Washington University in St. Louis must face employees’ proposed class claims that it breached its fiduciary obligations by allowing its retirement plan to pay fees that were too high, the Eighth Circuit said Friday.
The fee-based challenge states a viable claim under the Employee Retirement Income Security Act, the U.S. Court of Appeals for the Eighth Circuit said.
At this early stage, the complaint only needed to give the district court enough to infer from the allegations that the process by which Washington University made decisions was flawed, the court said. “The first claim clears this pleading hurdle. It alleges that fees were too high and that Wash U should have negotiated a better deal,” the court said.
Latasha Davis and others sued Washington University for allegedly breaching its fiduciary obligations under ERISA by allowing the retirement plan to pay excessive management and record-keeping fees and by keeping underperforming investment options in the plan for too long. The suit was dismissed in 2018.
The complaint alleges that the marketplace for retirement plans is competitive, and with $3.8 billion invested, Washington University’s “pool of assets” is large, the appeals court said.
From these facts, two inferences of mismanagement are plausible from Washington University’s failure to offer more lower-cost investment options, the court said.
The first is that it failed to gain access to them because, as the complaint alleges, it didn’t negotiate aggressively enough with Vanguard, the court said. “The second is that it was asleep at the wheel: it failed to pay close enough attention to available lower-cost alternatives,” the court said. Either is enough to state a claim for breach of the duty of prudence, it said said.
Washington University’s plan includes approximately 115 options from the Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (TIAA) and Vanguard, the court said.
The court affirmed dismissal of the second claim, which focused on three specific investment options.
For an investment-by-investment challenge, a complaint can’t simply allege that costs are too high, or returns are too low, the court said. Rather, it “must provide a sound basis for comparison,” a meaningful benchmark fund. The plaintiffs here failed to do that, the court said.
The Eighth Circuit is the latest federal appeals court to address litigation challenging the management of university retirement plans. The Seventh Circuit has rejected a suit against Northwestern University.
Last year, the Third Circuit ruled in favor of the university employees, reviving a lawsuit against the University of Pennsylvania. Penn appealed to the U.S. Supreme Court, which recently signaled its interest in the dispute by requesting a formal response from the university employees.
An appeal from a judgment favoring NYU is pending in the Second Circuit.
Judge David R. Stras wrote the opinion, joined by Judges Jane Kelly and Michael J. Melloy.
Berger & Montague, Edgar Law Firm, Chimicles & Schwartz, Edelson & Lechtzin, and Beus & Gilbert represented the employees. Morgan, Lewis & Bockius LLP and Husch Blackwell represented Washington University.
The case is Davis v. Washington Univ. in St. Louis, 8th Cir., No. 18-03345, 5/22/20.