An appeals court judge in Philadelphia reversed portions of a U.S. District Court's dismissal of a lawsuit against University of Pennsylvania alleging the university had breached its fiduciary duties of its 403(b) plan under the Employee Retirement Income Security Act of 1974.
The lawsuit, originally filed in August 2016, alleged that the university enabled the 403(b) plan's providers, TIAA-CREF and Vanguard Group, to collect excessive fees by using duplicative investment options and retaining underperforming investment options. A U.S. District Court judge in Philadelphia dismissed the suit in its entirety in September 2017.
In the 3rd U.S. Circuit Court of Appeals opinion filed May 2, Judge Dennis Michael Fisher said the court would reverse the dismissals of the third and fifth counts of the fiduciary lawsuit. In the third count, the plaintiffs alleged the university charged "excessive administrative fees, failed to solicit bids from service providers, failed to monitor revenue sharing, failed to leverage the plan's size to obtain lower fees or rebates, and failed to comprehensively review plan management," and the fifth count alleged the university allowed "unreasonable investment fees, including and retaining high-cost investment options with historically poor performance compared to available alternatives, and retaining multiple options in the same asset class and investment style," according to the appeals court filing.
Mr. Fisher in his opinion said both allegations of breach of fiduciary duty were "plausible" and that the District Court erred in ignoring "reasonable" inferences supported by facts and by faulting the plaintiffs for failing to plead facts contradicting inferences in the university's favor.
University of Pennsylvania spokesman Ron Ozio said in an emailed statement that the court "affirmed the dismissal of five of the seven claims. The university continues to believe that the remaining claims are without merit. The university retirement plan was at all times administered prudently and in the best interests of our faculty and staff. The university will file a petition for a rehearing of the appeal en banc with respect to the two remaining claims, and believes that it will ultimately prevail."
The lawsuit, filed in 2016, was one of many lawsuits filed by law firm Schlichter, Bogard & Denton over alleged mismanagement of university defined contribution plans. Other plans the firm sued for excessive fees and the high cost and poor performance of actively managed funds were 403(b) plans of Northwestern University, Cornell University, Columbia University, the University of Southern California, New York University, Yale University, Duke University, Vanderbilt University, Emory University and Emory Healthcare, and against a 401(k) plan of the Massachusetts Institute of Technology.
Jerome Schlichter, managing partner at the law firm, said in a telephone interview: "We have always contended that it's not enough for a fiduciary to populate a plan with an array of options without regard to their prudence and we're pleased the court of appeals agrees with that position. Also, the court agreed with our position that the standard for fiduciary conduct for universities is not just what other universities do; it's the standard for prudent fiduciaries without regard to the industry they're in."