On May 21, 2021, the terms of the proposed class action settlement in Cates v. The Trustees of Columbia University in the City of New York, Case No. 1:16-cv-06524 (S.D.N.Y) were announced. The case, which was filed in 2016, involved allegations that plan fiduciaries breached their ERISA duties by causing the plan and participants to pay excessive fees to service providers and by selecting and retaining expensive and poor-performing investment options.
In addition to a monetary payment of $13 million, the settlement agreement includes a number of non-monetary terms, including requirements that the Columbia University fiduciaries:
- Provide mandatory annual fiduciary training during a three-year period beginning on the effective date of the settlement (the Settlement Period).
- Negotiate recordkeeping fees on a per-participant or per-account basis, and rebate back to participants any revenue sharing received in excess of the per-participant or per-account fee, rather than using it to defray plan expenses.
- Inform participants of their ability to redirect assets held in any frozen investment options to other investment options in an updated investment menu.
- Maintain the lowest available share class of each investment option, except for investments under the self-directed brokerage window.
- Continue to use an independent investment consultant and continue to meet quarterly with the consultant.
- Initiate a request for proposal (RFP) for recordkeeping services before the end of the Settlement Period.
- Instruct the current recordkeeper not to use information received as a result of providing contracted recordkeeping services to cross-sell or market non-plan products or services (such as IRAs, life or disability insurance and wealth management services) to participants, other than in response to a request from a participant.
The Columbia case is only one of the many fiduciary breach/excessive fee litigation cases that have been filed against fiduciaries/committees of 401(k) and 403(b) plans.
The settlement — and the increasing trend of ERISA litigation cases being filed — serves as a reminder to fiduciaries/committees to ensure that they have implemented a prudent process for selecting and retaining investment options and for reviewing the fees and services of plan providers. The focus in these cases is not whether the fiduciaries ultimately made the correct decision, but whether the fiduciaries engaged in a prudent process and made an informed and reasoned decision based on analysis of relevant information.
Key issues to address as part of a good fiduciary process generally include, but are not limited to, the following:
- A periodic RFP or review of service provider fees and services.
- A review of investment options on a periodic basis (typically quarterly), including performance of existing options and a review of other aspects (e.g., non-mutual fund options, share class and actively managed versus passively managed).
- Confirmation that plan documents, including any committee charter or investment policy statement, are being followed.
- Review and discussion of the fee structure for service providers, such as alternatives for revenue sharing and fixed fees.
- Implementation of effective and regular meetings, including a work plan and monitoring process for investments, service providers and delegates.
- Maintenance of records documenting the fiduciary’s/committee’s process.
Having a prudent process in place will not necessarily prevent a claim from being filed, but having evidence of the fiduciary’s/committee’s prudent process is often the best method to successfully defend against these allegations.