University 403(b) Plan Faces ERISA Breach Lawsuit

Northeastern University is the latest plan sponsor to confront a lawsuit alleging breach of fiduciary duty to participants 

The new Employee Retirement Income Security Act lawsuit was been filed in the U.S. District Court for the District of Massachusetts. It names as defendants Northeastern University, the retirement plan investment committee and unnamed individuals involved in the operation of the university’s 403(b) defined contribution retirement plan.

The plaintiff is a Northeastern employee, who alleges in the proposed class action complaint that Northeastern retirement plan fiduciaries breached their fiduciary duties to plan participants. The complaint in the case puts forward allegations that mirror prior lawsuits filed against employers for purported fiduciary breaches in the management of their defined contribution retirement plans.

Here, the lead plaintiff claims that the retirement prospects of the university’s workers were harmed by plan fiduciaries. The complaint alleges injuries to participants’ retirements emanated from excessive fees for recordkeeping and investment management costs charged by Fidelity Investments and TIAA. It is further alleged in the lawsuit that the plan failed to ensure that recordkeeping expenses were reasonable and that defendants failed to act to replace plan menu investment options with excessive management fees.

“Defendants limited the plan’s participants to low-performing, high-cost investment options such as the consistently underperforming CREF Stock Account—which by itself accounts for over 10% of the plan’s assets invested—or the costly TIAA Real Estate Account,” the complaint states. “They also subjected participants to dramatically high recordkeeping costs over several years in the class period, well higher than similar plans. Moreover, many of these options were flagged as imprudent in prior ERISA litigation of which defendants could and should have been aware.”

The plan held at least $1.3 billion in assets under management at all times during the proposed class period, according to the complaint.

“Plans this large have outsized bargaining power in the marketplace for DC plan services and greater control over the fees and expenses charged against participants’ investment,” the complaint states. “Defendants, however, did not prudently use this power to ensure participants had access to the best investment options and reduce the plan’s expenses.”

According to the plaintiff, Northeastern compensated Fidelity and TIAA for recordkeeping and administrative services through a revenue-sharing arrangement whereby the recordkeepers received indirect payments from the investments in plans. The complaint explains that, while courts have recognized that the use of revenue sharing is not, on its face, imprudent, revenue sharing “may hide the true scope of fees from participants.”

The complaint states that revenue sharing harmed plan participants because it resulted in workers being forced to pay above-market recordkeeping and administrative costs that were hidden from view.

“The plan’s Form 5500 reports negative compensation to Fidelity, which obviously is not the case,” according to the complaint. “In 2020, the plan’s Form 5500 filed with the DOL reported direct recordkeeping compensation to Fidelity of -$348,656. The form had no entry for direct compensation to TIAA at all.”

The plaintiff claims that defendants “may have” caused plan participants to pay much higher recordkeeping fees than similarly situated plan participants, “but their failure to report accurately the plan’s recordkeeping fees in annual filings renders this information unavailable until discovery occurs.”

The complaint points to a publication by the Department of Labor that speaks to the impact of investment fees on long-term performance. According to the DOL, a worker paying 1.5% instead of 0.5% and earning 7% on an original $25,000 balance can expect their assets will be nearly 35% lower over the long term.  

“Despite these high stakes, despite being subject to ERISA’s strict fiduciary duties, and despite the serious potential for harm to plaintiff and other participants, defendants utterly failed to employ a prudent process for managing the plan,” the complaint states.

The complaint also claims that plan fiduciaries failed to prudently select and monitor the plan’s investment options by including high-cost and underperforming target-date funds. When compared to options in similarly sized plans, several of the Northeastern plan’s investments were substantially more expensive than others found in plans of the same size, according to the complaint.

The complaint explains that the plan included investment options with unreasonably high expense ratios, specifically the TIAA Real Estate Account, which carried an expense ratio of 0.77%.

“The result is that, while typical real estate funds available to retirement plan participants average expense ratios of 0.59% to 0.64%, the plan’s participants are paying up to a third more,” the complaint states.

The Northeastern plan also remained investing in Fidelity “K” share classes, which were also called out for excessive fees. While the plan qualified for less expensive “K6” shares, the “defendants failed to move the plan into less expensive versions of options already in the plan,” according to the complaint.

“Defendants’ failure to make these funds available resulted in participants paying expense ratios over 30% higher in some instances,” the plaintiff states.