In recent weeks, courts have started ruling on preliminary motions in the high-profile university fee cases filed last August (see our August 11, 2016 news item and an article on the topic for more information). Additionally, two new university fee cases were filed against the University of Chicago and Princeton, TIAA recently entered into a settlement with participants in its own plan, and the IRS has started to issue opinion letters on pre-approved 403(b) plans. This Client Alert summarizes these significant recent developments for 403(b) plans.

University Litigation

The current round of rulings in the university fee litigation cases, while not final, provides some insight with respect to how the courts view the plan participants’ (“plaintiffs”) claims.

The Northern District of Georgia’s ruling in Henderson v. Emory University on Emory’s motion to dismiss its complaint was largely a win for plaintiffs, as it allowed most of their claims to proceed. The Middle District of North Carolina’s ruling in Clark v. Duke University presents a more mixed result for plaintiffs and plan sponsors. The following table summarizes the claims discussed in each motion and whether the court stated that the claims should be decided at trial:

With respect to the plaintiffs’ claims regarding prohibited transactions incurred more than six years ago, the court in Henderson stated that it would determine whether the plan fiduciaries had a continuing duty to monitor and remove prohibited transactions under the Supreme Court’s ruling in Tibble v. Edison International.

These rulings, along with the Central District of California’s ruling in Munro v. University of Southern California (which allowed the plaintiffs in that case to pursue their claims in court rather than through arbitration as purportedly required by their employment agreements), suggest that other courts may follow suit and allow several of the plaintiffs’ complaints in other university cases to proceed. Plan sponsors should consider these rulings, review their fiduciary processes, and determine whether their procedures are adequate to reduce their risk of litigation.

University of Chicago and Princeton Lawsuits

On May 18, 2017 a group of law firms filed a complaint on behalf of plan participants in the University of Chicago’s 403(b) plan (Daugherty v. University of Chicago) which makes similar allegations to those set forth in other university fee cases. These include allegations that the plan fiduciaries:

• Selected and retained excessively costly investment options;
• Selected and retained underperforming investment options;
• Caused participants to pay unreasonable recordkeeping fees and failed to monitor service providers; and
• Engaged in prohibited transactions in connection with participant loans at TIAA by requiring excessive collateral and charging excessive fees.

Additionally, on May 23 a law firm filed a complaint on behalf of participants in Princeton University’s 403(b) plan. The complaint generally contains allegations similar to the complaint filed against the University of Chicago, and includes a number of allegations specific to TIAA investments and expenses.

Although both the University of Chicago and Princeton plans are “jumbo” plans, the cases were filed by a different law firm than the firm that filed the university fee cases last year.

Richards-Donald v. TIAA

Recently, TIAA entered into a settlement with its employees regarding its own retirement plan. Employees claimed TIAA breached its fiduciary duty by failing to engage in a competitive bidding process for recordkeeping services and failing to prudently evaluate whether to use non-proprietary funds in its own plan. In connection with the settlement, TIAA will add non-proprietary funds and a brokerage window to its own plan. It will also enhance its education program, modify its revenue-sharing practices, and employ independent consultants to assist with the settlement. The case against TIAA was one of many cases against service providers who had investment menus consisting primarily of proprietary investments.

Pre-Approved 403(b) Plans

The Internal Revenue Service has recently started issuing opinion letters approving the form of pre-approved 403(b) plans. These opinion letters provide assurance from the IRS that the pre-approved plan document complies in form with the Internal Revenue Code.  In late 2017 or early 2018, plan sponsors likely will need to begin restating their plan documents in connection with this process. Pre-approved 403(b) plan documents will be less flexible than the documents previously used by service providers. As a result, plan sponsors should anticipate completing a plan design review and assessment of their options to obtain assurance that their documents comply with the Code.

Additional Information

If you have any questions regarding the impact of these developments, please contact a member of our Employee Benefits Practice Group.