not previously dismissed. At the time, that was viewed as a major win for schools that had been targeted in similar litigation by Schlichter and other law firms.

But the district court erred in dismissing a claim over mutual fund share classes, according to Monday’s decision. That claim, for breach of duty of prudence, is going back to the lower court. The appellate judges also found that the plaintiffs were wrongly denied leave to amend their complaint to name additional defendants.

However, the appeals court affirmed several decisions by the district court, including the findings for NYU at trial, denial of a jury trial, the use of written declarations rather than live testimony and denial for a new trial. The plaintiffs had contended that the district court judge should have been disqualified, due to an alleged connection to NYU.

“The complaint sets forth cost differentials of specified basis points for the dozens of mutual funds as to each of which, they claim, NYU should have offered lower-cost institutional shares instead of higher-cost retail shares,” the recent appellate decision read. “Plaintiffs allege that this information was included in fund prospectuses and would have been available to inquiring fiduciaries when the fiduciaries decided to offer the funds in the plans.”

The university’s plans, which included one for the medical school, used TIAA and Vanguard Group Inc. as record keepers, and each included many investment options from each firm. Those investment options included mutual funds, fixed annuities and variable annuities.

The school allegedly breached its duty of prudence by opting for retail share classes of some of the mutual funds, rather than lower-fee institutional varieties.

Schlichter brought a separate case against another school, Northwestern University, which also was defeated at trial. In July, the U.S. Supreme Court agreed to hear arguments in the case.