TIAA Settles Excessive Fee Suit for $5 Million

In addition to the cash component, TIAA has agreed to make a number of changes in plan design and administration.

The Case

Plaintiffs in this case had alleged that TIAA breached its fiduciary duty to ensure that the fees and expenses paid out of the assets in the plans were reasonable, and that they failed to make decisions concerning the plans with the care, skill, prudence and diligence under the circumstances then prevailing that prudent fiduciaries acting in a like capacity and familiar with such matters would have used. Specifically that they allowed “excessive administrative and investment management fees” to be assessed, as well that they “imprudently and disloyally filled the Plans entirely with options managed by, and paying fees to, TIAA.”

For its part, TIAA responded that: (a) the investment options were reasonable in that they included a variety of fixed and variable annuities that offer participants lifetime income opportunities; (b) that the plans offered an appropriate investment mix for participants, across different asset classes, risk profiles, fee structures and outcome opportunities; (c) the fees charged by the investment options in the plans, including the fixed and variable annuities, were reasonable and often lower than the fees charged by TIAA’s competitors for similar products; (d) the investment options in the plans provided participants with strong performance; (e) the recordkeeping fees charged to plan participants were reasonable based on the nature and quality of the services provided by TIAA; and (f) TIAA met the Prohibited Transaction Exemption requirements to offer its own products as investment options for the plans.

Settlement Proposal

In the settlement proposal (Richards-Donald v. Teachers Ins. & Annuity Assn. of Am., S.D.N.Y., No. 1:15-cv-08040, motion for preliminary approval of class settlement filed 5/10/17), the parties have agreed that TIAA will deposit $5,000,000 in an interest-bearing settlement account that will be used to pay the participants’ recoveries as well Class Counsel’s Attorneys’ Fees and Costs, Administrative Expenses of the settlement, and Class Representatives’ Compensation as described in the Settlement Agreement.

Additionally, TIAA agreed as part of the settlement to:

  1. add ten non-proprietary investment options, including five options with investment management fees below 15 basis points, to the plans;
  2. rebate any revenue sharing from these non-proprietary funds to the participants in the plans;
  3. add a “brokerage window” from which plan participants can access thousands of additional non-proprietary funds; and
  4. on a one-time basis, provide Plaintiffs with the proposed changes to the plan menus, including, in the absence of a participant decision to transfer to a different fund, the mapping of replaced fund assets to agreed-upon non-proprietary index products and, where appropriate, the TIAA Lifecycle Funds.

The settlement says that following these changes, overall the plans and their participants should save over $2 million per year in fees. In some instances, the settlement explains investment management fees paid by Plan participants may decline by as much at 90% (if, for example, participant investments will be mapped from the current small cap equity fund to a small cap index fund).

Under terms of the settlement, TIAA also has agreed to:

  1. retain an independent consultant to advise the committee on the performance of investment options in the plans and their investment costs relative to the appropriate peer group;
  2. retain an independent consultant on a one-time basis to review the plans’ recordkeeping fees for potential cost efficiencies in light of the types and quality of services that TIAA provides; and
  3. review and enhance its investor education program for plan participants with respect to plan investment options and the fees associates with those options.

Additionally, Plaintiffs will seek $5,000 for each of the two Named Plaintiffs. As for plaintiffs’ attorneys, the settlement requests that they be paid out of the Gross Settlement Fund in an amount not more than one-third of the Gross Settlement Amount, as agreed with the Named Plaintiffs, or $1,666,667, as well as reimbursement of costs incurred.

The settlement still requires court approval.

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