By Amanda Sonneborn, Megan Troy, and Tom Horan
Seyfarth Synopsis: Since August 2016, sixteen elite colleges and universities have faced class action lawsuits related to management of their retirement plans. After five cases previously survived motions to dismiss, the University of Pennsylvania became the first college to secure a complete victory when accused of retirement plan mismanagement.
On September 21, 2017, the Eastern District of Pennsylvania ruled in favor of the University of Pennsylvania on every count in a proposed class action, which challenged the school’s retirement plan fees, investment lineup, and use of multiple plan record keepers. The proposed class action specifically alleged that both Penn and the administrator of its defined contribution retirement plan breached their fiduciary duty by “locking in” participants’ options to two investment companies, allowed the plan to pay too much in administrative fees, and charged excessive investment fees for access to an underperforming portfolio.
Citing Renfro v. Unisys Corp., 671 F.3d 314 (3d Cir. 2011), the court rejected the claim that by “locking in” arrangements with two investment companies, the plan fiduciaries’ imprudently failed to monitor the investment options offered to participants. Specifically, the court found that plaintiffs’ claims amounted to impermissible second-guessing of the fiduciaries’ investment decisions just because they turned out to lose money. The court noted that, standing alone, the decision to “lock in” arrangements with investment companies is not imprudent. The court likened locking a plan into an arrangement with an investment company for a stated period to cell phone companies offering discounted rates in exchange for two-year contracts, and found that plans are often able to obtain favorable terms in exchange for committing to providing a predictable period of business to investment companies.
The court found that plaintiffs’ administrative fee claims failed because there are lawful explanations for not offering the absolute lowest-available fees to participants. In dismissing these claims, the court stated: “the plaintiffs need something more than a claim that there may be (or even are) cheaper options available. The plaintiffs must show that there were no reasonable alternatives given to plan participants to choose from, which the plaintiffs have not pled.”
Similarly, with respect to the unreasonable investment management fees claim, the court stated: “The plaintiffs’ argument that fiduciaries must maintain a myopic focus on the singular goal of lower fees was soundly rejected in Renfro.” Plaintiffs also argued that, by offering too many investment options, there was participant confusion. Because they failed to point to a single participant that was confused by the investment options, however, the court dismissed the claim. The court also found no cause of action for plaintiffs’ claims that certain funds were outperformed in the market.
The Court characterized plaintiffs’ prohibited transaction claims as an impermissible attempt to shoehorn their fiduciary breach claims into prohibited transaction rules. The court found that accepting plaintiffs’ arguments would mean that administrators commit prohibited transactions every time they contract with a party to provide services to a plan for money, and dismissed the claims because there was no evidence of an intent to benefit parties at participants’ expense.
This decision is a significant victory for the University of Pennsylvania and a change in course for the cases against colleges and universities. The Court’s reliance on Renfro requires plaintiffs in these cases to do more than second-guess fiduciary decisions where they lose money, and instead holds them to the burden to plausibly allege systematic mismanagement that left participants with a choice between participating in a poorly-performing retirement plan or no plan at all. It remains to be seen whether the impact of Renfro will be limited to the Third Circuit or whether it will expand to other circuits as well.