A Trilogy of Briefs: Third Parties Weigh in on 403(b) Litigation

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Last week, three briefs were filed with the US Court of Appeals for the Third Circuit in support of the University of Pennsylvania and its Investment Committee. As you may recall, the UPenn was one of over a dozen universities hit with lawsuits alleging breaches of fiduciary duty in the latter half of 2016. In late 2017, this university was successful in getting all of the charges dismissed; however, that decision is currently under appeal.

The briefs, filed by TIAA, the Chamber of Commerce of the United States of America, American Benefits Council, the American Council on Education and other higher education associations support the assumption that 403(b) plans have traditionally been managed differently than 401(k) plans, and as a result, they cannot be viewed in the same light with respect to litigation. While they have similar tones, all three briefs have a different focus and combined they make broad arguments in support of 403(b) plan sponsors.

1. The TIAA brief outlines arguments that their fees are competitive, their investments perform well and that they provide unique services to the 403(b) market that are not, as the plaintiffs allege, ‘commodity services’. As TIAA has the largest vested interest in the suit, it is the most focused of the three in many respects. TIAA concentrates on the TIAA Traditional product and the CREF Stock Fund and they argue that the products offer both the ability to supply lifetime income and growth potential. They also provide data to support their belief that CREF Stock’s fees are reasonable when compared to peers.

With respect to recordkeeping, TIAA argues that their services are specialized to provide the opportunity for lifetime income and that they could not be duplicated at another recordkeeper. They focus not only on the administrative aspects of their services, but also on working with participants to achieve favorable retirement outcomes.

2. The American Council on Education (ACE) brief, which was filed on behalf of eight organizations representing higher education institutions, focuses on the differences between 403(b) plans in the higher education realm and 401(k) plans in the corporate sector. They argue that while both types of plans are most often now subject to ERISA, their unique histories and focus make them very different. They properly state that ERISA does not require a one-size-fits-all approach.

ACE discusses the history of 403(b) plans as the sole savings vehicle for educators, rather than a supplement to retirement savings, as 401(k)s were generally designed for in their early years. As a result, 403(b) plans have long had a greater focus on retirement income than their corporate brethren. Likewise, in many cases 403(b) plans received much larger contributions from educational institutions as a way to reward and compensate educators.

ACE points out that 68% of 403(b) plans offer annuities while only 6% of 401k)s offer similar products and that annuities increase the administrative complexities of 403(b) plans. They also quote a court decision which states that “ERISA protects plan participants’ reasonable expectations in the context of the market that exists”, pointing out that “a typical 403(b) plan for higher education employees will bear little resemblance to the average defined contribution plan”.1

3. The Chamber of Commerce of the United States of America and the American Benefits Council brief focuses more on the fiduciary side of the equation. They argue that fiduciaries are judged not on the outcome of their decisions, but for the process by which those decisions were made. They support the lower courts dismissal of the charges against University of Pennsylvania in that the court carefully examined the allegations and determined that they were without merit.

The brief discusses the many decisions plan fiduciaries must make and how there are often competing considerations. They argue that allegations of wrongdoing cannot rely solely inferences from circumstantial facts. In supporting this, they point out that many (or most) of the arguments from the plaintiffs made broad allegations that were not backed up by substantiated facts. They also go into some detail regarding allegations concerning investment selection. They clearly point out that many of the comparisons made in the complaint are simply not valid.

Overall, all three of these briefs offer valid arguments in support of the Court of Appeals upholding the dismissal of charges. The UPenn suit is one of over a dozen actions that are still pending. Sentinel will continue to follow developments in these cases and inform our clients regarding how the courts’ interpretation of ERISA and other laws may impact their plans.  
1 Jennifer Sweade et al. vs. The Univeristy of Pennsylvani et al., 29 (The United States District Court for the Eastern District of Pennsylvania April 12, 2018)

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