ERISA Excessive Fee Suit Filed Against University of Rochester

A participant in the University of Rochester Retirement Program has filed a lawsuit alleging that plan participants have paid an estimated $72 million in in recordkeeping, distribution, and mortality risk fees to provider TIAA.

According to the complaint, TIAA has been able to extract “grossly excessive fees” because its fees are tethered not to any actual services it provides to the plan, but rather, to a percentage of assets in the plan.

The complaint notes that this action is similar, but narrower in scope, to 18 separate lawsuits pending in federal district courts around the country which allege a university defendant breached its Employee Retirement Income Security Act (ERISA) fiduciary duties by allowing TIAA to collect excessive fees from the university’s retirement plan. It also notes that it appears TIAA is willing to meaningfully reduce its fees if universities will just ask. As an example, the complaint says, shortly after the University of Chicago was sued, it announced to its plan participants that it renegotiated TIAA’s fees, and successfully reduced fees on an annual basis by several million dollars.

In a statement to PLANSPONSOR, TIAA said, “TIAA stands firmly behind its offer of high-quality retirement products and services with strong long-term performance and reasonable costs, which provide lifetime income for millions of customers.”

The lawsuit claims that since the University of Rochester’s 403(b) plan has more than $4.2 billion in assets, it has tremendous bargaining power to demand low-cost, high-quality administrative services; however, it instead has failed to adequately take proper measures to understand the real cost to plan participants for TIAA’s services, to properly inform participants of the fees they were paying to TIAA as required by law, and to act prudently with such information.

The lawsuit alleges the quarterly account statements that the university provides to plan participants do not disclose any administrative fees paid to TIAA by participants. In addition, the plan’s annual Form 5500 Department of Labor (DOL) disclosures are supposed to identify the administrative fees paid to TIAA, but they do not clearly identify this information either. The plan’s Form 5500 identifies TIAA as receiving “indirect compensation” (revenue sharing) but states the amount TIAA received is “0” or “”none.” The complaint says that is false.

The university is also called out for failing to adequately benchmark plan fees. “If a fiduciary decides to use revenue sharing to pay for recordkeeping, it is required that the fiduciary (1) determine and monitor the amount of the revenue sharing and any other sources of compensation that the provider has received, (2) compare that amount to the price that would be available on a flat per-participant basis, or other fee models that are being used in the marketplace, and (3) ensure the plan pays a reasonable amount of fees,” the lawsuit says. The plaintiff argues that determining the price that would be available on a flat per-participant basis, or the price available under other fee models requires soliciting bids from competing providers: “In billion-dollar plans with over 36,000 participants, such as the Plan here, benchmarking based on fee surveys alone is inadequate. Recordkeeping fees for jumbo plans have declined significantly in recent years due to increased technological efficiency, competition, and increased attention to fees by sponsors of other plans such that fees that may have been reasonable at one time may have become excessive based on current market conditions. Accordingly, the only way to determine the true market price at a given time is to obtain competitive bids,” the complaint states.

The plaintiff argues that based on information currently available regarding the plan’s features, the nature of the administrative services provided by TIAA, the plan’s participant level, and the recordkeeping market, benchmarking data indicates that a reasonable recordkeeping fee for the plan would have been a fixed amount between $1,500,000 and $1,900,000 per year (approximately $50 per participant with an account balance); however, TIAA is collecting roughly $10,000,000 per year (on average approximately $277 per participant).

In addition to the claims regarding excessive fees, the lawsuit says TIAA’s participant loan process violates ERISA self-dealing, or prohibited transaction, rules. It requires a participant to borrow from TIAA’s general account rather than from the participant’s own account. In order to obtain the proceeds to make such a loan, TIAA requires each participant to transfer 110% of the amount of the loan from the participant’s chosen investments to one of TIAA’s general account products as collateral securing repayment of the loan. The general account product pays a fixed rate of interest, currently guaranteed to be 3%. All of the assets held in TIAA’s general account are owned by TIAA. Therefore, TIAA also owns all the assets transferred to its general account to “collateralize” the participant loan.

“Because the participant loan is made from TIAA’s general account, the participant is obligated to repay the loan to TIAA’s general account, and the general account earns all of the interest paid on the loan, in contrast to the loan programs for virtually every other retirement plan in the country, where the loan is made from and repaid to the participant’s account and the participant earns all of the interest paid on the loan,” the complaint states.

The lawsuit asks that the university make good to the 403(b) plan any losses to participants resulting from the breaches of fiduciary duties alleged and for the court to grant other equitable or remedial relief as appropriate.