A suit alleging a breach of fiduciary duty in an excessive fee/revenue-sharing case has been dismissed.
In Malone v. Teachers Ins. & Annuity Ass’n of Am. (2017 BL 70595, S.D.N.Y., No. 1:15-cv-08038, 3/7/17), brought in the U.S. District Court for the Southern District of New York, plaintiffs Elaine Malone and Patricia McKeough sued on behalf of The University of Chicago Retirement Income Plan for Employees and the Nova Southeastern University 403(b) Plan, alleging that the Teachers Insurance and Annuity Association of America (TIAA) breached its fiduciary duty to the plans under ERISA and engaged in prohibited transactions in violation of sections 406(a)(1) and 406(b), 29 U.S.C. § 1106(a)(1) & 1106(b) .
TIAA provided both investment management and custodial/record keeping services to the plans. As part of the investment services TIAA provides to the plans, TIAA offers group annuity contracts to plan members, which include various pooled fund investment offerings, such as pooled accounts and mutual funds, all of which have a 10-year contract period. All of the assets in Malone’s UC Plan account are invested in a TIAA traditional annuity, as are nearly all of the assets in McKeough’s Nova Plan account.
Payment for the recordkeeping associated with these group annuity contracts is provided for with a “recordkeeping offset,” whereby TIAA allocates a portion of the investment fee to pay for these recordkeeping services. Judge Castel noted that, “contrary to what is allegedly common practice, TIAA will not allow this revenue sharing to be paid to a recordkeeper other than itself,” and that if the plans were to change recordkeepers, they would remain obligated to pay the investment management fee to TIAA, but then they would have to pay the new recordkeeper their fee. “In essence, the Plans would have to pay double fees for recordkeeping, both to the new recordkeeper and to TIAA as part of its investment fee,” he noted, acknowledging that the arrangement “…makes it financially infeasible for the Plans to switch to a different recordkeeper and as a practical matter locks the Plans into using TIAA as recordkeeper for the duration of the Group Annuity Contracts.” This allegedly “blocked the plans from receiving the most competitively priced recordkeeping services on the market,” to the detriment of the plan participants and beneficiaries.
The plaintiffs claimed that the practice of refusing to share revenue with a potential third party recordkeeper was not a subject of negotiation with the plans and was not disclosed during the negotiations, and the plaintiffs also alleged that “TIAA denied the Plans access to information needed to evaluate the presence of a conflict of interest arising from TIAA providing the Group Annuity Contracts as well as recordkeeping services.” They also claimed that in 2012, while preparing for a meeting with a different retirement plan client who was considering alternative vendors, senior relationship managers allegedly instructed employees to tell the representatives of the retirement plan that the plan did not pay fees. They also claimed that TIAA “…failed to disclose that it charges individual Plan members a fee for wealth management services after representing that those services were part of the overall package of services provided to the Plans and included in those fees.”
While TIAA contended that plaintiffs’ complaint should be dismissed for lack of subject matter jurisdiction because the harm complained of is speculative and plaintiffs’ theory of liability is premised on actions defendant may or may not take in the future, Judge Castel noted that the allegation that they are being overcharged for defendant’s services as the plans’ services provider is “…a concrete injury-in-fact for which monetary damages or equitable relief would provide redress,” even though the move to a different recordkeeper hadn’t been attempted. He went on to note that “Plaintiffs’ theory is not only that they may suffer injury in the future, but that because TIAA has a colorable argument that the RSAs do not require it to share the recordkeeping offset with a potential future third party recordkeeper, the fees TIAA is charging the Plans right now are excessive in violation of ERISA.” TIAA had also argued that the contracts were entered into outside of ERISA’s six-year statute of limitations, but Judge Castel disagreed, determining that since the claim was that the plans are being required to “pay more for administrative services than they otherwise would and that defendant retains excessive compensation from the Plans’ assets,” that the plaintiffs “…suffer this alleged injury every time defendant collects fees,” certainly within the SOL.
Finally, Judge Castel noted that plaintiffs alleged a breach of fiduciary duty to the plans, but noted that in order to breach a fiduciary duty, “…one must be a fiduciary in the first place,” and that “transactions prohibited by sections 406(a)(1) and (b) are only prohibited with respect to fiduciaries.” He also noted that determining that TIAA is not a fiduciary of the plans with respect to the recordkeeping services it provides “thus precludes liability under those sections of ERISA.”
The plaintiffs contend that TIAA was acting as a fiduciary of the plans, arguing that by “exercising discretion” to take these plan assets subject to its policy that it would not share the recordkeeping offset, the firm exercised its discretion to adopt an undisclosed policy that would enable it to further exercise its discretion to take plan assets. However, Judge Castel noted that “calling TIAA’s alleged ‘undisclosed policy’ of refusing to share the recordkeeping offset an exercise of discretion does not make it so,” nor did he find that the arrangement resulted in the plans being “locked in” for the full contract, nor did it “establish an exercise of discretion on the part of TIAA or establish that TIAA is a fiduciary of the Plans.” He went on to note that “the fact that the fees used to pay for the recordkeeping services are collected from Plan assets does not give the collector of those fees authority over Plan assets.”
“When a person who has no relationship to an ERISA plan is negotiating a contract with that plan, he has no authority over or responsibility to the plan and presumably is unable to exercise any control over the trustees’ decision whether or not, and on what terms, to enter into an agreement with him,” Castel wrote.
Nor did he concur that TIAA’s periodic collection of fees amounted to an act of discretion that would give rise to a fiduciary duty, and he was similarly disinclined to find that “a potential future refusal by TIAA to share the recordkeeping offset, allocated as part of the investment fee, with a third party plan servicer, would breach the RSAs.” He wrote: “Ultimately, plaintiffs are arguing that the Plans made a bad deal and that TIAA’s ‘undisclosed policy,’ which Plaintiffs admit is consistent with the RSAs, is nonetheless inconsistent with TIAA’s fiduciary duties to the Plans, without any underlying support as to why TIAA is a fiduciary in the first place.”
In conclusion, Judge Castel noted that “Plaintiffs have not pled facts sufficient to establish that defendant was a fiduciary of the Plans with respect to its role as service provider, a condition precedent for all of plaintiffs’ claims for legal relief. Equitable relief is not appropriate in this case. Defendant’s motion to dismiss is thus granted.”