Duke University finds itself staring down a proposed class action lawsuit brought by three plaintiffs on behalf of participants in and beneficiaries of the school’s faculty and staff retirement plan.
The 28-page lawsuit kicks off by explaining that as of December 31, 2015, Duke’s faculty and staff retirement plan held $4.8 billion in assets and had 40,363 participants holding accounts, making it one of the largest defined contribution plans in the country. Defined contribution plans like those offered to Duke faculty allow employees to contribute a percentage of pre-tax earnings while an employer often matches those contributions up to a certain percentage. Participants’ contributions, the suit goes on, are directed into one or more investment options that are selected and maintained by fiduciaries responsible for monitoring their performance, as well as hiring responsible administrative service providers and making prudent investments.
The fees assessed to a plan’s participants are usually attributable to two categories of service, the case says: plan administration, including recordkeeping, and investment management. The lawsuit points out that the fees paid by a plan’s participants “can sometimes significantly reduce the value of an account in a defined-contribution plan” such as that offered by Duke. Proper recordkeeping is vital to a defined contribution plan, the case argues, as the individual charged with such keeps track of where participants’ money is invested. For their part, recordkeepers, depending on the specific type of retirement plan, are generally compensated a flat annual fee based on the number of participants in a plan, the complaint continues. Revenue-sharing retirement plans, for instance, see recordkeepers paid an asset-based fee dependent on “the amount of plan assets invested in the fund,” according to the complaint. For asset-based revenue-sharing plans, the lawsuit says, the fees paid to recordkeepers will increase as a plan’s assets increase “even if the number of participants or level of services does not change.”
Between 2011 and January 2019, the lawsuit says, Duke has engaged four recordkeepers for its faculty and staff retirement plan. These recordkeepers, the case notes, have been allowed by the school to “put their own proprietary investment funds” into the plan, which has resulted in more than 400 investment options offered to participants. At least as early as 2010, however, Duke was informed that its plan’s investment options were providing revenue sharing that overpaid for the plan’s recordkeeping services by “more than $3.5 million per year,” the complaint claims.
The plaintiffs charge that instead of recovering excess revenue shared, Duke instead arranged for companies offering mutual funds and insurance to pay the plan’s expenses while reimbursing Duke for its own expenses the school put into administering the plan—money the lawsuit says was spent “paying salaries and fringe benefits” of Duke human resources employees. Despite Duke’s supposed overpayment being discovered in 2010, the lawsuit alleges the school continued paying back itself from the excess revenue sharing for years. From the complaint:
“Duke did not cease paying itself from the Plan’s excess revenue sharing until August 2016, after it discovered that [the plaintiffs’] attorneys were investigating fiduciary breaches in the Plan. [The plaintiffs] commenced case number 16-CV-1044 in this Court on August 10, 2016 to recover their Plan’s losses from their fiduciaries’ breach of duty in causing the Plan to incur excessive recordkeeping administrative expenses and excessive investment management fees, and in causing the Plan to provide imprudent investment options.
All excess revenue sharing amounts were Plan assets, since they constituted excessive fees generated from participant investments, and that should have been restored to the Plan.”
Further still, the lawsuit claims that rather than take corrective measures, Duke “decided not to reduce the number of recordkeepers in the Plan,” nor negotiate more reasonable recordkeeping fees or remove the investment funds that paid out the excess revenue.
All told, Duke allegedly took over more than $1,500,000 for the putative reimbursement of employee salaries and fringe benefits that should have been restored to the retirement plan.