Pension & Benefits News Excess investment and recordkeeping fees under university 403(b) plan did not support claim for fiduciary breach
Thursday, December 20, 2018

Excess investment and recordkeeping fees under university 403(b) plan did not support claim for fiduciary breach

By Pension and Benefits Editorial Staff

Allegedly excess investment and recordkeeping fees did not state a claim for fiduciary breach where the facts did not allow for a plausible inference that the 403(b) plan fiduciaries took actions to benefit themselves or a third-party entity at the expense of plan participants, or acted under any conflict of interest in administering the plan, according to a federal trial court in Missouri. Moreover, the diverse selection of funds available under the plan negated any claim that the fiduciaries breached their duties of prudence merely because cheaper funds were available in the marketplace.

Excess fees and multiple options under university-maintained 403(b) plan. Washington University maintained a 403(b) plan that retained TIAA and Vanguard as recordkeepers. The recordkeepers were compensated from asset-based fees paid indirectly out of the plan’s investment options, which consisted exclusively of TIAA and Vanguard products.

The plan provided a diversified menu of investment options, including tax-deferred annuities offered by TIAA and mutual funds provided by TIAA or Vanguard. Overall, the plan offered 36 TIAA options and 83 Vanguard mutual funds.

Plan participants brought suit alleging that the plan fiduciaries breached their duties of loyalty and prudence under ERISA by: causing the plan to overpay for recordkeeping and administrative services; causing the plan to pay higher fees by offering retail investment class shares rather than equally available, lower-cost institutional class shares in the same funds; allowing duplicative and poorly performing funds to be bundled into the plan by TIAA and Vanguard mandates, resulting in higher fees and inferior investment returns; failing to take action to address persistent underperformance of certain investment options; and approving a loan program that was prohibited by ERISA.

The plan fiduciaries filed a motion to dismiss for failure to state a claim. The court, contributing to a growing trend (see, for example, Sacerdote v. New York University, DC NY (2018), No. 16-cv-6284), granted the motion.

Note: The primary significance of the court’s opinion was in its analysis of whether excessive fees can establish fiduciary breach.

Possibility of lower fees does not establish fiduciary breach. The participants’ argument that the fiduciary breaches forced them to pay excessive investment and recordkeeping fees was based on several specific charges: funds were selected because they resulted in higher revenue sharing payments to TIAA and Vanguard; the majority of the investment options were offered in retail share classes; and the asset-based revenue sharing the plan paid TIAA and Vanguard was far higher than reasonable compensation for the services rendered.

The participants further charged that the fiduciaries should have: used the size and bargaining power of the plan to negotiate lower recordkeeping fees based on the number of participants, and not the total amount of assets; negotiated a cap on recordkeeping fees; and utilized a single recordkeeper and solicited bids for services, in order to avoid duplicative costs and excessive fees.

Initially, the court dismissed the “false premise” that the possibility of lower fees in the marketplace establishes a breach of fiduciary duty. The court then concluded that the participants failed to allege facts sufficient to raise a plausible inference that the fiduciaries took any actions for the purposes of benefitting themselves, or a third-party entity with connections to Washington University, at the expense of plan participants, or that they acted under any actual or perceived conflict of interest in administering the plan.

Similarly, the court did not find the availability of cheaper funds to be dispositive. The plan offered a diverse selection of funds, including an array of asset classes, investment styles, annuity options, and fee profits, that negated any claim that the fiduciaries breached their duties of prudence just because less expensive funds were available in the marketplace.

The court also deferred to the fiduciaries’ discretionary choice to allow the recordkeepers to be paid on an asset-based rather than a flat fee basis. The participants’ charges, the court stressed, provided no basis for removing the discretion afforded to plan administrators or mandating recordkeeping fee caps or retention of a single recordkeeper.

Finally, the court found that the CREF Stock Account and the CREF Money Market Account were not locked into the plan. The options were bundled with the TIAA Traditional Annuity and could be removed. Bundling is a common practice in the industry, the court further explained, and does not constitute a breach of fiduciary duty.

SOURCE: Davis v. Washington University (DC MO).

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