Within a span of 10 days last August, a dozen coordinated lawsuits were filed against elite universities, alleging that they had imprudently managed their 403(b) retirement plans for faculty and staff. So far, all of the targets have one thing in common: They are private institutions, and the duties they are said to have breached derive from the Employee Retirement Income Security Act, better known as Erisa. Public universities, by contrast, are exempt from Erisa as government institutions. Does this mean that public universities have nothing to fear from this new species of litigation?
Not exactly. Although public universities are exempt from the fiduciary duties imposed by Erisa, they may be subject to similar duties under state law. Moreover, their status as government entities may allow plaintiffs to bring similar actions under government-specific state statutes, or as constitutional claims. State universities, then, would do well to insulate themselves from possible claims of imprudence — while at the same time providing an attractive benefit to employees — by instituting or continuing processes that demonstrate sound management of retirement assets.
The allegations in the employee lawsuits against Columbia, Cornell, Duke, Emory, Johns Hopkins, MIT, NYU, Northwestern, Vanderbilt, and Yale, as well as the University of Pennsylvania and the University of Southern California, follow a predictable pattern: The plaintiffs claim that by allowing unreasonable administrative fees and offering investment options that underperformed or charged relatively high fees, these institutions and their 403(b) plan administrators breached fiduciary duties owed to employees under Erisa. It is important to note that the plaintiffs’ claims are untested and are far from sure to succeed. But given the potential magnitude of the damages asserted, even the fact of the litigation itself is alarming.
Erisa is a federal statute that regulates retirement plans nationally and across almost all sectors of the economy. It imposes fiduciary duties of prudence and loyalty on employers in the administration of these plans. These concepts boil down to a requirement that in making decisions about their retirement plans, employers must act solely in the best interests of the employees who benefit under the plans, and with the care that a prudent person in similar circumstances would employ. It is a demanding standard of conduct for those subject to its requirements.
Given the potential magnitude of the damages asserted, even the fact of litigation itself is alarming.
But, importantly, it does not apply to government employers. However, this does not mean that no standards apply to public-university retirement plans, or that they are immune from lawsuits like those recently filed against the private institutions. The state common law of trusts, as well as state trust statutes, can impose duties analogous to those faced by private universities under Erisa, and can form the basis for similar lawsuits.
A suit filed in Minnesota in 2010 shows how this kind of litigation might work. The defendant in that action was the Evangelical Lutheran Church in America; like those of government employers, the retirement plans of churches are exempted from Erisa’s coverage. The plaintiffs in that case therefore based their suit on fiduciary duties imposed by state common law and state statutes.
They also claimed breach of contract, arguing that the church had promised a level of benefits that it subsequently failed to deliver. The Lutheran Church case ultimately settled favorably to the employer after the plaintiffs’ motion for class certification was denied, but it may serve as a road map for suits against other non-Erisa retirement plans.
Potential litigation against public universities may involve additional complications, based on the universities’ status as government entities. In addition to the common law and generally applicable statutes, other laws specifically enabling government retirement programs may establish — or limit — fiduciary duties. For example, California’s State Constitution imposes fiduciary duties of loyalty, prudence, and diversification on the administrators of public retirement systems. On the other hand, an Arizona statute appears to expressly preclude fiduciary duties on the part of public education employers.
The governmental status of public universities may also implicate constitutional property protections, as well as complex issues of state sovereign immunity. The laws of each state are different, making it extremely difficult to generalize about the prospects of this kind of litigation.
So what should public universities be doing to prepare for the possibility that they might be next on the list of institutions sued over the fees and investment options of their 403(b) plans? First, plan sponsors should understand the requirements of state law and make sure their institutions are in compliance. Beyond that, public-university administrators should ensure that they have procedures in place to evaluate the fee structure and investment options of their plans.
Retirement-plan fiduciaries are not required to look into the future and offer only investments that end up performing well; instead, the focus of fiduciary duty in this context is employing the appropriate methods to evaluate investments. Thus, a university that can demonstrate that it followed an industry-standard process in selecting and periodically reviewing investment options and fee structures is well on its way to defeating any claim that it breached its fiduciary duty of prudence.
Additionally, it is important that universities and other plan sponsors document these decision-making processes and their results. If an institution finds itself a defendant in a lawsuit alleging breach of fiduciary duty, it will want to be able to point to specific documentation that demonstrates exactly how it evaluated alternatives and came to a prudent decision.
So, although the recent spate of 403(b) fee litigation has so far been limited to private universities subject to Erisa, public universities would do well to ensure that they are following prudent fiduciary standards in the administration of their retirement plans. No one wants to be caught flat-footed by the next round of lawsuits.
Nancy G. Ross, Brian D. Netter, and Andrew Lyons-Berg are lawyers in the firm of Mayer Brown.
