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Stronger Than Its Weakest Links: NYU Survives 403(b) Fee Lawsuit

In the first University 403(b) plan fee case to proceed to trial, Sacerdote v. New York University (No. 16-cv-6284 (KBF) (S.D.N.Y. July 31, 2018), the Court found that plaintiffs were unsuccessful in proving that the NYU Retirement Plan Committee breached its fiduciary duties by failing to reduce high recordkeeping fees and failing to remove two underperforming investment options. Fiduciary obligations are often described in black and white terms. The Sacerdote opinion is a reminder that practical limitations often interfere with "best practices" for retirement plan fiduciaries – committee members have varied backgrounds and experience, timelines for completing fiduciary objectives are often interrupted, and implementing changes to plan design and operation can be labor intensive and may create disruption for participants. Sacerdote underscores that sound process and good documentation are key to avoiding trouble when the actions taken by plan fiduciaries are not perfect.

The first breach of fiduciary duty claim to survive to trial alleged that the NYU Retirement Plan Committee failed to consolidate recordkeeping services, failed to properly manage the RFP process, failed to allow potential recordkeeping candidates to propose pricing for all plan assets, and had preselected TIAA as a preferred vendor. The second claim alleged that the Committee failed to remove two underperforming accounts, the TIAA Real Estate Account and the CREF Stock Account, and had allowed too many investment options in each of the two plans overseen by the Committee. The Court ultimately found that the Plaintiff class failed to satisfy its burden of proof that the Committee acted imprudently or that the NYU plans suffered losses as a result.

During the relevant period, the NYU Retirement Plan Committee consisted of nine members who were responsible for the oversight of two retirement plans. It is clear from the opinion that the Committee had its weak points. One Committee member testified that he was unsure of whether he was still a member of the Committee at the time of trial (later confirming that he was not). Another Committee member testified that she did not view it as her job to review whether fees charged to the plans were appropriate. Moreover, several Committee members did not engage in oversight of the Committee's financial investment advisor and were unfamiliar with basic plan provisions. Fortunately for NYU, other members of the Committee were stronger, possessed an informed understanding of financial investments generally, and used their knowledge to question the plans' investment advisors on a regular basis. On the whole, the Court concluded that, because of the advice and guidance from more informed Committee members, the Committee as a whole "performed its role adequately."

Finding in favor of NYU on the first claim, the Court concluded that the Committee weighed the practical and administrative risks of moving to a single recordkeeper (for example, participant disruption and lack of experience of other vendors in recordkeeping TIAA annuities) appropriately in light of the fact that administrative recordkeeping plan fees were reduced year-over-year during the relevant period. Regarding the second claim, the Court noted that the Committee acted prudently in discussing the somewhat unique holdings of each fund, working to identify appropriate benchmarks, and analyzing the performance of the funds on an ongoing basis. In addition to testimony from experts (whom the Court found both credible and knowledgeable), the Committee's success hinged on evidence available through the pre-work and meeting minutes that demonstrated the Committee was exercising appropriate fiduciary discretion when evaluating its recordkeeping vendors and the funds in question. Absent this critical record evidence, the outcome could have been different.

The Sacerdote case demonstrates that a prudent process and documentation of that process are key to defending claims of fiduciary imprudence (even if fiduciary governance is less than perfect) and contains several lessons for fiduciary committees and plan sponsors. First, establish a retirement plan committee and adopt a charter for the committee outlining a process for appointing and removing committee members. Second, identify and train plan fiduciaries (including committee members) to ensure that they understand their responsibilities to the plan and have a basic level of familiarity with its terms and investments generally. Third, have an investment policy statement, review and update it regularly, and ensure that the committee looks to the statement to inform its investment decisions. Fourth, ensure that meeting minutes, pre-work, and other records are sufficiently detailed and are retained. Fifth, schedule meetings with investment advisors, consultants, and legal counsel to review plan documents, ensure that plan operations align with those documents, and regularly review service provider performance and the performance of the funds selected for inclusion the plan.

The employee benefits and executive compensation attorneys at Verrill Dana frequently provide advice and training to plan fiduciary committees. Please contact a member of our group if you feel that your organization could benefit from our experience.

Topics: Fiduciary Duties, Retirement Plans