Participants in the Duke Faculty and Staff Retirement Plan have sued Duke University and its investment advisory committee for fiduciary violations of the Employee Retirement Income Security Act (ERISA) due to excessive fees and a suboptimal plan model for participants.

According to the compliant, 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. The suit alleges Duke also selected and retained investment options for the plan that consistently and historically underperformed their benchmarks and charged excessive investment management fees.

According to the compliant, the 403(b) plan includes approximately 440 investment options offered by the plan’s four recordkeepers, which include the Teachers Insurance and Annuity Association of America and College Retirement Equities Fund (TIAA-CREF); the Vanguard Group, Inc.; Fidelity Investments Institutional Operations Company; and the Variable Life Insurance Company (VALIC). In addition, the complaint notes that the plan’s investments include retail and institutional share class mutual funds, insurance separate accounts, variable annuity options, and fixed annuity options. “The retail share class mutual funds are designed for small individual investors, not jumbo retirement plans such as the plan, and are identical in every respect to institutional share class funds, except for much higher fees,” the complaint says.

The lawsuit also calls out the individual annuities’ restrictions that make it hard for participants to liquidate assets from those options. For example, it says the TIAA Traditional Annuity must pay a 2.5% surrender charge to withdraw their investment in a single lump sum within 120 days of termination of employment. “Rather than being available to participants if they wish to liquidate their funds earlier, the only way for participants to withdraw or change their investment in the TIAA Traditional Annuity is over a ten-year period, unless a substantial penalty is paid,” the complaint says.

The complaint alleges that “prudent fiduciaries of defined contribution plans negotiate recordkeeping fees on the basis of a fixed dollar amount for each participant in the plan rather than as a percentage of plan assets.” The lawsuit says Duke failed to use its plan’s size to negotiate a lower per-participant recordkeeping fee for the plan. In addition, the complaint cites several articles that suggest 403(b) plans that consolidate to one recordkeeper save on costs. It also calls out the revenue-sharing that is being paid to the plan’s recordkeepers. 

“Despite the long-recognized benefits of a single recordkeeper for a defined contribution plan, defendants continued to contract with four separate recordkeepers for the plan... This inefficient and costly structure has caused Plan participants to pay duplicative, excessive, and unreasonable fees for plan recordkeeping and administrative services,” the complaint says. 

The lawsuit also cites an article that says, “Numerous studies have demonstrated that when people are given too many choices of anything, they lose confidence or make no decision,” suggesting that the multiple investment choices from multiple recordkeepers is not the best design for participants’ retirement readiness. 

Lawsuits with similar allegations have been filed against other large universities. 

The complaint in Clark v. Duke University and the Duke Investment Advisory Committee is here.