By Daniel Aronowitz
The Mayer Brown ERISA team led by Nancy Ross deserves to take a victory lap in the complete jury verdict against the Schlichter law firm. Whereas most excessive fee and imprudence cases settle, Mayer Brown is a rare defense law firm willing to take cases to trial to vindicate plan fiduciaries. There is a consensus brewing that plan sponsors and their insurance carriers should be willing to take more cases to trial, in order to reduce the fever pitch of lawyer-driven, jackpot ERISA litigation against plan sponsors. This is probably the correct strategy, but it must be weighed against the cost of defense, which is high. We estimate that Yale and its insurers had to spend at least $15 million to achieve this favorable verdict. It is also important to choose the right case to try, and that is difficult without the ability for plan sponsors to coordinate an effective defense strategy for the industry when individual companies are facing huge damage models.
Ultimately, based on our reading of the public record of the trial and the Motion for Judgment filed during the trial, Yale was the right university case in which to draw a line in sand. This was not obvious until you study the trial testimony, as it reveals that the Yale plan was different than most university plans. Contrary to Schlichter’s claims of fiduciary imprudence, the evidence adduced at trial showed that Yale sponsors a best-in-class retirement plan for its participants with low plan administration fees and many low-cost investments. The key evidence was that it took years of constant management to reduce those fees in an investment industry reluctant to change, and many of the plan changes took place in 2015 or earlier – before Schlichter filed the lawsuit. The lawsuit turned into a claim that Yale made changes too slowly, not that they failed to act. But from what we can tell, the evidence of imprudence was based on subsequent remedial measures that never should have been allowed as proof of negligence. Yale should never have been sued in the first place, because the plan fiduciaries were at the forefront in pushing TIAA and other investment providers for lower fees to benefit plan participants.
The following is an analysis of three key issues from our initial thoughts on the Yale defense verdict.
ISSUE #1: PLAN CHANGES ARE SUBSEQUENT REMEDIAL MEASURES THAT SHOULD NOT BE ALLOWED TO SERVE AS EVIDENCE OF FIDUCIARY IMPRUDENCE
A recurring theme in many excess fee cases is that plan sponsors made fee changes, but it was “too little too late.” Based on testimony in the jury trial, Yale University sponsors a $5.5 billion retirement plan with state-of-the-art low-cost investments and very low plan administration costs. The plan has evolved since 2010, with significant fee reductions over the last thirteen years as fees have compressed in the retirement industry. The most significant changes included consolidating all recordkeeping with TIAA in 2015, switching to a per-participant recordkeeping fee, and using low-cost Vanguard index funds to complement TIAA annuity products that many university educators want to fund their retirement. The Yale plan today ranks as one of the lowest-fee university plans in the entire country, and the plan fiduciaries are advised by top-notch investment advisors from a leading national firm.
But these changes were not good enough or fast enough for the ERISA police from Kansas City’s Schlichter Bogard law firm. Schlichter lawyers called twenty witnesses and five experts to testify before the jury in the pending trial, including professional plaintiff expert Al Otto, who testified that Yale and nearly every university defined contribution plan in America is administered imprudently.
Plaintiffs contended that the Yale defendants acted imprudently by failing to monitor recordkeeping expenses. The main evidence to prove excess recordkeeping fees is that the recordkeeping expenses in 2016 were lower than at the start of the class period in 2010. Plaintiffs’ expert Al Otto testified that there was an industry-wide reduction in recordkeeping fees over that same time period, and had the Yale defendants acted differently earlier in the class period, the savings for the plan could have been achieved earlier. From what we can tell from a complicated record that is available publicly, the two key recordkeeping issues are alleged (a) failure to consolidate quickly to a single recordkeeper (as Yale had both TIAA and Vanguard as plan recordkeepers until 2015), and (b) failure to switch to a fixed, per-participant recordkeeping fee.
Reduction in Recordkeeping Fee and Per-Participant Versus Asset-Based Pricing: Even today, many university plans have more than one recordkeeper given that TIAA requires that any plan that wants TIAA annuities to use TIAA as the recordkeeper. TIAA representative Steven Campbell testified in the Yale trial that in 2006, “all recordkeeping fees for all [TIAA] customers were the same.” TIAA had universal pricing and did not negotiate recordkeeping fees. This only started to change in 2010 or 2011. But before this time it was not feasible to consolidate recordkeepers or obtain discounts that plaintiffs insist were available. In addition, at the start of the class period in 2010, both Vanguard and TIAA were not willing to negotiate fees on a per-plan basis. When TIAA finally began to deviate from its policy of offering a universal price for recordkeeping in 2011, the Yale defendants promptly negotiated a revenue credit retroactive to 2011. With the help of an outside consultant, Yale negotiated a 9.5 basis point fee. The fee rebate was so unusual that it required TIAA senior management to sign off on the reduced fee. It is difficult to understand completely from the public record, but it also appears that Yale switched to a per-participant fee in 2015. Again, plaintiffs argue that this change was too slow, but the record shows constant changes and vigilance by Yale fiduciaries to reduce plan administration fees. Yale was well ahead of most plans in reducing fees. From our underwriting experience with thousands of plans, including hundreds of university plans, the Yale plan in 2015 was light years ahead of most large university plans in 2023 in terms of reducing recordkeeping fees and utilizing a per-participant fee structure. This is not evidence of imprudence, but quite the opposite.
