How Lawsuits Against Ivy League Retirement Plans Could Help You

If you could ask anyone for help investing your 401(k), to whom would you turn? A Nobel laureate in economics, perhaps, such as one of the nine from Yale, the four from New York University or the 16 from M.I.T.? Those universities must surely enjoy the finest retirement plans in the nation.

Credit: Getty Images

On the contrary, argue the plaintiffs in a trio of lawsuits recently filed against these schools. Those suits — and ones filed against the likes of Duke, Northwestern, Cornell, Penn, USC and others — allege that retirement plans used by some of America’s most financially sophisticated employees are riddled with expensive fees, high administrative costs and imprudent fund choices. Several of the schools are still digesting the complaints and have yet to comment. But Northwestern dismissed the claims as “baseless.” Yale said the “allegations are without merit” and that it will “oppose this suit vigorously.”

Assuming there is merit to the charges, you might wonder: If leading economists are forced to navigate poor investment options in their retirement plans, how can I be expected to invest well for my retirement?

Good question.

These suits are shining a light on hidden cracks in the scaffolding of the nation’s troubled retirement system (my book, Empire of the Fund and this Next Avenue interview with me show you what I mean).

The college lawsuits are hardly the first complaints to challenge the alleged inadequacies of employer-sponsored retirement plans.

Although they target college 403(b) plans, the same attorneys who filed them (Schlichter, Bogard & Denton) have brought many similar cases against corporations alleging problems in their analogous defined-contribution 401(k)s. Though trial verdicts are rare, this firm has lucratively settled cases for $62 million against Lockheed Martin, $57 million against Boeing and $27.5 million against Ameriprise.

The wave of litigation has generated a number of positive results for employees at those firms and investors everywhere:

• The employees at the sued companies now have less expensive and sounder offerings in their retirement plans.
• Employees at many other corporations have also won newly improved plans — not through legal settlements, but from the deterrent effect that comes from the implicit threat of being sued for failing to upgrade their offerings.
• And the rest of us have gained an education about the hidden problems with many defined-contribution plans.

In theory, those of us participating in an employer-sponsored plan to save for retirement should be helped when our administrator selects a prudent array of mutual funds for its menu. Rather than having to brave 8,000 funds in the open market, we should be protected from that Wild West when our plan winnows the number down to a manageable cohort of solid choices with reasonable fees. Right?

Sadly, that’s not the way things work.

Here’s some proof: Ian Ayres co-published a notable study in 2015 of 3,500 401(k) plans with more than $120 billion in assets. He found that the funds offered in those plans were remarkably more expensive than similar, lower-cost alternatives. In fact, Ayres concluded, fees were so high in 16 percent of the plans that “they consume the tax benefits of investing in a 401(k) for a young employee.”

If a public university were sued for its retirement plan and hit with a large judgment, ordinary citizens and the public fisc would have to pay that bill — either through higher tuitions, higher tax bills or fewer public services. Such an unpopular outcome might explain why all the defendants in the college plan suits, to date, have been private schools, many of them Ivies.

But if these new lawsuits do proceed to trial, it will be interesting to see whether Professor Ayres — a member of the faculty at Yale, as it happens — will appear as an expert for the plaintiffs or defendants. In any event, with the spotlight of litigation shining brightly on our nation’s finest universities, now is the time for us all to heed the lessons of their brilliant economic minds.

These cases illustrate how much money can be saved when retirement plans use their bargaining power to offer less expensive, institutional fund shares rather than more expensive, retail versions of the same investments. That is the kind of insightful investment practice our university professors teach in class, anyway, if not one they insist upon in their own retirement plans.