Brown University Settles ERISA Class Action Suit for $3.5 Million

Complaint alleged excessive fees cost 403(b) participants millions.

Brown University has agreed to pay $3.5 million to settle a class action lawsuit that alleged the school’s 403(b) plans’ managers breached their fiduciary duties under ERISA and cost employees millions of dollars in “excessive” and “unreasonable” fees.

The plaintiffs in the case are participants in the Brown’s deferred vesting retirement plan, and the Brown University Legacy Retirement Plan. According to the complaint, Brown retained TIAA and Fidelity Investments as recordkeepers for its retirement plans, and approved an asset-based compensation structure with no per-participant limitations.

“This caused recordkeeping fees to grow unfettered as the plans’ assets have grown,” said the complaint, pointing out that from the end of 2008 to the end of 2015, the Legacy Plan’s assets alone increased by approximately 68% to $1.08 billion from $733.7 million.

Brown “could have capped the amount of revenue sharing at appropriate levels to ensure that any excessive amounts were returned to the plans,” said the complaint, “but failed to do so, causing the plans’ participants to lose millions of dollars in their retirement savings.”

The complaint alleged that having two administrators was inefficient and caused the participants to pay “duplicative, excessive, and unreasonable fees for recordkeeping and administrative services,” adding that “there was no prudent reason for defendant’s failure to engage in a process to reduce such duplicative services and fees.”

The plaintiffs argued that a reasonable recordkeeping fee for the plans would have been $500,000 and $650,000, or approximately $35 per participant with an account balance. However, they said that TIAA received $3.9 million in indirect compensation for recordkeeping and administrative services just from the CREF variable annuities, TIAA Real Estate Account, and TIAA Traditional Annuity.

The complaint said Brown also breached its fiduciary duties by including too many investment options, with each plan offering at least 24 investments choices managed by TIAA-CREF and over 175 investment choices from Fidelity. It also said the plans were burdened with “duplicative, expensive, and underperforming TIAA investment products.”

According to the terms of the settlement, Brown agreed to pay $3.5 million into a fund created for the plans’ participants, and agreed to use “commercially reasonable best efforts” to reduce the plans’ recordkeeping fees for three years. If the fees still increase regardless of these efforts, Brown has agreed it will notify participants and explain the occurrence, and to conduct a request for proposal process to hire an independent investment advisor to the plans.

Brown decided to settle the lawsuit after “considering the prospect of years of costly litigation,” said a university official, according to The Brown Daily Herald student newspaper. The official said the university is “fully confident that our retirement plans are in compliance with all applicable laws.”

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