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By: John H. Goselin II
Beginning in August 2016, the ERISA Plaintiffs’ Bar launched a concerted attack on more than 20 major universities across the country filing class action lawsuits for alleged violations of ERISA fiduciary duties under ERISA Section 404 and alleged participation in ERISA prohibited transactions under Section 406.
Each side has won significant victories. Duke University, the University of Chicago and Vanderbilt University have capitulated and are paying six and seven-figure class action settlements. The University of Rochester and Long Island University fought until the plaintiffs simply walked away earlier this year. Northwestern University, New York University, Washington University and the University of Pennsylvania won impressive victories at the motion to dismiss stage.
But the battle is never over at the district court level. The United States Court of Appeals for the Third Circuit has provided new life to the plaintiffs bringing suit against the University of Pennsylvania, albeit only for 2 of the 7 counts that were originally alleged. Sweda v University of Pennsylvania, 2019 U.S. App. LEXIS 13284 (No. 17-3244, May 2, 2019). Not only does this reversal present new risks for the University of Pennsylvania, but it may put a damper on lower courts willing to dismiss these class action lawsuits.
The Third Circuit rejected a per se rule that would protect plan fiduciaries who provide a “mix and range of investment options” to plan participants. Instead, the Third Circuit held that Plaintiff Sweda had plausibly alleged that the defendants had “failed to conform to the high standard required of plan fiduciaries [under ERISA Section 404(a)(1)]” by alleging that (i) the recordkeeping fees were 6-7 times greater than the fees paid by similar plans, (ii) defendants failed to solicit competitive bids for recordkeeping and other plan services or (iii) defendants failed to hire an independent consultant to assess the plan’s administrative costs. Furthermore, the University of Pennsylvania Plan maintained high-cost investment options with historically poor performance compared to available alternatives, particularly the ongoing use of retail mutual fund shares when lower-cost institutional shares were available, but never adopted by the plan.
It is important to note that the claims being asserted against the universities apply to every business that maintains a 401(k) plan, or other ERISA investment plan, for their employees. The employer as a plan sponsor and the named and functional fiduciaries administering the plan will be held to the “prudent man” standard of care which requires all plan fiduciaries to exercise “the skill, care, 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.”
In short, the structure and administration of an ERISA plan must be continually reviewed, evaluated and modified to reflect the prevailing better/best practices. Plan sponsors and individual fiduciaries should develop a process of continuing and ongoing education regarding (i) what is expected of ERISA fiduciaries and (ii) the available options in the market place. Furthermore, plan fiduciaries must have a documented process pursuant to which they periodically evaluate the ERISA plan(s) for which they are responsible and make changes when necessary and appropriate.
Once the ERISA Plaintiffs’ Bar is done with the universities, they will be looking for their next targets.
If you have any questions or would like more information, please contact John Goselin at firstname.lastname@example.org.