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What NYU’s Landmark Win Means for Anxious Plan Sponsors

Now that a major university has prevailed in a lawsuit claiming it mismanaged its defined contribution plan, other employers may breathe a (small) sigh of relief, say asset managers.

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.

[II Deep Dive: The Upside of Getting Sued]

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. 

“I sympathize with plan sponsors,” said Josh Cohen, head of institutional defined contribution at PGIM, the asset management arm of Prudential Financial, in a telephone interview Wednesday. “Many want to take more of an institutional approach, but are feeling various pressures, whether it’s lawsuits or the spotlight on fees or performance.” He declined to comment on the NYU lawsuit specifically. 

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. 

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