Participant Suit Says Loan Process Epitomizes Self-Dealing

A plan provider is being sued, apparently for systematically producing via its loan process what are alleged to be “ill-gotten” gains that exceed $50 million per year.

In the case, Haley v. Teachers Inv. & Annuity Assoc. (S.D.N.Y., No. 1:17-cv-00855, complaint filed 2/3/17), plaintiff Melissa Haley filed suit to recover money that she claims Teachers Investment and Annuity Association (TIAA) unlawfully took from her retirement account in the Washington University Retirement Savings Plan. Haley claims to have borrowed money from her retirement account on four separate occasions, and fully repaid two of the loans, plus interest. She is currently repaying the other two loans.

However, citing what she outlines as standard practice among 401(k) plans, she alleges that all of the interest paid in connection with those loans should have been credited to her retirement account.

The suit outlines as typical the loan process that is doubtless familiar to many. Specifically, the suit notes that when a plan participant borrows from a plan account, the participant is deemed to have invested a portion of his or her account in the loan, monies in their account are liquidated, and the loan effectively becomes a “fund” in which the participant has invested.

TIAA ‘Craft’?

That is not how TIAA handled participant loans, however. The suit claims that a participant who wants to borrow money from the plan is forced to borrow from TIAA’s general account rather than from the participant’s own account. In order to obtain the proceeds to make such a loan, TIAA requires each participant to transfer 110% of the amount of the loan from the participant’s plan account as collateral securing repayment of the loan. The Traditional Annuity is a general account product that pays a fixed rate of interest, currently 3%, and as a general account, the defendant owns all of the assets, as well as the assets transferred to its general account to “collateralize” the participant loan. Then, because “…the participant loan is made from Defendant’s general account, the participant is obligated to repay the loan to Defendant’s general account, and the general account earns all of the interest paid on the loan,” a practice that the suit claims is “…in contrast to the loan programs for virtually every other retirement plan in the country, where the loan is made from and repaid to the participant’s account and the participant earns all of the interest paid on the loan.”

The suit notes that the plaintiff currently has two outstanding loans from her Washington University Plan account, the first with a current interest rate of 4.44%, the second with a current interest rate of 4.17%, but both variable rates, which the suit also describes as “…another break from standard plan loan policy.” The Traditional Annuity is paying an interest rate of 3%, and the plaintiff’s “collateral” invested in the Traditional Annuity, which is 110% of the loan amount, is earning 3% for plaintiff, while defendant is earning 4.44% and 4.17% respectively, according to the suit.

The suit alleges that the defendant failed to act in a prudent manner and failed to act exclusively in the retirement plan participants’ best interests, “in rank violation of ERISA §§ 403 and 404, 29 U.S.C. §§ 1103, 1104,” by:

  • requiring collateral for loan repayment to be invested in an investment vehicle in which participants did not benefit from all the investment gain, and in which Defendant profited by taking a portion of the investment return;
  • charging excessive and unreasonable fees for administering a plan loan program; and
  • requiring a transfer of plan assets to or for the use and benefit of Defendant.

In sum, “…there is no legitimate or prudent reason why plan participants who desire to borrow money from their individual accounts are required to first transfer that money, plus 10%, to Defendant’s general account, then borrow the money from the general account, and pay Defendant interest on their own borrowed money.”

All in all, the suit alleges that TIAA “has engineered a retirement loan process that enables it to earn additional income at the expense of retirement plan participants equal to the spread between the loan interest rate paid by participants and the interest rate received by participants for investment in the Traditional Annuity.” This loan process, according to the suit, “is the epitome of self-dealing.”

Post a Comment

Your email is never published nor shared. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>