Lawsuits and retirement plans have become quite the pair in recent years. Plan participants have become aware of the excessive fees and conflicts of interest that have plagued the retirement plan industry—and most are still not even close in terms of being fully financed for retirement. Rightfully so, they are now taking action.
While most lawsuits have involved “for-profit” institutions, the “non-profit” world is no longer invincible. Top universities such as New York University, the Massachusetts Institute of Technology (MIT), and Yale University were recently sued over similar allegations that have been made before about excessive fees and breach of fiduciary duty.
This is groundbreaking in terms of lawsuits being brought against non-profit institutions and their retirement plans. Jerry Schlichter, managing partner at St. Louis-based law firm Schlichter, Bogard, & Denton stated that, “these cases are the first cases involving university 403(b) plans.” As a quick reminder, 403(b) plans are the non-profit versions of 401(k)’s, which is the standard retirement plan option for many for-profit entities in the United States.
Are these new developments? Absolutely not! According to Mr. Schlichter, “it doesn’t surprise me at all that the tort bar is discovering 403(b) plans. The only thing that surprised me is that it’s taken so long.”
The allegations specifically made against the universities include:
- High-cost funds with no low-cost alternative
- Duplicative investment strategies that confused participants
An egregious example was the number of investment options in MIT’s 403(b) plan, which happened to be just over 300 different options for participants to choose from. As an investor, where would you even start in considering all 300 options? If a physician gave us 300 different procedures to perform on us, would we know which one would be best for our health? Of course not!
Fiduciary duty and actively managed mutual funds are also coming under heavy scrutiny as they continually prove to be in conflict with one another. It is not just the high fees that investors end up paying by being in this funds, it's the inferior performance that almost always accompanies them. As we have recently highlighted in our own research, some of the largest fund managers fail to outperform their benchmarks over time. Some examples include Wells Fargo, MFS Investment Management, JP Morgan, Lord Abbott, USAA, Midas Funds, Thrivent, American Funds, Fidelity Part 1, Fidelity Part 2, Oppenheimer Funds, T. Rowe Price, Invesco, Vanguard, and BNY Mellon.
So why do these types of investments find themselves in the vast majority of retirement plans? This is where we find significant conflicts of interest. For example, Fidelity CEO, Abigail Johnson, serves as a member of the MIT Board of Trustees. Who is in charge of running MIT’s retirement plans? Surprise, surprise….it’s Fidelity Investments. It has become customary for all parties involved in the actual plan (recordkeeper, fund provider, third party adminstrator, plan advisor, etc.) to engage in what is called "revenue sharing" where parties will share in ALL of the revenues generated within the plan. The unfortunate part of this process is that profits for the service providers become the focal point versus doing what is in the best interest for the plan sponsor and ultimately the plan participants. For example, as noted in the Investment News article referenced above, in 2015, MIT eliminated hundreds of options from their original 300 fund lineup, which would have saved participants a total of $8 million in fees alone in 2014.
When addressing the issue of retirement readiness, we must first ask the question, “what gives plan participants the greatest probability of having a secure retirement?” Unless you have been completely oblivious to the academic research that has been conducted on mutual fund performance, one would know that almost every single study has indicated the superiority of index funds over actively managed mutual funds over long time horizons. In fact, over the 32-year period ending December 31, 2006, 99.4% of the managers of actively managed mutual funds failed to demonstrate genuine stock picking ability.[i] That is more than what one would expect just by random chance.
There must also be processes in place to ensure that there are no perverse incentives within the plan that create a direct conflict of interest in the way of doing what is in the sole interest of the plan sponsor and plan participants.
We applaud the employees of these universities and hope they serve as catalysts for further investigations into what has been a long-time coming atonement of the retirement plan industry.
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About the Authors
Tom Allen
Tom Allen is an Accredited Investment Fiduciary (AIF®), Certified Cash Balance Consultant (CBC) and a Chartered Financial Analyst (CFA®) Level III Candidate. Tom received his Bachelor of Science in Management Science as well as his Bachelor of Art in Philosophy from the University of California, San Diego.
Mark Hebner - Founder, Index Fund Advisors, Inc. Â
Founder and President of Index Fund Advisors, Inc., and author of Index Funds: The 12-Step Recovery Program for Active Investors. He is a Wealth Advisor, with an MBA from the University of California at Irvine and a BS in Pharmacy from the University of New Mexico with a specialization in Nuclear Pharmacy.