A wave of lawsuits against large 403(b) plans run by universities, including NYU, MIT and Yale, across the country, tells other types of non-profits to “be forewarned,” says Sam Henson, vice president and director of legislative and regulatory affairs at Lockton. Hanson says plan sponsors should monitor their fee structures and potential lawsuits that may arise this year.

In 2016, the law firm of Schlichter, Bogard & Denton filed numerous lawsuits, on behalf of employees, against multibillion-dollar, university-sponsored retirement plans, claiming the universities allowed participants to be charged unreasonable expenses for plan administration and retained expensive, underperforming investments in the lineup, according to Henson.

Bloomberg/file photo

These claims are similar to those alleged of private-sector employers over the last decade, claiming fiduciary breaches such as selecting and retaining high-cost and poor-performing investment options; using multiple record-keepers; creating excessive and unreasonable fees; and forcing the use of the provider’s proprietary products, among other claims, Henson explains.

These plaintiff attorneys, who file suit on behalf on behalf of employees, spend a lot of time focusing on 401(k) plans, started to branch out to other targets with their move to 403(b) plans run by universities, explains David Levine, principal at Groom Law Group in Washington.

These suits are often not making it to trial, but ending in high-dollar settlements, Levine says. “There is not a lot of law coming out of the litigation,” he adds.

The next target
Because the university suits are likely to be successful, it will encourage plaintiff attorneys to move into the next area, including other universities and non-profit organizations, such as hospitals, Henson, an attorney, explains.

The non-profit sector has not faced the oversight that the private employer sector has experienced, he adds. Since there have been many 401(k) suits in the private sector, employers there have learned their lesson. But, the non-profits have not had such plan governance and oversight, Henson explains.

As a result, Henson sees trends in these non-profits that will make the cases “slam dunks,” such as having multiple record-keepers and not negotiating the cost of an agreement.

Besides the potential monetary impact, lawsuits would also affect a non-profit’s reputation. “Employees are the greatest asset,” explains Keith Mulvihil, a client executive with Lockton in Washington. “I can’t tell you how bad [it] would look if employees feel they are getting overcharged” for their service plans.

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To prepare for these suits, the non-profits need to talk with an adviser and fix their “past indiscretions,” Henson says.

“That does not mean throwing your hands up and saying, ‘There is nothing I can do,’” he explains. “You can get credit. You will get credit for identifying issues and changing them.”

He advises his clients to look at the past lawsuits as a lesson, and then encourages them to look at their processes and see where they need to change things.

Non-profits need an independent adviser, he adds, as they are experts in helping negotiate fees and provide and extra level of protection.

“The bottom line,” he adds, “it is time to clean-up … as the risk of litigation is millions, if not billions.”

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