Case Against University of Pennsylvania 403(b) Plan Dismissed

Pratter uses this “fiduciary balance” argument to reject many of the claims in the case, including the claim that the plan should have charged per-participant rather than asset-based fees. “The plan administrators are fiduciaries to every plan member, whether she invests $10 or $10 million. It is not up to courts to second-guess how fiduciaries allocate that cost, only that the fiduciary ‘discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries”’ as a whole,” she wrote.

Pratter also said the majority of the “excessive fee” arguments fail to state a claim because the mix and range of fee options included fees as low as 0.04%, which neither side claims is excessive. The strongest argument advanced by the plaintiffs is that the plan contained “retail class” shares, rather than other identical options with lower fees, known as “institutional class” shares. But, the judge decided the plaintiffs overstate their argument. While some shares in the plan are retail shares that could be replaced with institutional shares, nearly half of the shares (37 of 78) are already lower-fee funds. She noted that the plaintiffs’ argument also ignores that these institutional class shares would only be available if significantly more money were funneled into each of them. Switching from retail to institutional shares is not a matter of checking a different box. It requires fiduciaries to balance the menu of options given to plan beneficiaries against the fees. Sometimes, institutional shares are unavailable as an option because investment levels are too low in that fund. And, Pratter points out, institutional investment vehicles also come with a drawback: lower liquidity, citing Loomis v. Exelon Corp. 

Pratter also rejected the plaintiff’s allegation that defendants “provided a dizzying array of duplicative funds in the same investment style” leading to “‘decision paralysis’ for participants.” She found the plaintiffs have not alleged any participant who was confused by the different options. In addition, the plan administrators broke the options down into four categories based on the participants’ investment acumen to help guide them. “Offering 78 different choices is not an unreasonably high number, especially with the tiered descriptive guidance given to participants,” she wrote.

The plaintiffs’ derivative claim, namely that offering duplicative funds was unnecessary, fails as well, Pratter said. On the contrary, duplicative investment options are necessary based on the structure of the plan, and the fact these tiers contained some of the same funds is unsurprising and raises no plausible inference of a breach of fiduciary duty. “Indeed, if there was no overlap there could be greater cause for criticism or frustration,” she wrote.

Finally, the plaintiff’s claim that select funds were outperformed by the rest of the market, claiming that 60% of the plan’s investment options “underperformed their respective benchmarks over the previous five-year period.” To begin, Pratter said there is no cause of action in ERISA for “underperforming funds.” The statutory text requires fiduciaries to discharge their duties “with the care, skill, prudence, and diligence under the circumstances then prevailing” when they make decisions. The plan administrator deserves discretion to the extent its ex ante investment choices were reasonable given what it knew at the time, she ruled.

In addition, when examined closely, the plaintiffs’ claims do not withstand scrutiny, according to the opinion. A statistical sampling of funds would expect (all things being equal) half of the funds to be above benchmarks and half to be below benchmarks. Here, as opposed to what the simplistic statistical average would show, that 38 (half) of the 76 funds underperformed, the plaintiffs pled that 45 investment options performed below benchmarks. “Such a post hoc analysis of market performance, where only 7 more funds underperformed than would be expected, may be consistent with a breach of fiduciary duty, but does not show that the plaintiffs have nudged their claims across the line from conceivable to plausible.” Pratter wrote.

The plaintiff seeks recovery for prohibited transactions under ERISA using the theory that the contractual arrangement with TIAA-CREF and Vanguard constituted a prohibited transaction. The plaintiff argues that paying these companies constitutes a sale of property, a furnishing of services, and a transfer of assets in the plan. “If such an argument were true, then any time plan administrators contracted with another party to provide services to plan participants in exchange for money (which includes the basic elements of retirement plans, including making mutual funds available or recordkeeping services) it would qualify as a prohibited transaction. After all, fees charged by these companies necessarily requires ‘transfer of assets,’” Pratter wrote, noting that the plaintiff claims this all while maintaining that there are no per se ERISA violations in the revenue-sharing arrangement.