Major Universities Accused of Mismanagement of Retirement Funds

Major higher education institutions are under fire — including Yale, MIT, NYU, Duke University, Johns Hopkins University, the University of Pennsylvania and Vanderbilt University. They are accused of breaching their fiduciary duty under a 1974 law called the Employee Retirement Income Security Act. In this lawsuit, the schools are charged with permitting their 403 (b) plans to acquire unwarranted and unnecessary fees. Investment, record keeping and administration expenses are included. This allegation could have implications for physicians and others employed at these institutions.

If the accusation is true, the cost to the school’s participants in their 403 (b) plan is millions of dollars per year because fees are substrated from portfolio gains. This means the retirement money available to members is diminished. On the other hand, the income gleaned by the investment firms managing the funds is more meaning that their CEO’s and employees receive richer paychecks. In essence, if the charge is correct, there is a transfer of dollars from the employees participating in the plan who earned the money to the managers of their 403 (b) plan, often without the employee’s knowledge.

Definitions from the IRS

403(b) Tax-Sheltered Annuity (TSA) Plan is a retirement plan offered by public schools and certain tax-exempt organizations. An individual’s 403(b) annuity can be obtained only under an employer’s TSA plan. Generally, these annuities are funded by elective deferrals made under salary reduction agreements and non-elective employer contributions.

401(k) Plan is a defined contribution plan where an employee can make contributions from his or her paycheck either before or after-tax, depending on the options offered in the plan. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan. In some plans, the employer also makes contributions such as matching the employee’s contributions up to a certain percentage. SIMPLE and safe harbor 401(k) plans have mandatory employer contributions.

The law firm of Schlichter, Bogard & Denton is making the accusation against the seven prestigious institutions of higher learning. Jerry Schlicter, one of the managing partners of this firm, is the individual who lead the charge for retirement reform in 401 K plans. Those law suits have been successful and even endorsed by President Obama.

Whether the same outcome will be enjoyed with the present accusations is a matter of debate. Some people think the law firm is simply testing the waters to see if they can have the same success challenging 403 (b) plans as they did with 401 (k)’s. Others think there is validity in the charges and they will be successful. Either way, the lawsuits bring attention once again to excessive fees and the damage they can do to an investor’s portfolio performance.