PLANSPONSOR - August/September 2018 - 55

SAXON ANGLE
NYU Claims a Victory
I
Trial alleging imprudence ends for the school
n a sweeping victory, the fiduciaries of several 403(b) plans
sponsored by New York University (NYU) defeated a class
action lawsuit brought by participants. Sacerdote et al. v.
New York University is part of a spate of cases brought against
renowned higher learning institutions, alleging that excessive
recordkeeping and investment fees were charged and underperforming
investment options were offered by the plans. While a
number of such cases have settled or been dismissed, this was
the first to proceed to trial.
In a ruling for the plan fiduciaries on all claims, the U.S.
District Court for the Southern District of New York found that
NYU's retirement plan committee adequately managed the
plans' recordkeepers and investment options.
The case provides helpful guidance for other fiduciaries
subject to the Employee Retirement Income Security Act
(ERISA) and particularly those responsible for 403(b) plans.
Similar to claims brought against fiduciaries of 401(k)
plans over the last 15 years, those brought by Sacerdote alleged
that the committee could have reduced the plans' administrative
fees by negotiating better overall rates. However, the case raised
issues specific to 403(b) plans including the offering of multiple
recordkeepers to the plans. The plaintiffs also alleged that the
committee imprudently failed to remove two funds as investment
options despite their underperformance relative to benchmarks.
Following an eight-day bench trial, the court found in favor
of the plan fiduciaries on all claims. With respect to recordkeeping
fees, the court emphasized a number of facts that led to
its conclusion that the committee prudently managed its recordkeepers.
Even though the plans' investment consultant had
recommended consolidating to one recordkeeper, the committee
determined that consolidation entailed significant drawbacks-
namely, the enormous technical challenge of moving tens of
thousands of participant records at a time when the university
was overhauling its human resources (HR) system.
In addition, the court said, under 403(b) plans, participants
are commonly offered annuity contracts as investment options.
With many plan participants' annuity contracts issued directly
to them by one of the plans' recordkeepers, the court stressed, it
would have been unrealistic for anyone other than the contracts'
issuer to administer them. The court also found that the committee's
request for proposals (RFP) process for recordkeepers, done
once every seven years, was not too infrequent. As evidence of
the committee's prudent process, the court noted, plans' recordkeeping
fees had declined over the years.
The court also held that the committee prudently monitored
the different investment options offered. Prior to each
monthly meeting, the committee reviewed detailed reports from
the plans' investment consultant analyzing the performance of
specific funds. The committee's minutes further demonstrated
routine discussion of investment performance.
Moreover, witnesses at the trial testified that, even though
the committee accepted virtually all of the investment consultant's
recommendations, members frequently asked questions
regarding its advice and made independent evaluations of investment
options. The committee also routinely placed suspect
funds on a watch list and analyzed whether to retain them in
the investment lineup. This evidence " demonstrated that the
committee closely monitored the performance of the investment
alternatives offered in the plans. "
With respect to the two allegedly underperforming funds,
the court held that the committee did not act imprudently when
retaining the funds in the lineup. Although the plaintiffs' expert
testified that a real estate fund's cash holdings created a " drag " on
overall returns, the court noted that cash holdings are not inherently
imprudent and tend to boost returns when the real estate
market is down. The court also found that the plaintiffs' expert
had inappropriately compared the fund to a real estate investment
trust (REIT)-a riskier vehicle that lacks cash entirely. As for the
other fund, the court found that the plaintiffs' expert simply used
incorrect and misleading benchmarks, creating the illusion of
underperformance. The court, therefore, held that the committee
did not act imprudently in retaining either fund in the plans.
This decision represents the minimum standards that may
apply to decisions relating to investment and service provider
selection and monitoring. Nevertheless, it may not be the last
word, as the plan participants may pursue an appeal. Meanwhile,
a number of other university fee cases continue to proceed
toward trial. As these cases do so, plan fiduciaries should watch
for more potential settlements and rulings in this latest frontier
of ERISA litigation.
Stephen Saxon is a partner with Groom Law Group,
Chartered, in Washington, D.C. George Sepsakos is an
associate with Groom.
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