This lawsuit has something for everyone: a respected and revered institution (MIT), one of the leading providers of services to the retirement plan industry (Fidelity) and a prominent law firm in the field of fiduciary litigation (the firm of Schlichter Bogard & Denton LLP).   Even Jeffrey Epstein, the disgraced financier plays a role in this drama.


Even the allegations made against MIT were unique. Yes, MIT is being faulted for most of the same failures that other 401(k) and 403(b) plans have been criticized for. That by “retaining inappropriate, underperforming, excessively priced investments further caused the Plan to incur additional losses of $30 million.” Yadda, yadda, yadda. That part is not exactly man bites dog. All of these lawsuits make similar claims. However, it is the relationship between MIT and Fidelity that is at the heart of this law suit. The suit alleges that not only did MIT never engage in a competitive bidding process, it further alleges that this was, in effect, an illicit kickback scheme whereby Fidelity received excessive fees at the expense of the plan participants in exchange for 1) making donations to the MIT endowment fund, and 2) the fact that Fidelity’s CEO Abigail Johnson’s sat on MIT’s board of trustees (the allegations that Johnson’s ties to MIT and the potential influence that could have had were rejected by the court in 2017).


In a September 7th response to articles in the New Yorker and other periodicals, MIT president Rafael Reif “asked MIT’s General Counsel to engage a prominent law firm to design and conduct a thorough and independent investigation” to address what MIT’s policy for improper donations would be in the future. This followed the resignation of the director of the Media Lab at MIT after a New York Times report detailed his ties to Jeffrey Epstein and Epstein’s donations to MIT.


In referring to the Epstein donation, in an earlier letter to the MIT Community, Reif basically said that despite following long established processes about gifts, that MIT made a “mistake of judgement” in accepting the gift from Epstein. The Schlichter law firm shrewdly linked the statements by Reif (that MIT would review their policy about donations) to question why Reif failed to initiate the same type of investigation into Fidelity and that this was something to which “only Reif can testify.” In the discovery phase of the litigation, an email from one of Reif’s subordinates was uncovered that stated the MIT expected large donations after retaining Fidelity as the Plan’s service provider. This same individual and one other subordinate were alleged to have received gifts from Fidelity.


In short, the plaintiffs, by way of the Schlichter law firm state that “these and other disturbing engagements with the Plan’s primary Plan’s primary service provider, Fidelity, went uninvestigated and unchecked.”


The claims and counter claims flew fast and furious. A press release by the plaintiff’s attorney that were initially attributed to Fidelity employees, later said (by Fidelity) to be made by MIT executives, that were later (by plaintiffs) said to have been former Fidelity employees. And then, a few weeks ago the plaintiffs sought to compel testimony by MIT’s president on the standards the institution uses in accepting donations (following published reports about donations received by MIT from disgraced financier Jeffrey Epstein).


Hours before the trial was to begin, the parties reached an agreement in principle to settle the case. So far, no details of the settlement have been released.


By way of background, this lawsuit was one of the first of the wave of university law suits filed three years ago. Roughly 20 universities have been sued over fees and investment options in their retirement plans. In April of 2019 Vanderbilt University announced a $14,500,000 cash settlement, as well as a long list of fiduciary related process/procedural changes. Other universities that settled are Johns Hopkins, Brown University, the University of Chicago and Duke.


Washington University, New York University, the University of Pennsylvania and Northwestern University have thus far prevailed in court.


Some people are passionate about a particular charity. Many alumni are fervent supporters of the college or university that they attended. Both of these groups give freely of their time and their money. However, being a significant donor to a charity or sitting on the board of a university carries with it an implicit understanding that conflicts of interest must be avoided. One of ERISA’s core principles is that a retirement plan is to be operated solely for the benefit of the plan participants. Questions about impropriety with regard to retirement plans were previously the exclusive purview of the IRS or the Department of Labor. The issue was rarely (if ever) raised as an area of concern by either governmental agency. If a 401(k) or a 403(b) plan has a large enough critical mass of assets (and these lawsuits are moving downstream) and you are in a position to influence who will receive revenue from the plan’s assets, how comfortable are you in answering questions about the possibility that an improper quid pro quo arrangement exists? If you are not sure how you would answer the question, perhaps it is time to take a long, hard look at your investment committee’s processes.


Based upon August 8th, September 10th & September 13th articles in the National Association of Plan Advisors (NAPA) newsletters