2021 Retirement Plan Judicial Update

Each year, our Technical Services Committee creates a Regulatory Update covering the legislative, regulatory, and litigation developments affecting retirement plans. This year, we continue the conversation about the SECURE Act and the new provisions released this year, as well EPCRS changes, DOL updates, and the notable retirement plan fee litigation cases from this year. So far, we have covered our 2021 legislative, IRS, and DOL updates. This year brought several judicial updates. Here is what we cover about retirement plan lawsuits in 2021.

College and University ERISA 403(b) Litigation Update


New York University ERISA 403(b) Excessive Fee Lawsuit

Sacerdote v. New York University is one of the only higher education fee lawsuits that went to trial and received a decision. In July 2018, following a bench trial, a U.S. District Court judge issued an order in favor of New York University.

The plaintiffs appealed the dismissal of several claims to the 2nd U.S. Circuit Court of Appeals. Two of the six challenges to the decision were affirmed and were remanded to a lower court for further review. The two claims that were revived were: “(1) the dismissal of their claim that NYU breached its duty of prudence by offering particular share classes of mutual funds in the retirement plan, (2) the denial of leave to amend their complaint to name additional defendants…”

Offering the Lowest Cost Share Class
The appellate court determined that the dismissal of the share class claim prior to the bench trial was in error. The dismissal in the original decision indicated that the prudence of each investment did not need to be assessed individually but rather looked at the investments available in the plan collectively. Taken as a whole, it determined that the presence of the retail share-classes of some investments was not sufficient to taint the entire plan. The two plans in question both offered 63 retail share class options out of 103 options in the Faculty Plan and 84 offered in the Medical Plan.

In the original complaint, the plaintiffs alleged that lower share classes were readily available and that a simple review of an investment’s prospectus would have uncovered the lower-cost alternatives. The appellate court ruled that the plaintiffs had sufficiently alleged that NYU acted imprudently in offering the number of retail-class shares within the plans.

The decision was based on several factors:

  • The plaintiffs’ pleadings generated plausible inferences of the claimed misconduct and should not have been dismissed on the notion that prudent fiduciaries may elect to offer retail over institutional share classes.
  • The lower court relied too heavily on cost ranges from other ERISA cases.
  • Assessing the mix of investments in the plan as a whole is generally acceptable but does not preclude the assessment of individual funds, especially in a case where the decision is based on investments whose only differentiation is cost.

Amending Claim to Add Additional Defendants
Prior to the bench trial, the plaintiffs’ motion to add 17 individuals who had served as fiduciary committee members during the class period was denied. The appellate court ruled that the denial was based on the wrong legal standard and that the denial was not harmless to the plaintiffs’ case.

The original complaint named the NYU Committee as the defendant rather than the individual members. The trial court had criticized two committee members as incompetent in performing their roles as fiduciaries. These were two of the individuals that the plaintiffs sought to add to the complaint. Because the committee was the defendant, decisions were made based on the collective performance of the full committee rather than on the performance of individual committee members. The analysis and decisions may have been different had the individual committee members been named as defendants in the case.

Columbia University Settles ERISA 403(b) Lawsuit

In May of this year, the terms of the settlement in the case of Cates v. The Trustees of Columbia University in the City of New York were disclosed. The allegations against Columbia University were similar to most other higher education ERISA lawsuits. The plaintiffs’ claimed Columbia breached their fiduciary duty by selecting and retaining poor performing and expensive investments within the plan and causing the plan to pay excessive fees to service providers.

In electing to settle the case, Columbia University agreed to a $13 million monetary payment. In addition, similar to the other settlements, there were several non-monetary provisions. These provisions are worth noting as plan sponsors review their own fiduciary oversight.

These provisions include:

  • Mandatory annual training for the plan fiduciaries related to their ERISA responsibilities
  • Price recordkeeping fees on a per participant or per account basis
  • Maintain the lowest available share class for each investment option offered through the plan
  • Continue to use an independent investment consultant to participate in quarterly meetings
  • Conduct a request for proposal for recordkeeping and administrative services
  • Inform current recordkeepers that they may not use plan data to sell non-plan products and services to plan participants
  • Inform participants of their ability to redirect assets from frozen investment options to the new updated investment options

Supreme Court to Review Dismissal of Northwestern University ERISA 403(b) Excessive Fee Case

Hughes v. Northwestern University is an excessive investment and recordkeeping fee case similar to several other higher education, breach of fiduciary duty cases. This case was dismissed by the district court for failing to sufficiently plead a breach of fiduciary duty. On appeal, the Seventh Circuit Court affirmed the dismissal. This is the opposite result from the Second Circuit Court in Sacerdote v. New York University discussed earlier. In addition, in early 2020, the Third Circuit Court reversed a portion of the dismissal of another higher education lawsuit with similar claims against the University of Pennsylvania.

The Supreme Court was asked to hear the Northwestern case to resolve the inconsistent Circuit Court rulings on similar if not identical claims. The Supreme Court will have the opportunity to clarify and set a standard to determine what is sufficient to state a claim for a breach of ERISA’s duty of prudence related to selecting investments and monitoring plan expense. The Supreme Court will hear the case during its next term in October 2021 and a decision would be expected in 2022.

401(k) Litigation Update


Breach of Fiduciary Duty and Loyalty Claims Move Forward Against Investment Consultant

In Turner v. Schneider Electric Holdings, Inc., Schneider Electric and their investment consultant, AON Hewitt, were named defendants for ERISA claims of breach of fiduciary duty and prohibited transactions. Both defendants filed motions to dismiss and in May 2021 a federal judge dismissed some of the claims but allowed several to proceed.

The plaintiffs claimed the retirement plans included AON Hewitt’s proprietary collective investment trusts (CITs) as investment options. This included transferring assets from Vanguard’s target date funds to a suite of proprietary target date funds that did not have an extensive track record. The ruling indicated that while the claim would not survive based on a retroactive comparison of the AON investment performance to similar options, it would survive on the assertion that they were improper due to an insufficient track record to properly judge adequacy for the plan.

It is alleged that the use of the funds resulted in financial gain to AON and financial loss to plan participants. The plaintiffs claim both defendants breached a duty of loyalty and a duty of prudence for including the investments. The judge denied AON’s motion to dismiss on both claims because it was possible that AON failed to act solely in the interest of plan participants in promoting the use of their funds. Interestingly, the judge granted Schneider Electric’s motion to dismiss the duty of loyalty claim but not the duty of prudence. The duty of loyalty claim will only proceed as it relates to AON while the duty of prudence claim will proceed against both defendants.

The judge also allowed claims to proceed against Schneider that it failed to include the lowest share class of investments available and failed to put the plan services through a competitive bidding process.

The ruling pointed to other cases that have been allowed to proceed with similar share class and RFP allegations.

reg update 2021
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