Top University Retirement Plans: Excessive Fees And Conflicts Of Interest

by: Mark Hebner


Top universities such as NYU, MIT and Yale University have recently been sued over excessive fees and breach of fiduciary duty in the administration of their retirement plans.

Investment managers underperform and focus on maximizing their own revenues all while participants get shortchanged.

Overwhelmingly, passive investing gives plan participants the greatest probability of having a secure retirement.

Lawsuits and retirement plans have become quite the pair in recent years. Plan participants have become aware of the excessive fees and conflicts of interest that have plagued the retirement plan industry --and most are still not even close in terms of being fully financed for retirement. Rightfully so, they are now taking action.

While most lawsuits have involved "for-profit" institutions, the "non-profit" world is no longer invincible. Top universities such as New York University, the Massachusetts Institute of Technology (MIT) and Yale University were recently sued over similar allegations that have been made before about excessive fees and breach of fiduciary duty.

This is groundbreaking in terms of lawsuits being brought against non-profit institutions and their retirement plans. Jerry Schlichter, managing partner at St. Louis-based law firm Schlichter, Bogard & Denton stated that "these cases are the first cases involving university 403(b) plans." As a quick reminder, 403(b) plans are the non-profit versions of 401(k)s, which is the standard retirement plan option for many for-profit entities in the United States.

Are these new developments? Absolutely not! According to Mr. Schlichter, "it doesn't surprise me at all that the tort bar is discovering 403(b) plans. The only thing that surprised me is that it's taken so long."

The allegations specifically made against the universities include:

  • High-cost funds with no low-cost alternative
  • Duplicative investment strategies that confused participants

An egregious example was the number of investment options in MIT's 403(b) plan, which happened to be just over 300 different options for participants to choose from. As an investor, where would you even start in considering all 300 options? If a physician gave us 300 different procedures to perform on us, would we know which one would be best for our health? Of course not!

Fiduciary duty and actively managed mutual funds are also coming under heavy scrutiny as they continually prove to be in conflict with one another. It is not just the high fees that investors end up paying by being in these funds, it's the inferior performance that almost always accompanies them. As we have recently highlighted in our own research, some of the largest fund managers fail to outperform their benchmarks over time. Some examples include Wells Fargo, MFS Investment Management, JP Morgan, Lord Abbott, USAA, Midas Funds, Thrivent, American Funds, Fidelity Part 1, Fidelity Part 2, Oppenheimer Funds, T. Rowe Price, Invesco, Vanguard, and BNY Mellon.

So why do these types of investments find themselves in the vast majority of retirement plans? This is where we find significant conflicts of interest. For example, Fidelity CEO Abigail Johnson serves as a member of the MIT Board of Trustees. Who is in charge of running MIT's retirement plans? Surprise, surprise….it's Fidelity Investments.

It has become customary for all parties involved in the actual plan (recordkeeper, fund provider, third party administrator, plan advisor, etc.) to engage in what is called "revenue sharing" where parties will share in ALL of the revenues generated within the plan. The unfortunate part of this process is that profits for the service providers become the focal point versus doing what is in the best interest for the plan sponsor and ultimately the plan participants. For example, as noted in the Investment News article referenced above, in 2015, MIT eliminated hundreds of options from its original 300-fund lineup, which would have saved participants a total of $8 million in fees alone in 2014.

When addressing the issue of retirement readiness, we must first ask the question, "what gives plan participants the greatest probability of having a secure retirement?" Unless you have been completely oblivious to the academic research that has been conducted on mutual fund performance, one would know that almost every single study has indicated the superiority of index funds over actively managed mutual funds over long time horizons. In fact, over the 32-year period ending December 31, 2006, 99.4% of the managers of actively managed mutual funds failed to demonstrate genuine stock picking ability.[i] That is more than what one would expect just by random chance.

Click to enlarge

There must also be processes in place to ensure that there are no perverse incentives within the plan that create a direct conflict of interest in the way of doing what is in the sole interest of the plan sponsor and plan participants.

We applaud the employees of these universities and hope they serve as catalysts for further investigations into what has been a long ovecoming atonement of the retirement plan industry.

[i] Barras, Laurent, Olivier Scaillet & Russell Wermers. "False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas." Journal of Finance: April 2009.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.