Universities Sued by Employees Over High Pension Plan Fees

By Greg Wright

MBA, CFE, CFP®, CLU, ChFC

Certified Fraud Examiner

Certified Financial Planner™

This past week, MIT, Yale, and NYU were accused of charging employees excessive fees on their retirement savings.   The dirty little pension plan secret is that, in many pension plans, the employee pays almost all the plan’s expenses.  Employers experience little or no cost except for the contribution match that may cost them little out-of-pocket.  Especially when the match is paid in company stock.

The universities — the Massachusetts Institute of Technology, Yale University, and New York University  — each have retirement plans holding more than $3 billion in assets -- are each being sued by a number of their employees in cases seeking class-action status. 

Over the last decade, lawyers have filed numerous lawsuits against organizations including Anthem, Cigna, Caterpillar, British Petroleum, Boeing, Wal-mart, and New York Life on behalf of employees enrolled in 401(k) retirement plans.   Most have been settled in multi-million dollar awards. 

With the latest suits filed in federal courts this past Tuesday, the focus has turned from the corporate retirement savings market to non-profit organization 403(b) plans. These accounts are similar to 401(k) plans but are offered by public schools and nonprofit institutions like universities and hospitals.

The latest complaints allege that the universities failed to monitor excessive fees paid to administer the plans and did not replace more expensive, poor-performing investments with cheap ones.  Lawyers argue that participants could have collectively increased their retirement holdings by tens of millions of dollars.

The stated aim of the suits is to reduce conflicts of interest and the fees consumers pay.  In many cases, they argue, employers have not acted in the best interest of employees.  Pension administrators and investment managers have been chosen using arbitrary criteria and because of personal relationships with company executives and Board members.

Even modest reductions in costs can have a significant effect on retirees’ savings. According to the Labor Department, paying one percentage point more in fees over a 35-year career — say 1.5 percent instead of 0.5 percent — could leave a worker with 28 percent less at retirement. An account with $25,000 — and no further contributions for those 35 years — would rise to only $163,000 instead of $227,000, at an annual rate of 7 percent.

The complaint against N.Y.U. Charges that participants were offered too many investment choices  - there were more than 100 options for some employees, and many of them were too expensive.

The suit also argues that even the cheapest funds offered could have been provided for less, given the enormous size and bargaining power with $4.2 billion in assets for more than 24,000 participants.  The complaint also alleges that the university did not use its negotiating powers and overpaid for administrative services for many years. 

The issues concerning Yale’s 403(b) retirement plan — which held nearly $3.6 billion in assets follow a similar pattern.  According to the New York Times, “Yale eventually consolidated to one provider, TIAA, in April 2015, and swapped in some lower-cost investments, but the suit claims that the changes did not go far enough to fully protect the interests of its employees.”

The suit alleges that MIT, because of its longstanding relationship with Fidelity, did not conduct a thorough search for a plan provider, which might have provided better service for less. The complaint said that Fidelity had donated “hundreds of thousands of dollars” to M.I.T., while Fidelity’s chief executive, has served as a member of M.I.T.’s board of trustees, giving influence over the institution’s decision-making.

As I pointed out earlier this year, the courts may be interested; but, the regulators appear to be less interested – especially in the smaller plans.  Smaller employers have even higher fees.  Your boss’s relative or golfing buddy may receive a major part of his income from your pension plan. 

Here is a list of fees 401K and 403B participants may be paying:

·                Investment advisor fees for managing the fund’s portfolios

·                Marketing fees

·                Shareholder service fees

·                Custodial expenses

·                Legal expenses

·                Accounting expenses ·                Sub-accounting fees

·                Transfer agent expenses

·                Brokerage Commissions

·                Sales loads

·                Redemption fee

·                Exchange fee

·                Account fee

·                Purchase fee

·                Maintenance fee

·                Plan set-up

·                Portfolio management fees

·                Educational materials and services expenses

·                Recordkeeping services

·                Employee enrollment services

·                Customer service

·                Legal advice to employer

·                Compliance testing expenses & audits

·                Fees for investment seminars, investment advice, loan fee

Ask for a copy of your company’s retirement plan document.  Check out your employer’s obligations and your rights.