Fees for Penn's retirement plan raise questions

For University of Pennsylvania employees, one perk of working there is a generous retirement plan. But is Penn paying higher-than-normal fees for mutual funds and annuities?

A lawsuit poses that question, saying that the university isn't upholding its fiduciary duty, and that it should be offering lower-cost mutual funds through Vanguard and less-restrictive annuity contracts through TIAA-CREF. Penn's retirement plan currently offers 48 Vanguard mutual funds and 30 TIAA annuities and funds.

Penn's retirement plan had more than 26,000 participants - current or past employees who have invested in it - and $3.8 billion in assets as of 2014, the most recent period for which data are available.

Filed in August in U.S. District Court in Philadelphia, the lawsuit, Sweda et al v. University of Pennsylvania, alleges, among other things, that Penn offers only Vanguard's more expensive "retail" class shares, which charge higher fees than institutional-class mutual funds.

Given its size, some local financial analysts said, Penn could easily negotiate for institutional fees.

"There's definitely meat on this bone as regards the retail funds," said Derek Fiorenza, chief operating officer of Summit Group Retirement Planners in Exton. "Even a start-up company wouldn't use retail-class mutual funds at Vanguard. That would be an easy fix."

In some of Penn's fund offerings, the difference in fees is minuscule. But in other cases, employees can invest in the Vanguard Intermediate-Term Bond Index fund (VBIIX), a retail fund that charges 0.20 percent a year. The identical institutional fund (VBIUX) charges only 0.05 percent a year.

It's not just about lower fees, however, said Fiorenza: "Penn offers too many funds. We would never recommend a retirement plan offer that many."

In addition, he said, some of the TIAA annuities Penn currently offers its employees charge a 2.5 percent redemption fee or pay out only over 10 years. "That's highly restrictive," Fiorenza said. "There are hybrid offerings for annuities today that are much more flexible."

Hugh Connelly, creator of the 401(k) Tune-Up, described Penn's offerings as  "decent. Clear criticisms are too many choices of mutual funds and annuities with insurance benefits that are expensive and complicated."

Penn also may be paying 12b-1 fees, or what are known as sub-TA fees, then splitting the revenue with other third parties, the analysts said.

"My personal view is no plan should ever include funds with 12b-1 fees as these fees are for marketing and the plan won't need to market since it has a captive audience,"  Connelly said.

"New fiduciary rules have beefed up the standard of care for plans like this, making it a target, I suspect, for lawyers," he added.

Mark Mensack, founder of Prudent Champion in Marlton, reviewed Penn's plan and noted that "there is no question that given a specific fund, it is imprudent to pay retail when institutional is available. This is such a glaring fiduciary red flag for a plan this size."

Ferreting out excess fees is the sort of work Mensack does, and he said the forms universities file with government agencies often don't often tell the whole story.

"It is rarely the case that the Form 5500 [Employee Benefit Plan report filed with the U.S. Department of Labor] lists all of the fees," he said, and even the plan's sponsors don't understand them.

Often, share classes are not listed on the auditor's reports, and employees typically don't know how fees are split among various firms running a retirement plan, although they can ask the human-resources department.

"Revenue sharing typically consists of 12b-1 and sub-TA fees. I have never spoken with a plan sponsor who even knew what a sub-TA fee was," Mensack added.

He recently met with the benefits manager and attorney of a Fortune 500 company with several billion dollars in 401(k) and pension plans. The attorney "had no idea. and the benefits manager said he heard of them, but couldn't explain what they were," Mensack said.

The university declined to comment on whether it is overpaying. Penn president Amy Gutmann sits on Vanguard's board of directors.

Ron Ozio, director of media relations for Penn, emailed the following statement Monday: "The University employs a rigorous process to review all aspects of the investment options offered to its faculty and staff to ensure they are administered with the highest degree of care and prudence. We intend to defend ourselves vigorously against this litigation."