What NYU’s Landmark Win Means for Anxious Plan Sponsors

New York University has won a class-action lawsuit that alleged the university mismanaged two of its defined contribution plans, and that participants paid excessive fees as a result.

Hundreds of similar cases have been filed against U.S. plan sponsors in recent years, and almost all of them have ended in settlements or otherwise avoided going to court.

The ruling for NYU could ease anxiety among corporate and non-profit employers, many of which have simplified plans hoping to head off lawsuits, according to two executives at two New York-based asset managers. Both officials declined to be named given the sensitivity of the issue and both cautioned that it’s too early to know the ruling’s ultimate effect on the market.

Law firm Schlichter Bogard & Dento filed the lawsuit on behalf of two NYU plan participants, claiming violations of rules under pension regulation ERISA. Among other things, the case alleged that the university mismanaged the process by which it sought out recordkeepers. The decision, written by U.S. District Court Judge Katherine Forrest in New York, was made yesterday.

Schlichter Bogard & Dento has represented participants in many lawsuits making up the current litigation wave. The suits have targeted some of the largest U.S. employers, and claimed extensive misdeeds by their companies’ retirement plans. Many of them argue that poor plan management resulted in subpar investment choices and high fees, among numerous other things.

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Defined contribution plan trustees have increasing defaulted to index funds or a limited set of product choices, believing they will be less likely to be sued.

保诚金融（Prudential Financial）资产管理部门PGIM的机构固定缴款主管乔希•科恩（Josh Cohen）周三在接受电话采访时表示：“我同情计划发起人。“许多人希望采取更多的制度性做法，但感受到了各种压力，无论是诉讼，还是对费用或业绩的关注。”他拒绝具体评论纽约大学的诉讼。

But Cohen pointed to a recent PGIM paper —“Defined Contribution Investments on Trial”— in which he made the case for employers to design their DC plans as institutional investors would approach their pensions and other portfolios.

Defined contribution sponsors generally design their plans in three primary ways, one of which is simplicity. Cohen said, “Plans focus on keeping it simple and cheap. That usually means going purely passive, say, using target date funds.” This sets DC portfolios apart from how most other institutional investors manage assets. For example, Cohen pointed out, “very few defined benefit plans think passive is a good decision in fixed income.”

Cohen also said that institutions understand that active management can sometimes net higher returns, and even small additions have big impacts. A 35 basis point increase every year over a participant’s lifetime can add six years of spending. “That’s meaningful and not guaranteed. But most institutions would see that as achievable long term,” Cohen added.

According to the two asset management executives, the NYU decision may inspire some employers to include well-vetted actively managed funds alongside index products. Many sponsors want to offer well designed plans, they said, but are frustrated and feel the threat of litigation forces limited creativity and options.