A US federal appeals court reinstated two out of seven claims in a lawsuit alleging that the University of Pennsylvania breached its fiduciary duties when managing its 403(b) pension funds for its employees.
In September 2017, a district court dismissed the lawsuit against the University of Pennsylvania, Sweda v. Univ. of Penn., which accused the Ivy League school of breach of fiduciary duty, prohibited transactions, and failure to monitor fiduciaries under the Employee Retirement Income Security Act (ERISA). The suit alleged Penn “failed to use prudent and loyal decision-making processes regarding investments and administration, overpaid certain fees by up to 600%, and failed to remove underperforming options from the retirement plan’s offerings.”
But last week, the appellate court reversed the district court’s dismissal of the breach of fiduciary duty claims for counts 3 and 5, and remanded for further proceedings. Count 3 accuses Penn of breaching its fiduciary duties with unreasonable administrative fees and count 5 is in regard to unreasonable investment management fees, unnecessary marketing and distribution (12b-1) fees, and mortality and expense risk fees, as well as performance losses.
The appellate court said that the district court erred in dismissing the two counts by “ignoring reasonable inferences” that were supported by the alleged facts.
“While Sweda may not have directly alleged how Penn mismanaged the plan,” said the court in its ruling, “she provided substantial circumstantial evidence from which the district court could ‘reasonably infer’ that a breach had occurred.”
The plaintiffs are seeking to represent a proposed class of 20,000 current and former Penn employees who participated in Penn’s Retirement Plan since August 2010. The Plan is a defined contribution plan offering mutual funds and annuities, and the University matches employees’ contributions up to 5% of compensation.
Penn’s 403(b) plan offers mutual funds through TIAA-CREF and Vanguard Group, and annuities through TIAA-CREF. Since 2010, the plan has offered as many as 118 investment options, and as of December 2014, the plan offered 78 options: 48 Vanguard mutual funds and 30 TIAA-CREF options, including mutual funds, fixed and variable annuities, and an insurance company separate account.
The plaintiffs argue that Penn is obligated to limit the plan’s expenses to a “reasonable amount” to ensure that each fund is a prudent option for participants, and that it must make those decisions for the exclusive benefit of participants, and not for conflicted third parties.
Penn “squandered that leverage by allowing the plan’s conflicted third party service providers—TIAA-CREF and Vanguard—to dictate the plan’s investment lineup,” alleges the lawsuit, “to link their recordkeeping services to the placement of investment products in the plan, and to collect unlimited asset-based compensation from their own proprietary products.”