News feature

Court battle against MIT for excessive Supplemental 401(k) Plan fees continues

Participants in plan may have lost tens of millions

On Aug. 9, 2016, six current and former MIT employees, represented by lawyers of Schlichter Bogard & Denton LLP, proposed a class action suit in the Massachusetts district court against MIT and various MIT affiliated organizations. In the suit, Tracey et al v. Massachusetts Institute of Technology et al., the plaintiffs allege that MIT forced its clients to pay excessive retirement plan fees for the MIT Supplemental 401(k) Plan.

Simultaneously, 11 other suits were filed against other major universities, including Vanderbilt, Yale, Northwestern, and NYU. The trial in the NYU case begins April 16. Recently, in the MIT suit, the plaintiffs have filed a second amended complaint. A jury trial is set for May 6, 2019.

The plaintiffs’ complaint argues that the plan has charged excessive fees and kept poorly performing funds, a breach of MIT’s fiduciary duty under the Employee Retirement Income Security Act (ERISA).

The plan’s investment manager and recordkeeper is Fidelity. The investment manager picks funds and the recordkeeper tracks the plan’s assets. The complaint also alleges that MIT’s failure to monitor Fidelity may be a result of a conflict of interest between MIT and Fidelity.

MIT employees who are scheduled to work more than 20 hours per week as a salaried employee or 17.5 hours as an hourly employee, will have 1,000 or more hours worked in a calendar year, or have an appointment lasting three months or more are eligible for the plan. A participant’s retirement income depends on employee contributions, employer matching — MIT matches 100 percent — and investment options, subtracting fees and expenses.

As of December 2014, the plan had 18,268 participants and $3.6 billion in net assets, putting it in the top one percent of all defined contribution plans based on total plan assets.

Under ERISA, employers have fiduciary responsibility to participants and to the plan. This responsibility includes properly monitoring investments and removing imprudent ones, as established by Tibble v. Edison, a landmark 9–0 Supreme Court case also argued by lawyers from Schlichter Bogard & Denton LLP.

In an interview with The Tech, Jerome Schlichter, one of the lawyers who is representing the plaintiffs in this case, explained that the firm had developed a niche in this area, starting from a decade ago. He said that these cases were particularly important because since the employer’s money is not at stake, the “employer has no direct financial incentive,” and thus often becomes negligent. He also stated that the Department of Labor has never brought a case regarding retirement fees.

Schlichter said his firm has successfully represented 401(k) plan employee savers in many cases, including Abbott v. Lockheed Martin, Nolte v. Cigna, Beasley v. International Paper, and Spano v. Boeing.

Schlichter explained that MIT from 2010–2015 had over 300 funds in the plan under its agreement that every Fidelity fund that is available would automatically be included. Not only was this system confusing, it was a breach of the “elementary principle” that the employer should be analyzing and picking funds.

MIT reviewed and reduced its number of funds in June 2015. The complaint notes that the funds prior to the review charged participants fees 13 percent to 15,000 percent more than the funds post-review. According to the Department of Labor, a one percent difference of fees over a 35-year career makes a difference of 28 percent in savings at retirement.  

Importantly, Schlichter noted that while MIT reduced its number of funds in 2015, some of the funds in the plan are still “imprudent” and “poorly performing.” Schlichter argued that MIT should be able to bargain with its jumbo plan to obtain lower cost share classes of funds and lower fees.

Furthermore, since 1998, MIT has retained Fidelity as its investment provider and recordkeeper and has severely limited its search scope by only considering recordkeepers that are either already doing business with MIT or are local companies. In addition, Schlichter said MIT “failed to conduct a request for proposal (RFP) every three years, which is what prudent fiduciaries do when looking out for employees and retirees’ interests.” The complaint says that as a result, “the Plan, and the Plaintiffs and other Class members, lost tens of millions of dollars in their retirement savings.”

The first complaint argues that MIT made these choices because it had a conflict of interest with choosing a recordkeeper. The second amended complaint points out that since Fidelity was chosen as MIT’s recordkeeper, the Fidelity Foundation has donated hundreds of thousands of dollars to MIT, and since 2001, the Fidelity Non-Profit Management Foundation has donated over $18 million to MIT, among other relatively smaller donations.

Furthermore, since 2007, Abigail Johnson, CEO of Fidelity, has been a member of the MIT Corporation, the governing body of MIT. Johnson did not respond to The Tech’s request for comment.

On Oct. 4, 2017, U.S. District Judge Nathaniel Gordon agreed with most of U.S. Magistrate Judge Marianne Bowler’s recommendation regarding complaint. The judges both believed that it was reasonable to allege that MIT had breached its fiduciary duty, but not that this resulted from MIT’s relationship with Fidelity. Bowler found that the “plaintiffs’ theory was speculative” and the plaintiffs did not “allege that Ms. Johnson was involved with the Plan … and she was not on the Board [MIT Corporation] when Fidelity was decided as the investment provider.”

The second amended complaint added individuals on the Plan Oversight Committee to the suit and included both “additional details about the relationship between MIT and Fidelity” and additional details relating to the Breach of Duty of Prudence.

The Tech contacted defendants Executive Vice President and Treasurer Israel Ruiz and Vice President for Human Resources Lorainne Goffe for comment, and was emailed a statement from the MIT News Office. The statement emphasized that MIT offers “a comprehensive and competitive suite of retirement benefits to faculty and staff” and that plan fiduciaries “have volunteered their valuable time to serve the MIT community by overseeing the 401(k) plan as plan fiduciaries.” MIT is “vigorously defending against the claims asserted in this lawsuit.”

Schlichter noted that the case is still in “discovery” and that his team is continuing to get documents from MIT and “work through the documents that have been produced.” Specifically, they are looking into the practices of fiduciaries, including “what they did to run the plan” and “why they had so many investment options.” They are also working to refine their estimate of how much the excessive fees cost MIT employees.

The plaintiffs have requested that the court order the defendants to compensate for losses, “remove the fiduciaries who have breached their fiduciary duties,” “reform the Plan to only include prudent investments,” and “reform the Plan to obtain bids from recordkeeping and to pay only recordkeeping expenses.”

To close, Schlichter said, “We are fighting for the MIT employees and retirees … for a plan that enables them to build their retirement assets for the future. … The employees and retirees of MIT deserve to build their retirement assets the same way the employees of corporations do."