College and University Retirement Plan Fees and Controversial Class‐ Action Litigation Sponsored by February 16, 2017 Presenters Ira Shepard, Esq. James Keller, Esq. Partner, Partner, Saul Ewing, LLP Saul Ewing, LLP College and University 403(b) Plans • A retirement savings plan available to employees of colleges and universities, as well as employees of other non‐profit employers and hospitals. • Allowable Investments: – Annuities – Mutual Funds 1
ERISA Regulations • Duty of Prudence: – Fiduciary shall act with the “care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity” would use. 29 U.S.C. § 1104(a)(1)(B) • Duty of Loyalty: – Fiduciary shall act “solely in the interest of the participants and beneficiaries” and for the exclusive purpose of “providing benefits to participants and their beneficiaries.” 29 U.S.C. § 1104(a)(1)(A)(i) • Liability for Co‐Fiduciary Breach: – Participation – Enabling – Knowledge without acting to remedy 29 U.S.C. § 1105(a) 403(b) Plan Litigation • 12 colleges and universities sued between August 9 ‐17, 2016, including: Duke (4 th Cir.) Johns Hopkins (4 th Cir.) Vanderbilt Emory NYU MIT Penn USC Yale Northwestern • Why? Columbia Cornell – A fiduciary who breaches ERISA responsibilities, duties or obligations is personally liable to return losses to the plan and to restore profits. 20 U.S.C. § 1109(a) Alleged Breaches by Plan Fiduciaries • Who are the defendants? – College/University – Investment & Oversight Committees, and the individual members of those committees – Individual Employees, including: • VP of Human Resources • VP of Investments and Chief Investment Officer • Breaches Alleged: – Duty of Prudence – Duty of Loyalty – Duty to Monitor Co‐Fiduciaries 2
Alleged Breaches of the Duty of Prudence • Excessive administrative and recordkeeping fees – Too many recordkeepers – Use of revenue‐sharing – No competitive bidding process • Failure to consider lower‐cost investments • Duplicative investment options with too many choices • Retention of underperforming investments Defenses • Other 403(b) plans look like ours does • Administrative and Recordkeeping Fees are reasonable – Competitive bidding is not required; benchmarking studies are okay – Multiple recordkeepers are common (50% of higher education plans use more than 6 recordkeepers ) – Revenue fee‐sharing does not violate any statute or regulation. • Fixed or Flat Fees do not benefit all participants and can shift burdens disproportionally • The cost of investments is reasonable – Expense Ratios between 0.03% and 2.0% are reasonable • ERISA requires diversification • Hindsight is not permissible to evaluate fiduciary performance in investment selection and retention. • Lack of Standing • Statutes of Limitations And Now…We Arbitrate? • Only 1 of the 12 colleges and universities sued has asked the court to dismiss the case and submit the claims to non‐binding arbitration instead. • How? – USC’s plan participants signed an arbitration agreement with the University requiring arbitration for the types of claims pursued in the filed litigation. • Why? – Claims proceed on an individual basis, in a more private proceeding. 3
What Questions Should I Be Asking? • Recordkeepers – How are the plan’s recordkeepers selected? – How often are they re‐evaluated? Is a benchmarking study performed? – How many are there? – How are they compensated? Fixed‐fee? Revenue sharing? Expense ratio? • Fund Selection and Retention – How are the investment options offered selected? Are they duplicative? – How many options are there? Is there a tiered structure in place? – What processes are in place to monitor investment performance? – Are there any procedures for removing poorly performing investment options? – Are any conflicts apparent? • Monitoring Fiduciaries – Who is responsible for monitoring co‐fiduciaries? – What processes are in place to monitor and remove co‐fiduciaries, if necessary? Tweaks To Your Selection Process • Possible improvements: * competitive bidding * administrative cost comparisons * vetting to avoid conflict of interest or appearance of conflict; e.g., does recordkeeper/fund manager have college connections * independent expert grading of alternative service providers Poll Question • Does your institution currently have a competitive bidding process in the selection of fund investment alternatives? a) Yes b) No 4
Poll Question • Does your institution have an independent expert grade and/or monitor alternative fund investment alternatives? a) Yes b) No Poll Question • Does your institution have a conflict of interest procedure in place for the selection of fund investment alternatives? a) Yes b) No Importance of Regular Plan Review and Updates * Consider periodic outside and independent, benefits expert plan review by entity that is not a service provider and will not benefit from recommendations; *Consider regularly scheduled plan legal review by independent counsel 5
Poll Question • Does your institution have a regularly scheduled periodic review of your retirement plan by an independent benefits expert and/or outside legal counsel? a) Yes b) No What Should I Do Now? – Too soon to tell, but in the meantime consider asking questions. – Remember, if you want to make a change… “Allegations regarding subsequent, prudent conduct do not create an inference or serve as evidence that prior conduct was imprudent” and a fiduciary’s decision to “change funds [does] not sustain allegations that [any fund] was an imprudent choice previously.” Layboy v. Bd. of Trs. of Bldg. Serv., 32 BJ SRSP, 2012 WL 3191961, at *3 (S.D.N.Y. Aug 7, 2012), aff’d , 513 F. App’x 78 (2d Cir. 2013). Baltim ore Lockwood Place • 500 East Pratt Street, Suite 900 • Baltimore, MD 21202-3171 • T: 410.332.8600 • F: 410.332.8862 Boston 131 Dartmouth Street, Suite 501 • Boston, MA 02116 • T: 617.723.3300 • F: 617.723.4151 Chesterbrook 1200 Liberty Ridge Drive, Suite 200 • Wayne, PA 19087-5569 • T: 610.251.5050 • F: 610.651.5930 Harrisburg Penn National Insurance Plaza • 2 North Second Street, 7th Floor • Harrisburg, PA 17101-1619 • T: 717.257.7500 • F: 717.238.4622 New York 245 Park Avenue, 24th Floor • New York, NY 10167 • T: 212.672.1995 • F: 212.372.8798 Newark One Riverfront Plaza • Newark, NJ 07102 • T: 973.286.6700 • F: 973.286.6800 Philadelphia Centre Square West • 1500 Market Street, 38th Floor • Philadelphia, PA 19102-2186 • T: 215.972.7777 • F: 215.972.7725 Pittsburgh One PPG Place • 30th Floor • Pittsburgh, PA 15222 • T: 412.209.2500 • F: 412.209.2570 Princeton 650 College Road East, Suite 4000 • Princeton, NJ 08540-6603 • T: 609.452.3100 • F: 609.452.3122 Washington 1919 Pennsylvania Avenue, N.W. Suite 550 • Washington, DC 20006-3434 • T: 202.333.8800 • F: 202.337.6065 Wilm ington 222 Delaware Avenue • Suite 1200 P.O. Box 1266 • Wilmington, DE 19899 • T: 302.421.6800 • F: 302.421.6813 6
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