One of the first university 403(b) cases to be filed has had most of its motions to dismiss denied in the U.S. District Court for the District of Connecticut.
The suit against Yale University was one of the first to be filed in this area — and by Schlichter Bogard & Denton LLP, the law firm that led the litigation charge against 401(k) plan fees — in August 2016. As has been the case with most in this genre, it alleged that employees paid excessive recordkeeping fees in addition to selecting and imprudently retaining funds which the plaintiffs claim have historically underperformed for years. Moreover, the complaints challenge the use of multiple recordkeepers, rather than a single recordkeeper — a practice that they claim “… caused plan participants to pay duplicative, excessive, and unreasonable fees for plan recordkeeping services.”
The suit claimed that the defendants here (Yale University, Michael A. Peel, Yale’s Vice President of Human Resources during the class period, and the Retirement Plan Fiduciary Committee) breached their fiduciary duties of prudence and loyalty under ERISA (three counts) by carrying out transactions prohibited by ERISA (three additional counts), and with respect to Yale and Peel, by failing to monitor Committee members. For its part, the defendants moved to dismiss all seven counts for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) and for being time-barred.
Motions to Dismiss
As is routinely noted in considering a motion to dismiss under Rule 12(b)(6), here (Vellali v. Yale Univ., D. Conn., No. 3:16-cv-01345-AWT, order partly denying motion to dismiss 3/30/18) U.S. District Judge Alvin W. Thompson noted that the court must accept as true all factual allegations in the complaint and must draw inferences in a light most favorable to the plaintiff, and may consider “only the facts alleged in the pleadings, documents attached as exhibits or incorporated by reference in the pleadings and matters of which judicial notice may be taken.”
Defendants argued that “bundling is a common practice” that “frequently inure[s] to the benefit of ERISA plans,” but Judge Thompson noted that “even if bundling arrangements generally benefit participants of other defined-contribution plans, that does not necessarily mean that, under the circumstances here, the defendants prudently concluded that the bundling arrangement would benefit the Plan’s participants.” He then went on to cite the plaintiffs’ claims regarding the retention of the CREF Stock Account and the TIAA Real Estate Account as strengthening their argument. Judge Thompson then invoked Tibble’s “explicit recognition of a fiduciary’s ongoing responsibility to monitor and remove imprudent investments, and the fact that unreasonably high administrative expenses can make an investment imprudent” to conclude that “the plaintiffs have stated a claim that is plausible on its face that the defendants breached their duty of prudence with respect to a bundling arrangement under which they abdicated their responsibility to monitor and remove imprudent investments and reduce exorbitant fees.”
On a separate count, the plaintiffs had charged defendants with failing to employ strategies that would lower recordkeeping fees, such as installing a system to monitor and control fees; periodically soliciting bids in order to compare cost and quality of recordkeeping services; leveraging the plan’s “jumbo” size to negotiate for cheaper recordkeeping fees; consolidating from two recordkeepers to one; and implementing a flat fee rather than a revenue-sharing structure – a failure they said was “exemplified by a failure to even calculate the Plan’s total recordkeeping fees,” according to Judge Thompson. For their part, the defendants argued that the plaintiffs failed to allege “that the fees were excessive relative to the services rendered.”
“But,” Judge Thompson noted, “the claimed industry-wide prevalence of revenue-sharing or multiple recordkeepers does not negate the duty to ensure reasonable fees regardless of the fee structure.” Citing several specific allegations by the plaintiffs, he noted that “Taken together, these allegations plausibly state a claim for breach of the duty of prudence based on unreasonably high administrative fees.” Judge Thompson also noted that while the defendants “…contend that their 2015 decision to consolidate the two recordkeepers to a single one demonstrates an adequate monitoring process,” that “…does not address whether they had an adequate process in place from 2010 to 2015, the other portion of the class period.”
Turning to another count – that dealing with excessive investment fees — Judge Thompson noted that that involved “failing to offer lower-priced institutional shares rather than the higher-priced retail shares; offering too many investment options; failing to reduce fees on several TIAA-CREF investments; and failing to remove underperforming investments such as the CREF Stock Account and TIAA Real Estate Account.” While the defendants raised the issue of “myopically” focusing only on fees, but Judge Thompson said that was a determination best left to considerations of summary judgment.
