United States: Victory For NYU After First Trial In The 401(K) Fee Cases Filed Against Colleges And Universities

Last Updated: August 20 2018
Article by Darren E. Nadel and Pamela S.C. Reynolds

In the past two years, more than 16 prominent colleges and universities across the country have been targeted by class action lawsuits filed under the Employee Retirement Income Security Act (ERISA) challenging the fees and investment lineups in the schools' retirement plans. On July 31, 2018, a New York federal court issued an opinion and order in favor of NYU in the first of those cases to proceed to trial, Sacerdote v. New York University.1 As the first case to consider the merits of the claims asserted in these ERISA class actions, Sacerdote is not only a significant victory for NYU but also for the other colleges and universities defending similar suits.2

Background

The plaintiffs in Sacerdote are employees of NYU and participants in one of two NYU retirement plans: the New York University Retirement Plan for Members of the Faculty, Professional Research Staff and Administration (the "Faculty Plan") and the New York University School of Medicine Retirement Plan for Members of the Faculty, Professional Research Staff and Administration (the "Medical Plan") (together, the "Plans"). Their claims focus on the fiduciary obligation that plan fiduciaries have to provide sound investment choices and to utilize vendors for the plans (who charge fees to the plan) efficiently. The selection of vendors and the menu of retirement investments were ultimately chosen by NYU's Retirement Plan Committee ("Committee"), which oversees the two Plans.

The Plans, which were established in 1952, are both defined-contribution, participant-directed 403(b) plans available to NYU employees. In lay terms, these are similar to 401(k) plans, but are available to not-for-profit institutions. Each of the Plans offers diverse investment options – the Faculty Plan offers 103 investment options, and the Medical Plan offers 80 options – which include funds managed by Vanguard and another financial services organization. The options include fixed and variable annuities and actively- and passively-managed index funds. The individual annuities are contracts issued in a Plan participant's name and the annuities guarantee periodic payments at retirement.

Since 2010, recordkeeping services for the Faculty Plan were provided by Vanguard and another financial services organization. Prudential was the recordkeeper for the Medical Plan until 2013, after which a change was made to a different recordkeeper. The Faculty Plan eliminated Vanguard as a recordkeeper in 2018 and consolidated to a single recordkeeper. Recordkeeping fees were paid by the Plans through "revenue sharing," a common practice for large 403(b) plans.

The Committee was established in 2008 "to provide consistency and clarity in plan governance."3 It has nine members who hold employment positions with NYU, including the NYU Chief Investment Officer and the NYU Senior Vice President of Finance. Additionally, the NYU Director of Benefits and NYU Langone Medical Center Senior Vice President of Human Resources are designated as co-chairs. In February 2009, the Committee engaged Cammack LaRhette Consulting ("Cammack") as an investment advisor to provide outside expertise in managing and monitoring the financial aspects of the plans, including evaluating, selecting, and managing the Plans' vendors as well as advising them on the selection and monitoring of plan investments. Cammack provided quarterly updates to the Committee on various financial aspects of the Plans, including the performance of investment options, recordkeeping and other fees, and overviews of fiduciary responsibility. Annually beginning in 2011, the Committee approved an Investment Policy Statement (IPS) that it used in connection with decision-making with respect to fund options.

Plaintiffs' Claims and the Trial

The plaintiffs' initial complaint, filed on August 9, 2016, asserted seven causes of action against NYU, including breach of fiduciary duties of loyalty and prudence and breach of duty to monitor. All but two of the plaintiffs' claims were dismissed in a court decision dated August 25, 2017.4 The remaining claims alleged breach of duty of prudence.

The first of the plaintiffs' remaining claims asserted that the Committee imprudently managed the selection and monitoring of recordkeeping vendors resulting in excessively high fees. The plaintiffs claimed that the Committee could have reduced fees by "consolidating" its use of two recordkeepers into one and by negotiating a lower rate. The plaintiffs' arguments included that the Committee: "(1) failed to prudently manage a request-for-proposal ("RFP") process related to recordkeeping vendors; (2) failed to allow respondents to propose pricing for all Plan assets (versus only non-annuity assets); and (3) had pre-determined that [the] recordkeeper for annuity assets . . . was the favored vendor."5

The plaintiffs' second claim asserted that the Committee acted imprudently by failing to remove two specific investment opinions – a real estate account and a stock account – which in turn continued to allow the plaintiffs to invest in those funds. According to the plaintiffs, the Committee "used confusing and inappropriate financial benchmarks to review their performance and . . . these funds objectively underperformed, resulting in significant losses."6

In February 2018, the court certified a class consisting of all participants and beneficiaries of the Medical Plan and the Faculty Plan from August 9, 2010 to the date of judgment. The court then presided over an eight-day bench trial that concluded in May 2018, at which testimony of 20 fact witnesses and 5 expert witnesses were heard and over 600 documents were received into evidence.

