University Points Out Differences Between 403(b)s and 401(k)s in Motion to Dismiss Lawsuit

Earlier this year, a lawsuit was filed against George Washington University (GWU) over fees related to its 403(b) plan.

As with other similar complaints in the wave of lawsuits against higher education institutions, the GWU complaint says the company failed to use its bargaining power to negotiate lower fees for recordkeeping and investments.

“Rather than negotiating separate, reasonable, capped fees for recordkeeping, Defendants continuously retained share classes of Plans investment options that charged higher fees than other less expensive share classes that were available for the same funds. As a result, Plaintiff and Class members paid an asset-based fee for administrative services that continued to increase with the increase in the value of a participant’s account even though no additional services were being provided,” the complaint says.

The lawsuit also accuses the university and other 403(b) plan fiduciaries of attempting “to insulate themselves from liability” by offering a large number of investments in the plan and leaving it to participants to choose from them. According to the complaint, the plan included about 45 investment options from TIAA, more than 20 investment options from Vanguard, nearly 50 investment options from Fidelity; the recordkeepers for the plan were TIAA, Fidelity and AXA.

Not only does the complaint accuse the fiduciaries of keeping high-fee investment choices in the plan, it says they did not monitor the investments and kept low-performing investments in the plan. In addition, by selecting as the plans’ principal capital preservation fund an insurance company fixed-income account—the TIAA Non-Benefit Responsive Traditional Annuity—that prohibited participants from re-directing their investment in the Traditional Annuity into other investment choices during employment except in ten annual installments, the defendants effectively denied participants the ability to invest in equity funds and other investments as market conditions or participants’ investment objectives changed, the complaint says.

Motion to Dismiss

This month, GWU defendants filed a motion to dismiss the case. In a statement in support of the motion to dismiss, before addressing specific claims, the defendants presented a history of university 403(b) plans’ use of annuities.

Similar to arguments in a brief of amici curiae in the 3rd U.S. Circuit Court of Appeals in support of the University of Pennsylvania for a case concerning the management of its 403(b) plan, the GWU defendants note that 403(b)s have always looked differently and were set up for a different purpose than 401(k) plans. Since 1906, colleges and universities implemented a system of annuities that achieved a similar guarantee of lifelong income as corporate defined benefit (DB) plans, the document says. In addition, it notes that, unlike 403(b) plans, 401(k) plans were initially envisioned as supplements to DB plans, so they were not built around annuities. The defendants also note that the Government Accountability Office has endorsed an emphasis on lifetime income in 401(k) plans.

The document goes on to argue that the plaintiff in the case lacks standing because when she terminated from GWU, she signed a release of claims, and because she did not invest in the TIAA investment options she challenges.

The defendants also argue that its use of multiple recordkeepers “fails to support an inference of a flawed decision-making process” and the plaintiff’s allegations that recordkeeping fees were too high “are inadequate to state a claim.” As for claims relating to the plan’s investment options, the defendants say the plaintiff “does not adequately allege that the university failed to monitor investment fees,” and they point out that other courts have dismissed allegations that plans offered too many investment options.