Consolidation to a Sole Recordkeeper: On the second key recordkeeping issue, Yale consolidated to a sole recordkeeper in 2015 [a year before it was sued in 2016]. At trial, plaintiffs pointed to evidence that roughly two dozen TIAA clients (out of thousands) had consolidated to one recordkeeper by 2011 or 2012. But these were smaller plans. Yale was the third or fourth large university plan to move to a sole recordkeeping arrangement with TIAA. TIAA witnesses also testified that other large plans, like John Hopkins, had run into technical complexities and significant pushback from their faculty and staff when they tried to consolidate during an earlier time period. Yale also wanted to stage their recordkeeper consolidation for when the university’s benefits and administration software move to Workday in 2015. Even then, Yale consolidated within a reasonable time period.
Yale was accused of not reducing its recordkeeping fees by taking too long to consolidate recordkeepers and negotiate a fixed fee per participant. But using plan changes to prove imprudence is an improper use of subsequent remedial measures that violates rule 407 of the Federal Rule of Evidence. It is not proper to use evidence of changes to prove underlying negligence. Most cases settle before summary judgment or trial, so this is a rare instance when defendants can push back with the federal evidence rules. The entire basis of plaintiff’s case was an impermissible use of subsequent remedial measures. Plan changes are evidence of prudence, not evidence of imprudence. But that is what is alleged in many cases in which plaintiff law firms use plan fee reductions and other changes to claim fiduciary imprudence.
ISSUE #2: INVESTMENT IMPRUDENCE SHOULD BE MEASURED ON A LONG-TERM BASIS, NOT A SHORT, THREE-YEAR TIME PERIOD
Plaintiff’s investment expert Gerald Buetow testified that he would recommend termination of an investment that underperformed its benchmark over a three-year period by even a single basis point (one-hundredth of one percent). This is reminiscent of the plaintiff’s expert in the Verizon case who testified that Verizon should have removed the underperforming target-date funds at thirty-six months.
There is nothing in ERISA that requires plan fiduciaries to dump investments that trail a benchmark after such a short period of time. Most smart investment advisors would tell you that this is precisely when not to change out an investment. Every investment should be carefully monitored, but many underperforming investments will rebound as the market cycles changes. This year’s winners becomes next year’s losers, and vice versa. Retirement plans are long-term propositions, and three years is the wrong litmus test. There may be circumstances to remove an investment after three years, but five and ten year horizons are better benchmarks. Any three-year rule to dump underperforming stocks is dangerous for the further reason that it will cause disruption and chaos to make frequent changes.
The jury ultimately was not persuaded by this testimony, but it is a dangerous precedent for “experts” to judge fiduciary imprudence on a three-year performance timeline.
ISSUE # 3: CAUSATION IS OFTEN HARDER FOR PLAINTIFFS TO PROVE THAN NEGLIGENCE
The most perplexing part of the case is the jury verdict finding negligence in monitoring the recordkeeping fees, but no causation to the extent that other reasonable fiduciaries would have made the same decision. The jury found that the Yale fiduciaries breached their duty of prudence by allowing excess fees, and even found that this resulted in a loss to the plan, but there was no actual loss.
I. First Claim (Recordkeeping and Administrative Fees)
A . Have the plaintiffs proven by a preponderance of the evidence that the defendants breached their duty of prudence by allowing unreasonable recordkeeping and administrative fees to be charged to participants in the Plan? Yes
B. Have the plaintiffs proven by a preponderance of the evidence that the defendants’ breach of fiduciary duty resulted in a loss to the Plan? Yes
If you answer Yes, the loss proved by the plaintiffs is: $0
This has been reported in the initial press as a finding of negligence, but no finding of causation. Nevertheless, the second question as to whether the breach of fiduciary duty resulted in a loss to the plan is what we would interpret as the question as causation. But then the jury verdict asked a supplemental question as to whether other fiduciaries followed a prudent process could have made the same recordkeeping fee decisions, and the answer was yes:
II. Special Interrogatories
A. Have the defendants proven by a preponderance of the evidence that a fiduciary following a prudent process could have made the same decisions as to recordkeeping and administrative fees as the defendants? Yes
This could be considered a causation question, but we would see this as a component of proving negligence. If other reasonable fiduciaries would have taken the same actions, then it makes no sense to rule that the Yale plan fiduciaries were negligent in the same conduct. If the plan fiduciaries did not get the lowest possible recordkeeping price, you would presume causation and damages.
The jury verdict with respect to recordkeeping makes no sense. Hopefully the trial lawyers will explain the purpose of the jury questions and how they interpret the jury’s findings. We do not understand it. But to the extent that this is a jury verdict finding a breach but no causation, it a reminder that causation is often the hardest issue to prove in these cases. The party with the causation burden most often loses the issue. In the pending Home Depot appeal, the Department of Labor has argued that the defense bears the burden on causation. This violates the default rule that plaintiffs have the burden to provide negligence and causation. But it nevertheless emphasizes why that case is so important.
The Euclid Perspective
The Yale jury verdict is a welcome result for the plan sponsor community. It proves that plan sponsors like Yale with a thoughtful and diligent fiduciary process can be vindicated by going to trial. But at what cost? Again, we estimate that this verdict took at least $15m to achieve. Even if it was only $10-12m, it is not practical to try every case. We continue to have a legal system in which the federal regulators defer to plaintiff law firms to serve as the ERISA police. This time the plaintiff lawyers lost. But it is long past time to defund the ERISA law firm police junket and turn fiduciary regulation to the Department of Labor where it belongs. Only then can we restore the fiduciary flexibility and discretion necessary to manage complex retirement plans.