The Court's Opinion

Following trial, the court issued an extensive opinion, finding that there were deficiencies in the Committee's process but the plaintiffs did not prove that the Committee acted imprudently or that the Plans suffered losses as a result of those deficiencies.

The duty of prudence under ERISA requires a fiduciary to act "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims."7 In order to prevail on a claim of a breach of that duty, the burden is on the plaintiffs to establish that the Plans suffered a loss that was actually caused by the alleged breach of prudence.

The court found, as an initial matter, that "the level of involvement and seriousness with which several Committee members treated their fiduciary duty" was "troubling." The evidence showed, among other things, that several of the Committee members displayed a concerning lack of knowledge relevant to the Committee's mandate and were "under-prepared" and simply relied on Cammack's advice rather than independently seeking to verify its quality. The Court declared that Cammack's appointment "does not now and never has entitled the Committee or its members to unthinkingly defer to Cammack's expertise – even when Cammack was hired because it possessed expertise Committee members did not."8 However, not all of the Committee members demonstrated that lack of diligence. Between Cammack's advice and the guidance of the more "well-equipped" Committee members, the court was persuaded that the Committee performed its role adequately. The court thus determined that the Committee's conduct did not rise to a level of failure to fulfill fiduciary obligations.

The court further found that the plaintiffs failed to prove that the Committee acted imprudently with regard to recordkeeping fees. Among other things, the evidence supported that the Committee prudently managed its recordkeepers by running prudent RFP processes, obtaining lower fees for the Faculty Plan when consolidating the recordkeepers was impractical, and consolidating recordkeepers for the Medical Plan and later the Faculty Plan. The plaintiffs also failed to show that the Committee's alleged actions resulted in losses.

The court also found that the evidence demonstrated that the Committee closely monitored the performance of the investment alternatives offered in the Plans. Among other things, the Committee received and reviewed before each quarterly meeting a detailed report from Cammack that analyzed investment options. Cammack reviewed specific funds against its peers', investment objectives and risk, and expenses. Also, testimony showed that the Committee asked questions of Cammack regarding its advice, and on at least one occasion, the Committee questioned the viability of a metric Cammack used to analyze the investment options. Additionally, the Committee compiled a Watch List on a quarterly basis and using the IPS for guidance to monitor certain funds and analyze at almost every Committee meeting, including determining whether funds should be added or removed from the Watch List.

The court also did not agree with the plaintiffs' arguments that NYU failed to prudently monitor the Plans' investment options by continuing to offer a stock account and a real estate, which the plaintiffs claimed had high fees and performed poorly. The Court found that the plaintiffs failed to demonstrate that either account was imprudent or that participants in the Plans suffered losses due to their inclusion.

In sum, the court found for NYU on all claims, concluding that the evidence did not support plaintiffs' claims of a failure or loss with regard to recordkeeping fees, or with regard to the Plans investment options.

The Significance of the Case

As noted above, the Sacerdote case is the first of the recent slew of ERISA class actions filed against institutions of higher education to reach trial. The resulting victory for NYU may serve as a benchmark for the other cases.

Further, while it is notable that the court found there was no failure to fulfill fiduciary obligations by the Committee despite finding deficiencies in the conduct of some of the Committee members, the Sacerdote opinion provides some guidelines for the duty of prudence required of ERISA plan fiduciaries. For instance, where an ERISA plan fiduciary has delegated certain duties to a co-fiduciary, as the Committee did to Cammack, the fiduciary is not relieved of its independent duties and may not passively rely on information provided by a co-fiduciary. The fiduciary must fulfill its duty to investigate by making meaningful inquiry, reviewing data and assessing its significance, and making informed but independent decisions.9

Footnotes

1 Sacerdote v. New York University, 16-cv-6284 (KBF), 2018 WL 3629598 (S.D.N.Y. Jul. 31, 2018).

2 The counsel representing plaintiffs in Sacerdote also represent ten of the groups of plaintiffs from other colleges and university that have filed similar ERISA class actions against their employers. See 2018 WL 3629598, at *1.

3 2018 WL 3629598, at *8 (internal quotations omitted).

4 Sacerdote v. New York University, 16-cv-6284, 2017 WL 3701482 (S.D.N.Y. Aug. 25, 2017).

5 2018 WL 3629598, at *1.

6 2018 WL 3629598, at *1.

7 2018 WL 3629598, at *3.

8 2018 WL 3629598, at *6.

9 2018 WL 3629598, at *6 (citing Busian v. RJR Nabisco, Inc., 223 F.3d 286, 301 (5th Cir. 2000) and Howard v. Shay, 100 F. 3d 1484, 1490 (9th Cir. 1996)).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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