Duke University Charged in Second 403(b) Plan Lawsuit

A second lawsuit regarding Duke University’s 403(b) plan has been filed, alleging the plan suffered more than $1 million in losses due to the university’s breach of fiduciary duties under the Employee Retirement Income Security Act (ERISA).

The lawsuit also alleges the plaintiffs in the case suffered an injury because their accounts in the plan would have been increased had Duke not taken revenue sharing for its own benefit and instead delivered that revenue sharing to the plan for distribution among participant accounts and because each plaintiff invested in a plan investment that paid such revenue sharing.

This is the second lawsuit filed on behalf of participants in Duke University’s 403(b) plan by the law firm Schlichter, Bogard & Denton. The first lawsuit, filed in 2016 and still ongoing, alleges the university failed to use the plan’s bargaining power, causing the plan to pay unreasonable and greatly excessive fees for recordkeeping, administrative, and investment services. It also alleges Duke selected and retained investment options for the plan that consistently and historically underperformed their benchmarks and charged excessive investment management fees. This second lawsuit focuses specifically on the university’s practices with regard to revenue sharing.

The new complaint says, “In an indirect, revenue-sharing arrangement, plan investment options pay the plan’s recordkeeper an asset-based fee based on the amount of plan assets invested in the fund. Because the revenue-sharing payments are asset based, the fees will increase as plan assets increase even if the number of participants or level of services does not change. Thus, a recordkeeper’s compensation can (and usually does) increase without any change in the services it is providing. A prudent fiduciary that allows revenue sharing to pay for recordkeeping monitors the amount of the revenue sharing the recordkeeper receives each year and limits the recordkeeping compensation to a reasonable, fixed level by obtaining rebates of any revenue sharing amounts that exceed that level.”

According to the lawsuit, Duke was informed at least as early as 2010 that the plan’s investment options were providing revenue sharing that overpaid for the plan’s recordkeeping services provided by three of its recordkeepers—TIAA, Fidelity, and VALIC—by more than $3.5 million per year. Instead of recovering excess revenue sharing for the plan, the plaintiffs claim that Duke arranged with those companies to pay plan expenses and to reimburse Duke for its own expenses putatively in administering the plan, including paying salaries and fringe benefits of employees in Duke’s Human Resources department and other expenses Duke previously had been paying itself.

Duke first established this arrangement in 2011, arranging for Fidelity to make available $750,000, TIAA-CREF to make available $630,000, and VALIC to make available $80,000 for payment of putative plan expenses, the plaintiffs allege. These amounts were made available for 12 months and expired if they were not used to pay plan expenses. In 2013, Fidelity increased its amount to $1.2 million.

The lawsuit goes on to say that Duke first started paying itself from these plan assets in 2012, and it did not arrange for returning excess revenue sharing back to the plan for allocation to participant accounts until 2014, when it arranged revenue credits programs, but then only with Fidelity and TIAA (not VALIC). “Under those programs, the plan was to receive only the amounts that remained after Duke paid itself for the salaries and fringe benefits of its employees and other expenses that it incurred. Duke did not arrange for the revenue credit programs to include all amounts of excess revenue sharing that participant investments had generated in prior years,” the complaint states. It says that Duke did not arrange for the transfer of excess revenue sharing to participant accounts until September 2016, and did not cease paying itself from the plan’s excess revenue sharing until August 2016, after it discovered that plaintiffs’ attorneys were investigating fiduciary breaches in the plan—related to the filing of the first lawsuit.

The new lawsuit alleges that Duke took for itself out of plan assets over $1,500,000 in putative reimbursement of employee salaries and fringe benefits. It also claims that Duke decided not to reduce the number of recordkeepers in the plan, to negotiate reasonable and lower recordkeeping fees for the plan, or to remove or reduce high-fee mutual funds and annuities from the plan that paid revenue sharing because it sought to maintain enough excess revenue sharing payments to pay itself for employee salaries and fringe benefits and other expenses.

“Duke did not enter into any contract or formal arrangement, much less a reasonable contract or arrangement, for reimbursement of proper plan expenses, but instead just paid itself from plan assets under this scheme when it had a clear conflict of interest with the plan and plan participants,” the complaint says. “Duke did not hire an independent fiduciary to determine whether it was in the interest of the participants to engage in this scheme or whether the services that Duke employees performed were necessary for the operation of the plan, whether the amounts charged for those services were reasonable, and whether Duke was being reimbursed only its direct expenses incurred in providing necessary services to the plan.”

The lawsuit also calls out the university for not disclosing its revenue-sharing practices to plan participants. According to the complaint, the plaintiffs did not discover what the university was doing with revenue-sharing payments until discovery was started in the first lawsuit.

“Duke is obligated to disgorge to the plan all amounts it received and must make good to the plan all losses the plan suffered from being deprived of those assets, namely, the gains the plan would have earned had those amounts been restored to the plan,” the complaint says.