Class action lawsuits against colleges and universities for

Last week, several class action lawsuits seeking millions of dollars in damages were filed against eight for-profit universities challenging the administration of their 403(b) retirement plans. The lawsuits, all filed by the same St. Louis-based law firm, are a continuation of the numerous 401(k) fee lawsuits against large corporations filed in recent years that resulted in millions of dollars in damages and legal fees. These lawsuits prove that colleges, with their large plans and plan assets, are not immune to challenges to the administration and oversight of those plans.

Public educational institutions and nonprofit organizations may offer their employees a 403(b) retirement plan. These plans are similar in how they work to 401(k) plans in that tax-free contributions are made to the plan and then invested tax-free by participants until the amounts are withdrawn at retirement. Like 401(k) plans, most 403(b) plans are subject to the rules of the Employee Retirement Income Security Act (ERISA).

In the cases filed last week, the plaintiff employees allege that the fiduciaries of the 403(b) plans sponsored by their university employers breached their fiduciary duty under ERISA with respect to the management of the plans’ investments – specifically, the number of investment options offered to participants and the fees associated with those investment options. The complaints in these recently filed cases include the following allegations:

The plans contained too many investment options for participants, with several plans containing hundreds of investment options and many duplicative investment options;
The plans used multiple record keepers, resulting in excessive record keeping fees;
The plans included underperforming funds as investment options;
The plans included several actively managed mutual fund options, effectively producing index fund returns at higher costs than passive index funds;
The plans included more expensive or retail-focused investment options when lower-cost identical or nearly identical institutional-grade alternatives were available; and
The plans did not use their bargaining power, which was based on the amount of assets each plan had—the sued plans reportedly total more than $27 billion—to obtain lower-cost investment options for participants.

Litigation related to investment fees and the costs paid by these plans is increasing rapidly and expanding into new areas. These recently filed cases are an excellent reminder of ERISA’s high standards and the care required to properly oversee the investment offerings in a 403(b) or 401(k) plan. Fiduciaries of 403(b) or 401(k) plans can take steps to reduce the risk of litigation and ensure they meet ERISA’s high standards. For example, fiduciaries can conduct an audit of their plan’s fiduciary practices and provide fiduciary training for the individuals who administer the plan. Plan fiduciaries should also review their plan’s fee structure and enter into negotiations with vendors to reduce these costs. In addition, plan fiduciaries should consider whether it would be prudent to engage an investment advisor to select and develop the plan’s investment platform.