Five Costly Mistakes in 403(b) Retirement Plan Management and How to Avoid Them


In 2016, a trio of renowned universities received unwelcome publicity. Yale University, New York University and the Massachusetts Institute of Technology were each sued for breaches of fiduciary duties related to their 403(b) plans.

At its core, the suit alleges that the universities overpaid for management and recordkeeping services to the detriment of plan participants. While these plans each have more than $3 billion in assets (making them attractive targets), sponsors of smaller-sized plans should take note: inattentive management can make plan sponsors vulnerable to costly litigation. As more of these kinds of cases emerge, more law firms will look to profit from complaints against organizations alleging they have improperly managed their plans and recordkeeping arrangements.

We believe these recent suits and allegations offer lessons applicable to plans of all sizes. In this blog post, we will review several of these lawsuits and their complaints against well-known universities. We will also review five common mistakes and consider what plan sponsors can learn from them to help protect their organizations going forward.

Taken to Task—and to Court:  Allegations against University 403(b) Plan Sponsors

One law firm has been the primary agent in these lawsuits against a number of universities including MIT, NYU and Yale. This particular law firm has filed costly suits against large corporations resulting in settlements ranging from $35 million (Cigna) to $62 million (Lockheed Martin).

The suit against NYU, which involves two 403(b) plans covering faculty, research administration and the medical school, centers primarily around costs. They claim participants were not only offered too many investment choices (with more than 100 options for faculty), but many were also too expensive while cheaper options existed.

Moreover, according to the suit, even the least expensive funds offered by the plans could have been provided for a lower cost. Lastly, the complaint alleges that the university did not use its considerable negotiating power to select a single, low-cost recordkeeper for administrative tasks, (such as sending statements to employees) and had overpaid for these services for many years.

The suit filed against MIT, on the other hand, alleged that the university did not conduct a thorough search for a plan provider that could have provided better service for less. There was some question of conflicts of interest as well, citing the fact that the university had a long-standing relationship with Fidelity which may have hindered ongoing due diligence. The complaint pointed out that Fidelity had donated “hundreds of thousands of dollars” to MIT, while Fidelity’s CEO, serves on MIT’s Board of Directors.

The law firm built its suit against Yale’s 403(b) retirement plan of approximately $3.6 billion in assets (spring 2014) on similar complaints: multiple recordkeepers with excessive fees that cost participants millions of dollars over the last six years; too many investments of the same style; and the use of high-cost funds instead of identical but lower-priced alternatives.

Yale ended up consolidating to one provider, TIAA, in April 2015 and changed to some lower-cost investment choices. However, the suit claims that the changes did not go far enough to fully protect the interests of its employees. Participants were still burdened with sorting through more than 100 options, many of which were too expensive.

Additional Universities Sued for Similar Reasons

The same law firm has also brought suits against other major universities, including Duke, Johns Hopkins, the University of Pennsylvania and Vanderbilt. Each of the 403(b) plans exceeds $3 billion in assets with tens of thousands of participants. The allegations among the lawsuits are nearly identical:

  • Multiple Recordkeepers: Vanderbilt’s and Duke’s plans used four separate recordkeepers, while Johns Hopkins used five and the University of Pennsylvania retained two.
  • Inappropriate Compensation: The universities imprudently used revenue sharing to pay recordkeeping services.
  • Option Overload resulting in “Decision Paralysis”: The institutions offered too many investment options, many of which were underperforming funds and retail share classes when a less-expensive institutional share class may have been available. Johns Hopkins’ plan, for example, offered more than 440 investment options, Duke more than 400, Vanderbilt, 340 and University of Pennsylvania, 78.

In addition, the same law firm filed a lawsuit against Emory University and Emory Healthcare, a university-affiliated health system, that alleges they breached their fiduciary duties by causing participants in their 403(b) plans to pay excessive recordkeeping, administrative and investment management fees and by retaining high-cost and poor-performing investment options.

Another law firm recently sued Columbia University for “unreasonable” and “greatly excessive” recordkeeping, administration and investment management fees in its 403(b) plans, and similar suits have been filed against Cornell, Northwestern and USC.

Learnings from Costly University Planning Mistakes: 5 Best Practices to Review

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photo credit: Best Practices

Highland considers five mismanagement themes among these law suit allegations that all plan sponsors should not ignore. 403(b) plan sponsors can take precautionary steps to guard against a similar fate.

