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Another Win Some, Lose Some for Parties in 403(b) Suit

By Nevin Adams • October 06, 2017 • 0 Comments
Citing the rulings in a number of other university 403(b) suits, a federal district court has weighed in on the issues in a case involving Johns Hopkins University.

The suit, brought against the plan fiduciaries of Johns Hopkins’ $4.3 billion plan (as of 2014) a little more than a year ago by the law firm of Schlichter, Bogard & Denton on behalf of plan participants, had claimed that they had failed to take advantage of their “jumbo” plan size to negotiate better deals for their plan participants and beneficiaries, including:

  • providing active management solutions, rather than passives;

  • offering duplicative investments “in every major asset class and investment style”

  • forcing the use of the CREF stock account and CREF money market account;

  • using mutual funds – and retail mutual funds at that – rather than collective investment funds or separately managed accounts; and

  • flooding their plan menus with a “dizzying” array of funds that the suit alleges serve only to intimidate participants into “decision paralysis” while at the same time imposing higher-than-reasonable fees.

Motions to Dismiss

Last week, in Kelly v. Johns Hopkins Univ. (D. Md., No. 1:16-cv-02835-GLR, order partially denying motion to dismiss 9/28/17), U.S. District Court Judge George Russell cited previous cases involving Emory University, New York University and the recently decided case involving the University of Pennsylvania in accepting the defendants’ motion to dismiss the claim that offering plan participants too many investment options is imprudent.

In the hearing in the U.S. District Court for the District of Maryland, Judge Russell was also persuaded by the reasons set forth in the New York University and University of Pennsylvania cases that the plaintiffs failed to state a claim to the extent that they alleged that including higher-cost share classes in the plan, rather than available lower-cost share classes of the same funds, was imprudent.

He was “persuaded by the reasons set forth in Henderson and Clark that 29 U.S.C. § 1002(21)(B) (2012) prohibits Plaintiffs from bringing prohibited transaction claims as to the mutual funds included in the Plan,” and “persuaded by the reasons set forth in Henderson and Sacerdote that allegations that revenue sharing from a mutual fund is a prohibited transaction under 29 U.S.C. § 1106(a)(1)(D) (2012) fail to state a claim.”

Persuade ‘Ed’

However, Russell did not dismiss the remaining claims: “Henderson (Emory University), Sacerdote (NYU), and Clark (Duke University) all concluded that allegations that a university offering actively managed funds was imprudent supports a breach of fiduciary duty claim under ERISA, and the Court agrees,” he wrote. And, unlike other courts, Judge Russell was “also persuaded by the reasons set forth in Henderson, Sacerdote, and Clark that allegations that a prudent fiduciary would have chosen fewer recordkeepers and run a competitive bidding process for the recordkeeping services supports a breach of fiduciary duty claim.

“At this stage, the Court cannot make a determination that any of Plaintiffs’ other claims fail as a matter of law,” he wrote, going on to explain that “discovery related to those claims will shed light on whether the Court can decide the claims as a matter of law or whether a factfinder must resolve any genuine disputes of material fact.”

In sum, Judge Russell granted the defendant motions to dismiss plaintiff arguments alleging that Johns Hopkins acted imprudently by offering too many investment options or higher-cost share classes in the plan, as well as their arguments that the plans participated in a prohibited transaction related to mutual funds or that revenue sharing from a mutual fund is a prohibited transaction. The other claims stand for now – and Judge Russell said that the court will issue a scheduling order in this case.

Other Cases

Over the past 18 months, more than a dozen universities have found themselves in the crosshairs of class action lawsuits regarding the fees, investment menus and recordkeeping structures of their retirement plans, with a varied judicial response to what have been largely identical claims, albeit in different jurisdictions and somewhat different plan designs, including Duke, Emory and the University of Pennsylvania. The latter is the only clear victory for the plan fiduciaries in these cases.

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