Three well-known universities were recently targeted in lawsuits over the administration of their employee retirement plans. The cases could signal the start of a troubling trend for all kinds of tax-exempt organizations.

Allegations

The Massachusetts Institute of Technology (MIT), New York University (NYU) and Yale currently face similar allegations in lawsuits brought by their employees. Class action lawsuits allege that the universities breached their duties as plan sponsors by:

• Failing to monitor excessive fees paid to recordkeeping service providers for their retirement plans,
• Offering too many investment choices, and
• Failing to replace expensive, underperforming investments with less costly alternatives.

Each school has retirement plans holding more than $3 billion in assets. So, the plaintiffs claim that the defendants could have used their bargaining power to negotiate lower fees and to offer fewer and better investment options

Potential Cost Savings

Even relatively small cost reductions can have a significant impact on retirement savings. The U.S. Department of Labor reports that a mere 1% more in retirement plan fees over a 35-year career — for example, 1.5% instead of 0.5% — could leave an employee with 28% less in savings at retirement.

To illustrate the effect that fees may have on an employee’s retirement savings, let’s assume an employee has a retirement plan with a current balance of $25,000 that will earn an annual return of 7%. If the employee makes no additional contributions, his or her account would grow to about $163,000 in 35 years, if annual fees are 1.5%. But the same account would reach almost $227,000, if the annual fees are lowered to 0.5%.

Implications for Other Nonprofits

For years, corporate employers have been targeted by class action lawsuits over the administration of their 401(k) plans. Now, the attention is turning to 403(b) plans offered by nonprofits and public schools.

In 2015, a $32 million settlement was awarded to employees of a nonprofit hospital system in such a case. Last year, in Tibble v. Edison, the U.S. Supreme Court unanimously ruled that retirement plan sponsors have a continuing duty to monitor investments and remove imprudent ones.

Fortify Your Defenses

Nonprofits (and for-profits, too) should take heed of the ruling — and the pending lawsuits against MIT, NYU and Yale — and ensure that their plan investments and fees are benchmarked on a regular basis. Failure to do so could result in a costly lawsuit.

For help reducing fees and improving the efficiency of your retirement plan, contact us.