Penn will pay $13 million to settle class action lawsuit over excessive retirement plan fees

Penn will pay $13 million to settle a long-running class action suit that accused the University of mismanaging its employee retirement plans, becoming the eighth university to settle related claims. 

The complaint, Jennifer Sweda, et al. v. The University of Pennsylvania, et al., was originally filed against the University and Vice President of Human Resources Jack Heuer in 2016 by law firm Schlichter Bogard & Denton in United States District Court for the Eastern District of Pennsylvania and dismissed in September 2017. Plaintiffs alleged that Penn was charging excessive fees from the 20,000 employees covered by its 403(b) retirement plan and forcing them into high-priced and poorly performing investments — thereby breaching their duties under the Employee Retirement Income Security Act. 

In May 2019, however, the U.S. Court of Appeals for the Third Circuit revived the employees’ proposed class action on appeal, and a subsequent motion by defendants for a full court reconsideration of the ruling was rejected, along with Penn’s petition to the U.S. Supreme Court for a case review.

While Penn did not admit to any wrongdoings or liability with respect to any of the lawsuit allegations, the University will make the payment to resolve the case and bar any further related claims. The settlement, made in December, stipulates that up to one-third of this amount may be used as plaintiffs’ attorneys fees.

ERISA is a federal law that protects a retirement plan's assets by "requiring that those persons or entities who exercise discretionary control or authority over plan management be subject to fiduciary responsibilities." Fiduciary responsibilities refer to the obligation retirement plan managers have to run the plan with the exclusive purpose of providing benefits to plan participants and being able to pay expenses. 

Legal Studies & Business Ethics and Management professor Janice Bellace said that the fiduciary and ERISA requirements are a "complex area of law subject to copious regulations," and that Penn has a legal obligation to act in the best interests of its retirement plan's participants. 

The settlement terms reached by Penn and Schlichter Bogard & Denton include a three-year monitoring period where the law firm will monitor the University's compliance to the agreed-upon terms. These include a new investment menu, as well as a requirement that the University impose certain regulations to lower the retirement plan's fees. 

Schichter Bogard & Denton has sued roughly 20 other leading American universities over the same issue and reached similar settlements with eight others. Massachusetts Institute of Technology agreed to pay the largest settlement to date at $18 million.

"This settlement includes both financial compensation and valuable non-monetary improvements to Penn's retirement plan going forward. We are confident that these critical changes will better enable Penn employees and retirees to build their retirement assets for the future," Schlichter Bogard & Denton founding and managing partner Jerry Schlichter told the Associated Press. 

According to Bellace, many universities, including Penn, were overpaying the retirement plan's recordkeepers, the firms who track each person's assets. This led the University to charge the plan's participants excessive fees that otherwise would have been reinvested. 

Penn's retirement plan originally had two recordkeepers, Vanguard and TIAA-CREF, but the settlement now requires the University maintain a single recordkeeper to ensure that fees decline.

Bellace said that Penn’s retirement plan now offers a reduced number of investment options as a result of the settlement, as the original complaint was also motivated by the fact that the retirement plan offered an excessive array of investment options. Employees experienced in investment matters now have the option of opening a brokerage account which will permit them to make choices that are not on the streamlined menu.

"My view is that these are sensible changes that will benefit most people and make no difference to some depending on how they are currently invested," Bellace said, adding that research has shown that people become overwhelmed by a large number of alternatives, leading them to make "suboptimal choices." 

Heuer explained that the Fiduciary Committee of Penn Faculty and Staff had been looking to make changes to the retirement plan before the settlement had been reached. 

"These changes are not dependent on the settlement and will be made regardless of [it]," Heuer said, adding that the committee has made efforts to streamline the plan's investment menu over the years. 

Once implemented, Heuer agreed that the proposed changes will be beneficial to the plan's participants. 

"We believe the changes will benefit participants by ensuring that they continue to have an investment menu that allows them to build a well-diversified investment portfolio, while further reducing the fees associated with the plan's investments and administration, and enhancing participants’ interaction the plan," Heuer said.