Nearly a decade has passed since universities first became the target of defined contribution (DC) fee litigation, which had previously focused on 401(k) plans sponsored by for-profit organizations. Since 2015, more than 20 cases have been filed against universities. Many of these cases have been settled, with payouts totaling nearly $140 million to date. One case went to trial, resulting in a favorable verdict for the university. Another reached the Supreme Court and remains in litigation, with a second case scheduled for argument in 2025. As of November 2024, nine cases are still pending.
By now, the claims have become familiar. Generally, the lawsuits allege that the universities offered too many investment options, failed to replace expensive and underperforming investments and charged above-market fees for investments and recordkeeping services. Some cases have argued that plans with multiple recordkeepers generated duplicative and excessive fees for plan participants. More recent claims by plaintiffs allege misuse of forfeiture assets and imprudently selected target date funds.
A silver lining
One positive result of these lawsuits is that they have prompted many plan sponsors to review and update their fiduciary and governance practices. Now, many plan management activities that were once ad hoc or inconsistent have become routine and best practice. These include:
- Regular reviews of investment performance
- Greater use of delegated investment advisors
- Annual assessments of investment fees
- Market comparisons of recordkeeping fees
- Regular fiduciary training
- Governance assessments
- Periodic evaluations of a plan’s investment lineup and recordkeeping services.
When it comes to plan governance, a set of best practices has also come into focus. For example, it is now common for colleges and universities to have a planning committee that meets regularly with pre-circulated agendas and meeting materials, followed by timely distributed minutes. Investment policies are drafted and updated, committee members receive ongoing fiduciary training, the committee’s charter and delegation are clearly defined, fiduciary liability coverage is reviewed regularly and the committee’s structure and member composition are routinely evaluated.
Higher education’s unique obstacles
But higher education faces unique obstacles that these best practices don’t always fully address. For historical and statutory reasons, retirement plans in higher education look different from those in for-profit companies. In-plan annuity contracts are common, and multiple recordkeepers are prevalent. Many colleges and universities sponsor multiple defined contribution plans. Unlike 401(k) plans, investment options within a 403(b) plan are currently limited to annuities and registered mutual funds. Finally, higher education embodies a distinct culture of excellence, which often necessitates a high-touch response to the demanding expectations of faculty and staff.
Given these challenges, we’ve identified four common claims in university lawsuits that higher education plan sponsors should pay close attention to. We also suggest actions that go beyond the basic fiduciary and governance best practices mentioned above.
A comprehensive retirement structure review can address many of the challenges outlined above. The stakes are high but the goal across all colleges and universities should be the same: to provide the best outcomes for participants while protecting the institution from unnecessary risk.