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.
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:
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.
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.
01
While consolidation may lead to lower recordkeeping fees, there may be legacy commitments that hamper immediate consolidation. Annuities administered by one recordkeeper may not be readily transferable to another and participant-owned annuity contracts may be impossible to unilaterally terminate or transfer. Long-term solutions to address these barriers include designating a lead recordkeeper or directing all new contributions to a new recordkeeper. Plan sponsors should make sure their recordkeeper structure is designed to give the most value to plan participants. They should also keep a good record of why they chose the structure. Additionally, a committee should periodically review their multiple recordkeeper arrangement and document their reasoning, whether they decide to keep this structure or chart a timetable for change.
02
A culture of choice is common in higher education and as a result, plans often offer numerous and, at times, overlapping investment options. Sometimes these options are influenced by faculty or staff members advocating for specific funds. While choice is generally viewed as a good thing, too much choice may not be to the benefit of plan participants. Indeed, academic studies show that too many investment choices can lead to “choice overload,” resulting in suboptimal decision making. Equally important, too much choice undermines the leverage that scale could otherwise bring to lowering costs. Perhaps most important, the Supreme Court has rejected arguments that investment menus need to include only some ‘good’ funds to allow some bad ones. Instead, each fund has to stand on its own merits, or at least relative to the other funds in the overall menu. Given these considerations, plan sponsors should continually monitor their investment lineup to avoid excessive and duplicative investment options. They should document the rationale for their decisions and establish a governance process for responding to participant input.
03
Higher education faces barriers that the 403(b) lawsuits don’t fully consider. While per-participant fees have become the preferred structure in 401(k) plans, implementing this structure in 403(b) plans is often challenging. The reason is that 403(b) plans often include annuity contracts with embedded fees that are difficult to isolate. Establishing a per-participant fee structure when some participants elect annuities and others don’t adds complexity. Nonetheless, it’s important for plan sponsors to work with their advisors and recordkeepers to establish a fee structure that’s competitive, practical and equitable for all participants. While revenue sharing — the use of a portion of an investment expense ratio to pay for services — isn’t itself a problem, revenue sharing needs to exist within an equitable allocation of fees across participants. Thus, an investment structure that includes revenue for some funds (or recordkeepers) and not others can be especially problematic and warrants additional documentation of higher due diligence.
04
When comparing fees, it’s important to ensure that benchmarking is done on an “apples to apples” basis that reflects the current competitive market. Unfortunately, relying on fee surveys is often insufficient, particularly for 403(b) plans, given that these markets are subject to particular changes as universities themselves respond to unique demographic and consumer pressures. Several additional factors must be considered when benchmarking investment and recordkeeping fees for higher education institutions. These include the number of plans the institution sponsors, the size of plan assets, the number of recordkeepers, the type of plans included, the prevalence of annuity contracts and the levels of service demanded by faculty and staff. Given these considerations, colleges and universities often find that a customized services fee benchmarking review or a formal recordkeeping search is needed. As stated by the Supreme Court, the inquiry into the duty of prudence should be “context specific.”
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.
