Washington University in St. Louis Faces 403(b) Plan Lawsuit

The lawsuit claims plan participants paid excessive investment and recordkeeping fees and alleges the plan’s loan program violated ERISA prohibited transaction rules.

A lawsuit has been filed against Washington University in St. Louis, Missouri, alleging multiple violations of the Employee Retirement Income Security Act (ERISA) over its selection and monitoring of its 403(b) plan investments, selection and monitoring of plan recordkeepers and the plan’s loan program.                   

The complaint first contends that because the marketplace for retirement plan services is competitive and the plan is large, it has tremendous bargaining power to demand low-cost administrative and investment management services and well-performing investment funds. The complaint notes that the university’s plan has more than $3.8 billion in assets and more than 24,000 participants as of December 31, 2015.

“But instead of leveraging the Plan’s substantial bargaining power to benefit participants and beneficiaries, Defendant caused the Plan to pay unreasonable and excessive fees for investment and administrative services,” the complaint says. “Further, Defendant selected and retained investment options for the Plan that historically and consistently underperformed their benchmarks and charged excessive investment management fees.”

The plaintiffs in the case allege Washington University did not negotiate separate, reasonable, and fixed fees for recordkeeping, and it continuously retained investment choices and share classes that charged higher fees than other less expensive share classes that were available for the same investment fund. “As a result, plaintiffs 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 plaintiffs also accused the university of failing to regularly monitor all the plan’s investment choices and failing to periodically monitor and review the entire investment choice menu to determine whether it provided an appropriate range of investment choices into which participants could direct the investment of their accounts.

According to the plaintiffs, one piece of evidence of a flawed process was “the inclusion of a dizzying array of thirty-five TIAA-CREF and more the eighty Vanguard investment options.” The complaint notes that of the 83 Vanguard funds available to participants, for 41 of those choices, the university has designated only the retail “investor” share class as available investment alternatives offered under the plans. Of the other 42 available Vanguard funds offered by the plans, either Admiral Shares are offered with substantially lower fees or the funds offer only one share class.

“Defendant could have designated the institutional share class for the designated investment options, as opposed to investor share classes, at substantially lower cost to Plan participants,” the complaint says.

NEXT: Annuity, loan program and recordkeeper choice

The lawsuit specifically calls out Washington University’s selection of the TIAA Traditional Annuity as the plan’s principal capital preservation fund, which prohibited 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 changed. The Traditional Annuity also prohibits participants from receiving a lump-sum distribution of the amount invested in the annuity, unless they pay a 2.5% surrender charge that bore no relationship to any reasonable risk or expense to which the fund was subject, the complaint says.

Additionally, the lawsuit calls out the approval of a TIAA loan program that required excessive collateral as security for loan repayments, charged grossly excessive fees for administration of the loan, and violated U.S. Department of Labor (DOL) rules for participant loan programs. According to the complaint, “By accepting and approving the design and administration of a loan program in a manner intended to benefit TIAA, a party in interest to the Plans, at the expense of Plaintiffs and Class members, [Washington University] caused the Plans to engage in prohibited transactions in violation of ERISA.”

The university is charged with contracting with two recordkeepers (TIAA-CREF and Vanguard), maintaining an “inefficient and costly structure” which caused plan participants “to pay and continue to pay duplicative, excessive, and unreasonable fees for Plan recordkeeping and administrative services.” According to the complaint, “There is no loyal or prudent reason for Defendant’s failure to engage in a process to reduce duplicative services and the fees charged to the Plan or to continue with two recordkeepers to the present.”

The plaintiffs in the lawsuit seek to restore to the plan all losses resulting from each breach of fiduciary duty. In addition, they seek such other equitable or remedial relief for the plan as the court may deem appropriate.

The complaint in Davis v. Washington University in St. Louis is here.