University of Pennsylvania Wins Dismissal of Case Against 403(b)

The case had challenged multiple recordkeepers, multiple investment options and the use of retail share class funds.

By Rebecca Moore | September 22, 2017
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U.S. District Judge Gene E. K. Pratter of the U.S. District Court for the Eastern District of Pennsylvania dismissed all claims against the University of Pennsylvania and its vice president of human resources that they violated their fiduciary duties under the Employee Retirement Income Security Act (ERISA) by causing 403(b) plan participants to pay excessive fees and by offering an array of investment choices, many of which the plaintiff says underperformed.

The lawsuit filed last year claims the defendants breached their fiduciary duty by “locking in” plan investment options into two investment companies, allowing administrative services and fees that were unreasonably high due to the defendants’ failure to seek competitive bids to decrease administrative costs, and allowing unnecessary investment fees to be charged while the portfolio underperformed.

The court opinion notes that at the end of 2014, the plan had $3.8 billion in net assets and 21,412 participants, making it among the largest 0.02% of defined contribution (DC) plans in the United States based on total assets. In addition, Pratter noted in her opinion that the university’s plan has a diverse array of beneficiaries to serve, from grounds and cleaning crews to renowned Wharton School and Law professors, physicists, anthropologists, hockey coaches and endless others. “These individuals have different goals, risk tolerances, investment acumen and income,” she wrote. “To make it easier for potential investors, plan managers divided the investment options (which ranged between 76 and 118 options) into four tiers. Tier 1 is for the “do it for me” investor; tier 2 is geared toward the “help me do it” investor; tier 3 is designed for the “mix my own” investor; and tier 4 is built for the “self-directed” investor.”

“The touchstone of an effective ERISA defined contribution plan is if it ‘offer[s] participants meaningful choices about how to invest their retirement savings,’” Pratter said, citing previous case law. “Such a duty to offer choice is more pronounced in plans as large as Penn’s, which serves a broad array of needs and desires.”

Several times in her opinion, Pratter cites Renfro v. Unisys Corp., in which plaintiffs challenged “the selection and periodic evaluation of the Unisys defined contribution plan’s mix and range of investment options” in a 401(k) plan. In upholding the dismissal of the claim, the 3rd U.S. Circuit Court of Appeals held that courts must look to the “mix and range of options and . . . evaluate the plausibility of claims challenging fund selection against the backdrop of the reasonableness of the mix and range of investment options.” Under that framework, the court concluded that in light of the available options—which included 73 investments with fees ranging from 0.10% to 1.21%—plaintiffs had “provided nothing more than conclusory assertions” of fiduciary breach and it affirmed dismissal of the case.

The opinion includes a summary of the history of retirement plans and concedes that 403(b) plans pre-date 401(k) plans by about 20 years. It notes that 403(b) and 401(k) plans for years differed dramatically in both scope and structure. For one thing, 403(b) plans initially were limited to annuity contracts. Pratter said that even if governed by ERISA, these salient differences resulted in different management and fiduciary requirements, since the duties by a fiduciary to an annuity contract differs dramatically from the duties of a fiduciary managing mutual funds. However, she noted that 403(b) plans have moved away from annuity offerings to offer a range of options that are similar to those offered by 401(k) plans, and fiduciary requirements by 403(b) plan administrators are nearly identical to those requirements for 401(k) administrators.

Addressing the Claims