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Schlichter Says Retirement Savings 'Squandered' in Quid Pro Quo

Fiduciary Rules and Practices

Sir Isaac Newton’s Third Law of Physics says that, “for every action there is an equal and opposite reaction.” That also apparently applies to ERISA litigation.

On August 5, the law firm of Schlichter Bogard & Denton, LLP filed papers opposing a motion by fiduciary defendants of the MIT Supplemental 401(k) Plan for a summary judgement in the suit initiated in 2016 as one of the first university excessive fee cases. 

Not only did they file papers, they issued a press release, drawing attention not only to the filing, but to an allegation made in the initial suit – one that distinguishes it from the nearly two dozen such cases filed and fought over the past three years – that there was a quid pro quo between MIT and Fidelity, the plan’s recordkeeper. 

New Motion

In the August 5 filing, the plaintiffs – five employees of the Massachusetts Institute of Technology (MIT) and plan participants – allege that “purposefully favoring its business relationship and admitted “partnership” with Fidelity over its fiduciary duties exclusively owed to participants, Defendants defied the advice of consultants, lawyers, and numerous MIT policies and procedures in place to prevent precisely this type of misconduct,” with a net consequence that “the Plan paid Fidelity between $8 and $11 million yearly in the early part of the class period,” – some 300% more than the market rate, according to the filing – and that “in return, MIT leveraged Fidelity’s revenue stream from the Plan to secure numerous donations (over $23 million since Fidelity became the recordkeeper), partnerships, and other business relationships.”

This week’s filing recounts the plaintiffs’ allegation that, “since the fall of 2010, the Plan has lost over $15.8 million because of Fidelity’s excessive recordkeeping fees singularly derived from the unmonitored investments,” while it also notes that “retaining inappropriate, underperforming, excessively priced investments further caused the Plan to incur additional losses of over $30 million.”

Bearing in mind that Fidelity is not a party to the action (though they certainly seem to be a target of the press release), the plaintiffs take a statement (attributed to an unnamed Fidelity executive, but that – according to a Fidelity spokesman – is actually that of an MIT employee) that Fidelity would “really care about being the record keeper and keeping as much actively managed [assets under management] as possible.” The press release connects that statement to a separate comment attributed to the Dean of MIT’s Sloan School of Management (where, they note (ominously?) “Abigail Johnson, CEO and co-owner of Fidelity, also served on the School’s Visiting Committee”): “If we’re not switching to Vanguard or TIAA-CREF, I am going to expect something big and good coming to MIT from the Johnson family.”

The latter, according to the plaintiffs here was not only the retention of the Fidelity relationship, but a subsequent donation of $5 million to MIT by Fidelity – which the suit claims was “its largest donation in over 15 years.”

Nothing New?

None of that seems new to this case – the allegations regarding Johnson’s ties to MIT and the potential influence were rejected by the court in 2017 – though it certainly seems to have engendered some new and energetic industry coverage. While the recent filing also mentions certain actions (numerous outings for MIT executives and their families, including providing tickets to game five of the 2010 NBA Finals, that the filing says were “in direct violation of existing MIT policies and procedures against accepting gifts and purchasing goods and services (requiring competitive bids and ‘clear and robust supporting documentation’)” – those are portrayed as further attempts at influencing plan fiduciaries.

Reported admonitions by the MIT plan’s consultant (Mercer) and counsel (Groom Law) to “appropriately monitor” the plan’s investment options are described as an imprudent rejection of that advice once Fidelity “informed them that it would significantly reduce its recordkeeping revenue and require a discussion at the most senior level between MIT and Fidelity.” 

Moreover, they claim, citing Brotherston – a case currently under consideration by the United States Supreme Court – that once the plaintiffs have established that the defendants have breached their fiduciary duty and a loss to the plan, that the burden shifts to the fiduciary to prove that the loss wasn’t caused by the breach. The current split among district courts regarding that burden of proof is, in fact, the issue drawing the prospect of a Supreme Court review.

In addition to restating the claims made in earlier stages (including a couple that the plaintiffs believe were inappropriately dismissed), the legal issues raised by the plaintiffs here seem largely based on their notion that the testimony of their experts – which they note raise issues of fact – seem to have been dismissed without consideration or the deference generally accorded the “non-moving” party in a motion for summary judgement, and without acknowledging that there are genuine disputes as to material facts in the case.

Other Suits

Of the roughly 20 universities that have been sued over the fees and investment options in their retirement plans since 2016, five have settled.  The largest to date was Vanderbilt University, which in April 2019 announced a $14,500,000 cash settlement, as well as a long list of process/procedural changes that were also to be monitored over a three-year period, and earlier this week Johns Hopkins University announced the second-largest settlement to date, $14,000,000, also with an extensive list of process/procedural changes.

In March, Brown University settled for $3.5 million, as well as “other, structural relief.” In May 2018, the University of Chicago entered into a class action settlement for a $6.5 million cash payment and changes to the university’s $3 billion plan, while earlier that year Duke University announced a $10.65 million settlement.

On the other hand, St. Louis-based Washington University, New York University, the University of Pennsylvania and Northwestern University have thus far prevailed in making their cases in court.

Where will the MIT case wind up?  Stay tuned.