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Fiduciary Breach Lawsuit Issues Explored - Topic #4: Multiple Active Recordkeepers

With more than 100 lawsuits filed against the fiduciaries of defined contribution retirement plans for breach of their responsibilities, litigation has plagued the retirement plan industry over the past decade. While the original lawsuits focused on large corporate 401(k) plans, litigation has expanded to include large healthcare organizations and higher education institutions, with more than twenty suits filed against these sponsors since 2016. Other lawsuits have even trickled down to medium- and small-sized retirement plans, rendering all plan sponsors as potential targets.

The claims in these lawsuits cover a broad range of topics and issues related to actions taken or not taken that may have limited the potential growth of plan participant account balances. Most of the claims focus on fees charged in the plan, or investments used that have not performed adequately to yield the return participants should have received.

Last month, we provided an in-depth exploration of the issues with having too expansive an array of investment options available as one of the issues surrounding potential fiduciary breach. This month, we discuss the concern over offering multiple active recordkeepers for administering the plan.

Topic #4: Multiple Active Recordkeepers

One of the common threads among the institutions that were sued over their retirement plans is that they had multiple recordkeepers available for active participant contributions. Out of the twenty-three lawsuits involving primarily the 403(b) plan of healthcare and/or higher education organizations, sixteen of them included the claim that the fiduciaries breached their responsibilities by allowing multiple recordkeepers to be active vendors in the plan. According to the lawsuits, having multiple providers allegedly led to significantly higher recordkeeping fees and subsequently lowered the account accumulations for the plan participants.

A Historical Look

Multiple recordkeepers in a 403(b) plan is not uncommon. Originally, 403(b) providers would only offer their own investment options when providing their recordkeeping services. If a plan sponsor wanted to include the investments from a certain fund manager, they generally had to add that fund manager as a recordkeeper to the plan. Because of this, many 403(b) plans accumulated two or more recordkeepers for the participants to use.

In the 1990s, recordkeepers began to offer investments beyond their own proprietary funds. As it became more common to offer investments from any investment provider, it became less necessary to include multiple recordkeepers to service a plan; and thus, plan sponsors began to consolidate their plan recordkeepers over time. While many plan sponsors reduced their vendors down to one, others retained multiple providers preferring to give their participants choices for their retirement savings.

The Impact of Multiple Recordkeepers

In general, retirement plans may experience higher fees as a result of using multiple recordkeepers. When more than one provider is available, participants select the provider that will work best for them. In a single recordkeeper environment, the provider receives all of the contributions to the plan and can run simple calculations to determine the associated costs. However, in a multiple vendor environment, neither vendor collects the full contribution amount. Inevitably, the contributions are split amongst the providers. Each vendor must try to project the portion of the total contributions it will receive. Additionally, the vendor needs to send representatives onsite more often to sell its services, in order to convince participants to use its program, rather than the other available option(s). As a result, in a competitive environment, the vendor must spend more resources to collect fewer contributions. This typically leads to the recordkeeper charging higher fees than if they were the exclusive provider.

For the participant, having multiple recordkeepers servicing the plan adds to the decision-making process. In addition to deciding whether or not to participate, determining how much to contribute, and in which options to invest their assets, they must also choose from the available recordkeepers. Additional decision points can cause confusion and potentially lower participation. Faced with the need to conduct additional analysis, some employees may delay enrollment or fail to enroll at all.

Litigation Outcomes

In the lawsuits, the plaintiffs endeavor to portray the plan sponsors using multiple recordkeepers as lacking good judgment. For example, in Short v. Brown University, the complaint includes the following statement: “Despite the long-recognized benefits of a single vendor for a defined contribution plan, since at least 2012, the Defendant has contracted with two recordkeepers”(1). Identical or similar language is found in many of the lawsuits against institutions using multiple recordkeepers.

In the motions-to-dismiss hearings, these claims have met with mixed success. In the Short v. Brown University case, the judge allowed the claim to continue, “Plaintiff’s allegation that a prudent fiduciary would have chosen one – rather than two – recordkeepers suffices at this stage to state a plausible claim”(2). Likewise, in Henderson v. Emory University, Kelly v. Johns Hopkins University and Sacerdote v. New York University, the claim that using multiple recordkeepers was not dismissed, and thus allowed to proceed.

However, in Sweda v. University of Pennsylvania, the judge agreed with the defendant’s argument that it needed to have the two recordkeepers in order to get the preferred investments for the plan. “Here, it is rational to comply with Vanguard’s requirement that they serve as recordkeeper if that is required to gain access to the desired Vanguard portfolio”(3). Thus, the claim that the University breached its fiduciary responsibility by offering multiple recordkeepers, leading to administrative fees that were too high, was dismissed. The claim was similarly dismissed in Cunning v. Cornell University.

In Vellali v. Yale University, the result was mixed within the lawsuit itself. The plaintiff claimed that Yale University had violated both the duty of prudence and the duty of loyalty in having multiple recordkeepers. In the motion-to-dismiss hearing, the judge determined that the plaintiff “plausibly state a claim for breach of the duty of prudence based on unreasonably high administrative fees”(4). However, the judge rejected the plaintiff’s claim that having multiple recordkeepers also violated the defendant’s fiduciary duty of loyalty; and thus, this portion was dismissed.

As for the results in any trials, Sacerdote v. New York University remains the only case from the crop of healthcare and higher education lawsuits that has gone to trial. As discussed in previous articles in this series, the judge found entirely in favor of the defendants in this case. With respect to the issue of offering multiple recordkeepers, the judge reviewed New York University’s previous efforts at conducting Requests for Proposals (RFPs) and evaluating the results and had the following conclusion: “Consolidation [of recordkeepers] may lead to lower recordkeeping fees. However, recordkeepers may offer a variety of collateral services to participants which also have value. Thus, any examination of fees needs to account for total value—that is, both recordkeeping and collateral services. Finally, when reviewing a recordkeeping vendor’s RFP response, a fiduciary needs to examine both fees, the services offered, and total value. The Committee performed this holistic review appropriately”(5).

What Does this Mean for Plan Sponsors?

As mentioned above, the claim that offering multiple recordkeepers for a retirement plan is a breach of fiduciary responsibilities has met with mixed results. However, it has survived a significant portion of the motion-to-dismiss hearings. Plaintiffs have generally had more success in persuading presiding judges that this claim has merit based on the presented circumstances and legal arguments.

Nevertheless, there may be reasons why it is beneficial to offer more than one provider. If one provider is unable to deliver all of the services being sought by a plan sponsor, it may be necessary to contract with two or more recordkeepers. However, based on the results of these lawsuits, plan sponsors should closely examine their reasons for including more than one provider in their plan. Given the potential for higher fees to be charged by the recordkeepers when more than one is present, the plan sponsor must be able to explain how the multiple provider structure benefits participants more than with just one, and should be able to demonstrate a regular review of these recordkeepers to show that a multiple provider arrangement remains necessary for the plan.

Sources

(1) Short v. Brown University
(2) Short v. Brown University
(3) Sweda v. University of Pennsylvania
(4) Vellali v. Yale University
(5) Sacerdote v. New York University


Editor’s Note: Additional articles from our Fiduciary Breach Lawsuit Series can be found via the links below:

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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