Too Many Funds?
As for the issue of offering too many funds, Thompson agreed with the argument presented by the defendants that “the plaintiffs have neither alleged that any participant experienced confusion nor stated a claim for relief,” and dismissed that complaint, citing Sweda v. Univ. of Penn. He also noted that “the possibility of lower fees resulting from the concentration of assets” did not “defeat the general presumption in favor of a broader range of options.”
Thompson dismissed the claim regarding a failure to reduce fees, noting that “the plaintiffs have not alleged that any layer of the fees (other than the recordkeeping portion) can be lowered through negotiation or that an identical, lower-cost substitute exists,” at least to the extent that it was based on failing to reduce fees on several TIAA-CREF investments.
With respect to the failure to remove underperforming investments, Thompson here also said that determination was “not appropriately addressed at the motion to dismiss stage,” and denied the defendants’ motion to dismiss this claim.
As for claims alleging a breach of loyalty, Thompson said that “a plaintiff must allege facts that permit a plausible inference that the defendant ‘engag[ed] in transactions involving self-dealing or otherwise involve or create a conflict between the trustee’s fiduciary duties and personal interests.’” Yet, “here, the plaintiffs offer no plausible theory in any of the counts to suggest that the defendants’ decisions favored themselves or a third party at the expense of the Plan participants,” Thompson wrote. “Rather, the plaintiffs attempt to couple repeated conclusory allegations that the defendants favored TIAA-CREF and Vanguard with the fact TIAA-CREF and Vanguard benefited from the bundling and fee arrangements. But a theory of breach based on incidental benefit, without more, cannot support a breach of loyalty claim,” he wrote, dismissing the duty of loyalty claims.
Thompson next turned to the claims regarding prohibited transactions, and after a discussion of the requirements, and the allegations (and defenses) presented, Judge Thompson denied the motion to dismiss, writing that in “accepting the factual allegations in the Amended Complaint as true and drawing inferences in a light most favorable to the plaintiffs, as the court must at the motion to dismiss stage, the court concludes that the defendants have failed to show that these counts should be dismissed.”
Duty to Monitor
Regarding the duty to monitor the Committee, Thompson noted that the plaintiffs have alleged facts sufficient to state claims for breach of the duty of prudence (as noted above), and that, having also identified two fiduciaries (Yale and Peel), who were responsible for monitoring the performance of members of the Committee and had authority to discipline or remove Committee members, and “because the appropriate ERISA mandated monitoring procedures vary according to the nature of the Plan at issue and other facts and circumstances, an analysis of the precise contours of the defendants’ duty to monitor at this stage is premature” – and denied that motion to dismiss as well.
Finally, with regard to the various claims being time-barred — Thompson explained that the defendants argued that because various annuity contracts, disclosures, notices and prospectuses provided the plaintiffs with actual knowledge of the fact that Yale “had no discretion to discontinue the Stock and Money Market Accounts,” as well as actual knowledge of fees, performance, and total number of investments — “all more than three years before the plaintiffs commenced the instant suit,” they were prevented from making the claims. However, Thompson pointed out that “each of the remaining claims alleges a flaw in the process for selecting investments or services,” but that “the various disclosures the defendants describe give information about transactions or investments, not the underlying process for reaching the decision regarding each or whether the fees themselves are reasonable” — and denied that motion to dismiss as well.
All in all, Judge Thompson dismissed allegations that the Yale defendants acted disloyally in managing its retirement plan, and that participants were harmed by offering too many investment options. However, still active are claims that Yale was “locked-in” with recordkeeping services that kept the university from adequately monitoring the plan’s investments and fees, that the offering of retail class shares was a problem, and that there was a breach of fiduciary duty in failing to monitor the plan committee.
Yale is, of course, one of more than a dozen universities to be confronted with class action lawsuits regarding their retirement plans over the past 30 months.