Response to the MIT 401(k) lawsuit: the forest, the trees, and MIT’s employees
Why the lawsuit against MIT over its 401(k) plan is opportunistic
I’m a recent MIT alum who is now in law school, so I was quite concerned when I first heard about the lawsuit against MIT over its Supplemental 401(k) Plan. Because plaintiffs generally want attention and defendants don’t, MIT has not commented publicly very much. Accordingly, the public story is one-sided. In the interest of fairness, I would like to explain what the lawsuit is about and why I think it has little merit.
Such an explanation requires some background, which I will try to succinctly provide.
First, MIT employees are automatically enrolled in a defined-benefit pension plan. This means that upon retirement, MIT pays a pension depending on how long the employee worked there and in what capacity, independently of how well the stock market was or is doing. MIT employees do not need to do anything beyond work at MIT to enjoy the benefits of this retirement plan.
If an employee has disposable income and wants to take a more active role in managing their retirement investments, they can also enroll in the Supplemental 401(k) plan. Under this plan, employees may contribute part of their pay to their personal retirement fund, which is distinct from the pension plan that MIT automatically offers. MIT outsources the management of these 401(k) accounts to Fidelity, a large financial services provider.
Furthermore, when an employee contributes money to their 401(k) account, MIT matches that contribution dollar-for-dollar, up to 5 percent of gross pay annually. For example, if someone makes $100,000 and contributes $5,000 to their 401(k) in a given year, MIT chips in an additional $5,000. In other words, MIT effectively pays its employees extra to save for retirement. Such employer contributions are common, but MIT’s contribution is on the generous side.
A key difference between the supplemental 401(k) plan and the defined-benefit pension is that the employee must manage their own 401(k) investments. As part of MIT’s arrangement with Fidelity, employees are given access to buy into any of the funds that Fidelity manages.
Different funds employ different strategies. More complex strategies require more overhead and thus higher fees. The trade-off that such funds should presumably (not always!) post better gross returns because of the savvy investments they make so that their investors do better, even after paying higher fees.
Finally, MIT is legally held to a fiduciary standard to its employees and their investments. This is the highest legal standard of duty, which requires MIT to act in the best interests of its employees regarding their retirement investments, potentially even to MIT’s own detriment. Other standards of duty are: no duty whatsoever (such as between strangers), taking reasonable care (the care a “reasonably prudent person” would take when driving, etc.), and so on.
Now we have the vocabulary to understand the lawsuit. The complaint alleges that MIT failed to uphold its fiduciary duty because it granted employees access to all of Fidelity’s funds, thus making it confusing for employees to invest and allowing them to potentially invest in bad funds.
The lawsuit alleges that as a fiduciary, MIT should have “pruned” the basket of available funds so that employees only had good options to choose from, as opposed to the full universe of funds Fidelity manages. MIT actually did so in 2015 but created the plan in 2010, so employees were exposed to potentially bad funds in those five years in between. The complaint also alleges that MIT should have used its weight to negotiate lower fees for its employees and solicit competitors to Fidelity every three years in order to keep Fidelity on its toes and ensure MIT employees were getting the best possible terms with Fidelity.
Keep in mind, however, that the employees always retain sole control over their 401(k) investments. They alone choose which funds to invest in, if any at all.
The original complaint further alleged that there is a conflict of interest between MIT and its employees because Fidelity donates money to MIT and has other ties to MIT. I won’t go further into this because the judge ruled that this allegation was not plausible enough to warrant further consideration. However, the complaint has been amended, so this allegation may pass muster the second time around.
To me, this lawsuit sounds rather ridiculous because: 1) MIT employees have automatic access to the defined-benefit pension plan; 2) the supplemental 401(k) is supplemental and fully optional as the name suggests; 3) most peer institutions don’t even offer a supplemental 401(k) plan; and 4) MIT doesn’t control its employees’ 401(k) investments.
It sounds to me like MIT took a hands-off approach to the 401(k)’s and decided to let its employees make their own decisions regarding their supplemental investments. Maybe MIT could have held its employees' hands more or driven a harder bargain with Fidelity, but that's about all MIT can credibly be accused of in my eyes. I think these are judgment calls that reasonable people can disagree about.
To put this all in perspective, MIT employees have about $3.6 billion invested into their 401(k)’s and the alleged cumulative losses are in the "tens of millions," or on the order of 1 percent of the total funds invested. To be sure, this is a lot of money, but it is still small potatoes in the scheme of the total investments.
Finally, during my time as an undergrad, I worked with a lot employees across MIT, and everyone seemed to love working for MIT. As I learned from them, MIT has generous employee policies regarding maternity leave, flexible hours and working from home, childcare, healthcare, you name it. Few of MIT’s peer institutions treat their employees as well as MIT does. On the contrary, some are have had very public disputes over labor relations. All in all, this lawsuit fails to see the forest of MIT’s employee benefits for the trees of some marginal complaints.
Shenghao Wang graduated from MIT in 2016 with an SB in Mathematics. He is now a member of the Class of 2020 at Harvard Law School.