The rash of lawsuits filed against 401k plans has moved into the 403b not-for-profit world with cases filed against three major universities by the leading plaintiff’s attorney in this burgeoning area. NYU, MIT and Yale, each with more than $3 billion in plan assets, are the most recent target of lawsuits filed by Jerome Schlichter on behalf of employees seeking class action status alleging excessive fees and high cost poor performing funds causing lost retirement savings.
Larger plans have substantial bargaining power to negotiate lower fees which they sometimes neglect to use caused, in part, by the fact that these costs are paid by participants. The most recent lawsuits against NYU and Yale, which use TIAA as their record keeper, and MIT which uses Fidelity, are seeking class action status which will be the key to moving forward. Along with excessive fees, the suits allege that there were too many funds, especially high-cost and low performing investments.
Most of the lawsuits have been filed against for profit companies using 401k plans but the issues that plague these companies are also prevalent in the not-for-profit 403b world. Because of limited competition with fewer providers enjoying a greater share of market, it may be more difficult for plan sponsors to find record keepers and other service providers equipped and willing to serve their plans.
The suits allege that TIAA’s fees were inflated using high cost variable annuities while it was alleged that MIT’s selection of Fidelity was possibly influenced by donations to the university as well as a key Fidelity executive serving as a Trustee
Lawsuits against money managers offering their own investments in their company’s 401k plan are exploding with the most recent one filed against Neuberger Berman.
Though the lawsuits against smaller plans are limited because there are fewer assets and potential damages, experts predict that more cases are likely as the new DOL conflict of interest rule limits the ability of providers to restrict class action lawsuits. As smaller plans grow, they tend to stay with the same providers even if they are no longer appropriate and they often neglect to renegotiate fees even as they buying power increases.
Look for the rash of lawsuits to continue and expand into the 403b market where competition is limited as well as the small plan market as class action status becomes easier to obtain.
