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The Latest on the Higher Education Fee Litigation The Latest on the Higher Education Fee Litigation

The Latest on the Higher Education Fee Litigation

In August 2016, class action lawsuits were filed against 12 private universities sponsoring defined contribution Code Section 403(b) and/or 401(k) retirement plans. The lawsuits allege that the universities paid excessive recordkeeping, administrative, and investment fees and failed to remove expensive, underperforming investments from their plans' menus of investment options in favor of lower cost investments. The higher education lawsuits are unique in that they are the first fee litigation cases involving 403(b) retirement plans and allege that very common 403(b) funding arrangements constitute fiduciary breaches. While the ultimate success of the lawsuits remains to be seen, plaintiffs in two of the cases recently survived the first hurdle to moving forward.

On May 10, 2017, the district court in Atlanta issued the first substantive decision in the higher education fee litigation cases, granting in part and denying in part Emory University's motion to dismiss plaintiffs' complaint. Significantly, the Emory court rejected plaintiffs' claims that Emory acted imprudently by offering too many investment options, which plaintiffs argued resulted in participant "decision paralysis." The court held that offering a large number of investment options does not harm participants, but rather increases their opportunities to choose the investments they prefer.

For the most part, however, the Emory court allowed the plaintiffs' claims to proceed.  Specifically, the court denied Emory's request to dismiss claims that it breached its duties of loyalty and prudence by engaging in the following practices:
  • Choosing retail class shares over institutional class shares
  • Including recordkeepers' actively-managed funds without researching alternative options
  • Including certain funds that charged excessive fees due to unnecessary layers of fees
  • Retaining underperforming funds
  • Including the TIAA Traditional Annuity rather than a stable value fund
  • Using an improper revenue sharing method
  • Retaining multiple recordkeepers
  • Failing to put recordkeeping services out for regular competitive bids
The court largely denied Emory's request to dismiss claims that it engaged in prohibited transactions under the Employment Retirement Income Security Act of 1974 (ERISA), as well as Emory's request to dismiss the claim that it acted imprudently by "locking in" agreements with its vendors that prohibited Emory from removing certain underperforming funds of the vendor.  However, the court did rule that ERISA time-barred plaintiffs from recovering any damages from breaches that occurred more than six years from the date of filing.

The second substantive decision in the higher education fee litigation cases was issued the next day, on May 11, 2017, by a district court in North Carolina. That decision refused to grant most of Duke University's motion to dismiss. Although the Duke opinion was very brief with little explanation given for the court's decision, it is interesting in its deviations from the Emory decision. The Duke court broke with the Emory court in dismissing as time-barred all claims arising from Duke "locking in" agreements with its vendors that prohibited the removal of certain vendor investment options.  In contrast to the Emory court, the Duke court permitted plaintiffs to move forward on the claim that Duke acted imprudently by including too many investment options under the plan.

While the courts are just beginning to give shape to the initial cases filed, plaintiff law firms are not sitting still. On May 18, 2017, the University of Chicago became the 13th private university sued over its retirement plan's fees and investment options. The University of Chicago lawsuit is very similar to the earlier 12 lawsuits, but additionally asserts that TIAA's loan program constitutes a prohibited transaction and that TIAA failed to disclose indirect fees related to that loan program. 

While the Schlichter Bogard & Denton law firm—a prolific filer of excessive fee lawsuits since 2006—has filed the majority of these lawsuits, two have been filed by other law firms. This suggests that more law firms are likely to jump into the fray, perhaps attracted by the potential of large settlements at times generated from these types of cases. A simple google search shows that plaintiffs' firms are actively soliciting employees participating in the retirement plans of many other private universities as potential class action representatives. Institutions are well-advised to review their retirement plans and take appropriate steps now to better position themselves from being the next defendant.

For more information on the higher education fee litigation, contact your Ice Miller benefits attorney, or Tara Sciscoe, Chris Sears, or Raven Merlau.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances. 
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