Brown University Settles ERISA Class Action Suit for $3.5 Million

Brown University has agreed to pay $3.5 million to settle a class action lawsuit that alleged the school’s 403(b) plans’ managers breached their fiduciary duties under ERISA and cost employees millions of dollars in “excessive” and “unreasonable” fees.

The plaintiffs in the case are participants in the Brown’s deferred vesting retirement plan, and the Brown University Legacy Retirement Plan. According to the complaint, Brown retained TIAA and Fidelity Investments as recordkeepers for its retirement plans, and approved an asset-based compensation structure with no per-participant limitations.

“This caused recordkeeping fees to grow unfettered as the plans’ assets have grown,” said the complaint, pointing out that from the end of 2008 to the end of 2015, the Legacy Plan’s assets alone increased by approximately 68% to $1.08 billion from $733.7 million.

Brown “could have capped the amount of revenue sharing at appropriate levels to ensure that any excessive amounts were returned to the plans,” said the complaint, “but failed to do so, causing the plans’ participants to lose millions of dollars in their retirement savings.”

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The complaint alleged that having two administrators was inefficient and caused the participants to pay “duplicative, excessive, and unreasonable fees for recordkeeping and administrative services,” adding that “there was no prudent reason for defendant’s failure to engage in a process to reduce such duplicative services and fees.”

The plaintiffs argued that a reasonable recordkeeping fee for the plans would have been $500,000 and $650,000, or approximately $35 per participant with an account balance. However, they said that TIAA received $3.9 million in indirect compensation for recordkeeping and administrative services just from the CREF variable annuities, TIAA Real Estate Account, and TIAA Traditional Annuity.

The complaint said Brown also breached its fiduciary duties by including too many investment options, with each plan offering at least 24 investments choices managed by TIAA-CREF and over 175 investment choices from Fidelity. It also said the plans were burdened with “duplicative, expensive, and underperforming TIAA investment products.”

According to the terms of the settlement, Brown agreed to pay $3.5 million into a fund created for the plans’ participants, and agreed to use “commercially reasonable best efforts” to reduce the plans’ recordkeeping fees for three years. If the fees still increase regardless of these efforts, Brown has agreed it will notify participants and explain the occurrence, and to conduct a request for proposal process to hire an independent investment advisor to the plans.

Brown decided to settle the lawsuit after “considering the prospect of years of costly litigation,” said a university official, according to The Brown Daily Herald student newspaper. The official said the university is “fully confident that our retirement plans are in compliance with all applicable laws.”

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Tags: 403(b), Brown University, Endowments, ERISA, Lawsuits

The owner of a New Jersey-based vending machine company has been indicted on 10 counts of embezzling more than $186,000 from his employees’ benefit plan, and three counts of failure to file an annual report.

According to the indictment announced by the US Attorney’s Office for the District of New Jersey, Howard Preschel, 62, of Teaneck, New Jersey, served as a trustee for the CMG Vending Inc. Pension Trust Fund.

CMG Vending operated, leased, and rented vending machines throughout New Jersey and New York. According to the charges against him, Preschel started to embezzle from the fund in October 2013 and took a total of $186,123. He allegedly issued pension trust checks, drawn on the pension’s bank account that were either made out to himself or to cash, which he then endorsed.

In order to conceal the ongoing embezzlement, Preschel allegedly did not inform employees that insufficient funds were being forwarded to the plan, failed to distribute the annual funding notice to participants in the plan, and failed to file annual reports for the plan with the US Department of Labor.

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The complaint against Preschel said that as a result of the withdrawals and transfers he allegedly made, the balance of the bank account for the pension trust was $0.02 by about the end of 2015.

Additionally, the complaint alleged that when an employee of CMG Vending asked Preschel about distributing the annual funding notice to the other employees, Preschel told the employee not to do so because he didn’t want any of the employees to know anything about the pension plan. He allegedly told the employee that the plan was his money and that anything the employees would receive was a gift.

The embezzlement charges each carry a maximum penalty of five years in prison and a fine of up to $250,000. Failing to file an annual report charges each carry a maximum penalty of 10 years in prison and a fine of up to $100,000.

Preschel surrendered to authorities and subsequently was released on a $100,000 bond.

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Tags: CMG Vending, Embezzlement, Howard Preschel, Pension, Vending Machine