Let’s take a look at those five mistakes and discuss practices that can protect sponsors from committing, even inadvertently, costly actionable offenses.

Allegation #1: The plan has excessive recordkeeping fees and the sponsors failed to conduct a thorough search for alternative plan providers on a regular basis.

On average, Highland recommends that plan sponsors issues RFIs/RFPs for vendor services and perform cost benchmarking on a scheduled and regular basis. We also suggest that organizations conduct ongoing evaluations of the exact share classes that recordkeepers offer, as well as how the revenue and expenses are allocated among participants.

Each organization should make it a practice to do a recordkeeper review, on average, every three years. By doing so, plan sponsors can help ensure the fees are appropriate and competitive in the marketplace, while alleviating concerns that participants are shouldering excessive charges.

Allegation #2: Plan sponsors engaged in imprudent selection and retention of underperforming funds.

Performance of the 403(b) investments should be monitored and reviewed on a quarterly basis at a minimum, and documented accordingly. We also find that having reviews of fund managers and proper analysis can help you better understand performance and why it may be outsized in either a positive or negative direction.

One caution, however, is simply releasing a manager due to some period of underperformance. “Mean reversion,” the theory that prices and returns will eventually move back toward the mean, is well-known and documented, and investment strategy performance can move in cyclical patterns, underperforming and alternately outperforming in different investment environments.

We understand that, realistically, identifying an underperforming investment can be an exercise in 20/20 hindsight. However, the key to effective oversight is for plan sponsors to understand the “why” behind performance, and making a sell or change if something material has occurred.

The Prudent Expert standard of ERISA states that fiduciaries have a responsibility to follow a diligent and prudent process. Evaluating investment managers on an ongoing basis is based on that standard, not solely the investments’ performance. For example, perhaps the management team changed, the investment strategy scope has changed or the opportunity set has changed or no longer exists.

Allegation #3: The plan has/had several recordkeepers, alleged to be inefficient and costly.

Typically, plan sponsors maintain only one recordkeeper, as this is likely the most cost effective and straightforward solution. If a plan works with more than one recordkeeper, consolidating services could result in a cost savings while facilitating better administration for the client.

In other words, the client only has one recordkeeper relationship to manage, rather than multiple relationships. Moreover, plan sponsors and participants won’t need to check multiple recordkeeper websites to monitor performance of investments or plan balances.

It is worth noting that certain situations may for at times call for more than one recordkeeper (e.g. some legacy insurance or investment structures may require keeping a legacy recordkeeper) and that having more than one recordkeeper is not necessarily an issue. However, plan sponsors should ensure that the number of recordkeepers retained, first and foremost, promotes the best intent of plan participants.

Allegation #4: The plan had a large number of investment options (100+), and in some cases, too many of those options are from the plans’ recordkeeper.

Generally, smaller lineups are less burdensome to monitor for plan participants. While larger lineups can (and should) be monitored, they typically require more resources be allocated to do so.

Retirement plan committees should always consider participant usage of funds and whether there might be potential communications challenges or confusion for the participants. We’ve seen cases where participants who are given 100 or more funds to invest in are overwhelmed, especially if they don’t understand what the funds are or if they are unfamiliar with the language. Doing this often ends up in poorly constructed participant portfolios which may be concentrated in inopportune areas or at inopportune times.

Allegation #5: The plan offers high-priced mutual fund share classes (retail, high revenue sharing) where cheaper, institutional shares are available and should have been considered.

Finally, we encourage plan sponsors to conduct thorough reviews of each available share class for a particular strategy and document the rationale for the selection of the share classes that are chosen. Make sure you regularly revisit these selections.

If a new and more affordable vehicle comes into existence, you want to be in a position to incorporate that cheaper option and ensure participants have the opportunity to select it as part of their portfolio, should they choose to do so.


The recent scrutiny of university retirement plan management is likely to continue. It is the fiduciary responsibility of recordkeepers and 403(b) plan sponsors to ensure that participants have access to a comprehensible and affordable retirement plan.

By taking note of each of the five mistakes committed by plaintiffs in recent law suits, plan sponsors can mitigate or even potentially eliminate concerns of future litigation. Learning from others’ mistakes – even Ivy League mistakes – is always less costly than learning from your own.

photo credit: Analysis By G. Altmann

Richard Veres, CFA, CEBS