Princeton Retirement Plan Faces ERISA Challenge

A new lawsuit filed in the U.S. District Court for the District of New Jersey, Nicolas vs. Trustees of Princeton University, will make for some very familiar reading for retirement industry professionals.

The suit was filed by attorneys with Schneider Wallace Cottrell Konecky Wotkyns LLP and Berger & Montague PC—two firms behind some of the best-known examples of Employee Retirement Income Security Act (ERISA) litigation. Fidelity, Aon Hewitt, Charles Schwab, State Farm, Voya, Xerox and TIAA have all been named in suits filed by the firms in recent years.

This latest lawsuit includes broad swaths of text borrowed directly from those previous challenges. Here is how the classic claim is leveled: “Instead of leveraging the plans’ massive bargaining power to benefit participants and beneficiaries, defendant failed to investigate, examine and understand the real cost to plans’ participants for administrative services, thereby causing the plans to pay unreasonable and excessive fees for investment and administrative services.”

Specifically, plaintiffs suggest Princeton inappropriately “agreed to pay an asset-based fee for administrative services that increased as the value of his participant account rose, even though no additional services were being provided.” Further, the suit contends, Princeton “selected and retained investment options for the plans that historically and consistently underperformed their benchmarks and charged excessive investment management fees, as well as share classes that were more expensive than other share classes readily available to qualified retirement plans that provided plan investors with the identical investment at a lower cost.”

The retirement programs of nationally known U.S. universities have increasingly become the targets of such ERISA claims. Broadly the lawsuits include many of the same disputes and seek similar forms of damages and relief, arguing that these retirement programs should look more like best-in-class 401(k) plans run by private sector employers. However there are many who argue this perception is fundamentally flawed, in that 403(b) retirement plans offered to college administrators and faculty will be serving potentially quite a different purpose from the perspective of the whole benefits package compared with a corporate 401(k).

NEXT: Reading into the Princeton lawsuit 

Among other lines of argument, the lawsuit zooms in on investment options provided by TIAA, in particular the plans’ principal capital preservation options. This slot on the investment menu, plaintiffs explain, is filled by the TIAA Traditional Annuity.

According to plaintiffs, the investment in imprudent for an ERISA plan for a variety of reasons. First, it “prohibits participants from re-directing their investment in the Traditional Annuity into other investment choices during employment except in ten annual installments, effectively denying participants the ability to invest in equity funds and other investments as market conditions or participants’ investment objectives change.”

The Traditional Annuity, plaintiffs assert, also prohibits participants from receiving a lump sum distribution of the amount invested in the Traditional Annuity unless they pay a 2.5% surrender charge “that bears no relationship to any reasonable risk or expense to which the fund is subject.”

Plaintiffs assert the continued offering of the annuity option conflicts with various ERISA standards that require plan sponsors to ensure the investment opportunities they present to employees are prudent and reasonably priced. Beyond this, they suggest “there is substantial additional evidence of a flawed process, such as incorrect reporting on the participant fee disclosure prepared by TIAA of expense ratios for the available Vanguard funds, making many of those funds appear more expensive than they really were.”

The text of the lawsuit actually directly quotes a 2012 PLANSPONSOR article as it discusses further claims regarding Princeton’s choices about recordkeeping for the plan. The plaintiffs essentially claim that an employer with the scale and sophistication of Princeton should have long ago moved to consolidate and rationalize its recordkeeping arrangements.

“Despite the long-recognized benefits of a single recordkeeper for a defined contribution plan, defendant continues to contract with two recordkeepers, TIAA-CREF and Vanguard,” the suit states. This is a claim that many 403(b) industry practitioners will view skeptically, given the differences between the typical 401(k), which indeed probably should have just one recordkeeper, versus a 403(b) plan, wherein recordkeeper capability to offer and service annuities is generally a much more important part of the whole equation.  

The lawsuit goes on to make the assertion that Princeton is effectively allowing “kickbacks” to flow to TIAA via revenue sharing from plan investments, representing, they argue, an impermissible conflict of interest that has prevented optimal plan performance. 

The lengthy text of the full complaint, including more specific details about the claims described above, is available for download here.