The 3rd U.S. Circuit Court of Appeals has revived a lawsuit against fiduciaries of the University of Pennsylvania’s 403(b) plan which had been fully dismissed by a District Court in 2017.

The appellate court agreed with the dismissal of most claims, but when it came to claims about excessive fees and improper investments, the court found the plaintiff plausibly alleged a breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA). It said the plaintiff’s factual allegations are not merely “unadorned, the-defendant-unlawfully-harmed-me accusations, but are numerous and specific factual allegations that the university did not perform its fiduciary duties with the level of care, skill, prudence, and diligence to which plan participants are statutorily entitled under ERISA Section 1104(a)(1).

“Sweda offered specific comparisons between returns on plan investment options and readily available alternatives, as well as practices of similarly situated fiduciaries to show what plan administrators ‘acting in a like capacity and familiar with such matters would do in the conduct of an enterprise of a like character and with like aims,’” the court opinion states. In addition, the 3rd Circuit found the allegations plausibly allege that university failed to “defray reasonable expenses of administering the plan” and otherwise failed to “discharge its duties” according to the prudent man standard of care.

“While Sweda may not have directly alleged how Penn mismanaged the plan, she provided substantial circumstantial evidence from which the District Court could ‘reasonably infer’ that a breach had occurred,” the assenting judges concluded.

Dissenting opinion expresses concerns about lawsuits

In a dissenting opinion in which she says she would affirm in full the District Court’s dismissal of the amended complaint, Senior Judge Jane Richards Roth notes that between 2009 and 2014, the plan’s assets increased in value by $1.6 billion, a 73% return on investment. “Despite this increase, plaintiffs have filed a putative class action, claiming that the plan’s fiduciaries have imprudently managed it and seeking tens of millions of dollars of damages. Having convinced this Court to reverse in part the District Court’s dismissal of the action, the plaintiffs will continue to pursue their remaining claims, which will be litigated extensively, at large cost to the university,” she says.

Roth says the university is in “an unenviable position, in which it has every incentive to settle quickly to avoid expensive discovery and further motion practice, potential individual liability for named fiduciaries and the prospect of damages calculations, after lengthy litigation, with interest-inflated liability totals.”

She adds that this pressure to settle increases with the size of the plan, regardless of the merits of the case, and that a plaintiff’s attorney, seeking a large fee, will target a plan that holds abundant assets. “I am concerned that this is the case both here and in numerous other lawsuits that have targeted large corporations and universities that administer some of the largest retirement plans in the country,” she states.

Roth adds, “This reality demands that cases such as this one be carefully scrutinized in order not to permit implausible allegations to result in a large settlement, under which a substantial portion of the funds that are to be reimbursed to retirement plans are instead diverted to attorneys’ fees.”

She says the case presents a question virtually identical to the one addressed by the 3rd Circuit seven years ago, in Renfro v. Unisys Corp.: Does an ERISA plan fiduciary acting in good faith, under the prudent person standard, have a duty to do more than provide a wide, reasonable, and low-cost variety of investment options for individual plan beneficiaries who want to have control over their own investment portfolio? “Plaintiffs contend that because the pleadings have identified specific problematic funds in the mix and range offered by defendants, the answer should be yes. The majority agrees, holding that the administrators of a pension plan must ensure that sophisticated investors receive the best version of each plan available. This departs from the core principles in Renfro… which the District Court followed faithfully.”