NEW YORK, N.Y. – Employees of the Massachusetts Institute of Technology, New York University and Yale University are suing the schools over their handling of employee retirement plans, alleging too-high fees have undercut their savings.
Missouri law firm Schlichter, Bogard & Denton, which represents the employees, said the schools’ actions as retirement plan sponsors caused workers to pay millions of dollars in “unreasonable and excessive fees” related to their 401(k) or 403(b) accounts. That includes what workers paid for in record keeping expenses, as well as the fees charged by the mutual funds offered in the plans.
The three lawsuits, one against each college, say the schools did not live up to their obligations under the Employee Retirement Income Security Act. That law requires them to act in the best interest of participants and plan beneficiaries. The lawsuits say the colleges failed to pick the best-performing or least-expensive investment options and that employees had less in retirement savings as a result.
The lawsuit against MIT also challenges the school’s relationship with Fidelity Investments, the plan’s record keeper, suggesting it was influenced by the fact that Fidelity CEO Abigail Johnson is a member of the MIT board of trustees.
NYU spokesman John Beckman said the university is careful in choosing and administering retirement plans for employees and that its decisions are influenced by feedback from employees.
“We will litigate this case vigorously and expect to prevail,” he said.
An MIT spokesman said the university does not comment on pending litigation. A Yale representative did not respond to a request for comment.
A fee of a per cent or two may sound innocuous, but it can mean a big difference in the size of a nest egg after years of compounding. Research shows that one of the best predictors for a mutual fund’s success is whether it has low fees, for example. That’s for the simple reason that a high-cost fund has to perform that much better than a low-cost fund to deliver the same returns.
The Securities and Exchange Commission gives an example of a $10,000 investment made in two nearly identical mutual funds. Both return 10 per cent before fees each year, but one has annual operating expenses of 0.5 per cent and the other 1.5 per cent. The lower-cost investment would be worth an additional $11,133, or 22 per cent more, over 20 years.
Investors have noticed, and more are steering their dollars toward lower-cost options such as funds that simply track an index rather than try to pick which stocks will beat it. Investors pulled a net $236 billion out of actively managed stock funds during the first six months of the year, according to Morningstar. At the same time, they poured $229 billion into stock index mutual funds and ETFs.