A number of claims were dismissed in a university 403(b) excessive fee suit – but the “wins” appear to have been mostly by forfeit.
The plaintiffs might well have seen a negative result coming when Chief Judge William E. Smith began by referring to theirs as “one of many, look-alike lawsuits[1. If you’re having trouble keeping track of these suits, it’s no wonder. The list now includes plans at Cornell University, Northwestern University, Columbia University and the University of Southern California, as well as Emory University, Duke University, MIT, New York University and Yale. Meanwhile, some of the earlier suits are just getting to hearings on motions to dismiss, specifically Emory University and Duke University — both of which are currently proceeding to trial.] filed nationwide by current and former members of faculty and staff of private (mainly elite) universities in which it is alleged that the universities imprudently managed retirement accounts to the detriment of their employee-plan participants.”
And indeed, the plaintiffs in the case (Short v. Brown Univ., D.R.I., No. 1:17-cv-00318, complaint filed 7/6/17), Diane G. Short, Judith Daviau and Joseph Barbosa, individually and as representatives of a class of participants and beneficiaries of the Brown University Deferred Vesting Retirement Plan ($244 million and 8,054 participants) and the Brown University Legacy Retirement Plan ($1 billion and 6,325 participants) alleged, as have the vast majority of these excessive fee cases (to Judge Smith’s point), that rather than “leveraging the Plans’ substantial bargaining power to benefit participants and beneficiaries, Defendant caused the Plans to pay unreasonable and excessive fees for investment and administrative services.”
Also cited were the plan fiduciaries’ decisions to select and retain “investment options for the Plans that historically and consistently underperformed their benchmarks and charged excessive investment management fees.” Also challenged (as has been the case on other such suits) were the “bewildering array” of “duplicative” investment options.
Having outlined the issues presented, and turning to the petition to dismiss the suit, Judge Smith in the U.S. District Court for the District of Rhode Island, noted that in order to “overcome a motion to dismiss under Rule 12(b)(6), a complaint must possess sufficient facts “to state a claim for relief that is plausible on its face,” taking “…all of the pleaded factual allegations in the complaint as true,” and that “[b]arring ‘narrow exceptions,’ courts tasked with this feat usually consider only the complaint, documents attached to it, and documents expressly incorporated into it.”
However, at the very outset, Judge Smith noted that since the plaintiffs “expressly concede that Counts III and IV (involving the loan program) do not survive Brown’s Motion for lack of standing, the Court dismisses those Counts.”
As for Counts I and II, Judge Smith held that that on those counts, which involved the alleged breach of a duty of loyalty and a duty of prudence, “…there is enough heft to their claims to survive Brown’s Motion to Dismiss.”
Count I involved allegations that Brown did not engage in a prudent process for evaluating and monitoring fees and expenses that TIAA and Fidelity charged to the plans, specifically faulting the fiduciaries for:
- offering too many investment options, including duplicative options, rather than a “core” lineup;
- using more than one recordkeeper;
- failing to employ a competitive bidding process with respect to record-keeping;
- offering investment options that charged “multiple layers of expense charges”; and
- offering investment options that charged asset-based fees and used revenue sharing, instead of a per-participant rate.
However, as with their duty-of-loyalty claims, Judge Smith noted that the plaintiffs “neglect to rebut certain of Brown’s arguments with respect to the duty of-prudence claims,” and therefore “those particular theories must fall away.”
For example, “By offering not one word in response to Brown’s Motion with respect to their allegations that the Plans offered investments with multiple layers of fees, Plaintiffs waive this aspect of their imprudence claim,” Smith wrote. Similarly, he determined that their failure to respond on the motion to dismiss regarding the decision to use asset-based fees and revenue sharing was seen as an abandonment of that claim.
“Another aspect of Plaintiffs’ imprudence claim that falls away – albeit for different reasons,” Judge Smith wrote, “is the allegation that Brown was imprudent in offering a surplus of investment options and failing to feature a set of ‘core’ investment options.” On this issue, Smith found persuasive Brown’s assertion that “…courts have repeatedly rejected, as a matter of law, identical claims in factually analogous cases, and ERISA does not impose that fiduciaries limit plan participants’ investment options.” Or, as he went on to note (citing the ruling from Henderson v. Emory Univ., another 403(b) university suit), “Allegedly offering too many investment options for participants does not suffice for a breach of ERISA’s duty of prudence.”
“Indeed,” he wrote, “courts have bristled at paternalistic theories that suggest ERISA forbids plan sponsors to allow participants to make their own choices.” But, as Judge Smith explained, the plaintiffs “fail to rebut Brown’s argument on this score, so the Court disregards any duty-of-prudence claim conditioned on such a theory.”
There were, however, claims that withstood scrutiny, including:
- the decision to use multiple recordkeepers (citing a ruling in Nicolas v. Trustees of Princeton Univ., “plaintiffs’ allegation that a prudent fiduciary would have chosen one — rather than two — record-keepers suffices at this stage to state a plausible claim”);
- failing to engage in a competitive bidding process (“the Court deems unpersuasive Brown’s point that ERISA does not per se require competitive bidding”); and
- that the plan’s participants were charged “excessive fees and expenses” (“Plaintiffs allege specific facts to support their claim, including identifying what, based on various factors including the recordkeeping market, the outside limit of a reasonable recordkeeping fee for the Plan[s] would be”).
On the latter point, Judge Smith specifically noted that “[t]he question whether it was imprudent to pay a particular amount of record-keeping fees generally involves questions of fact that cannot be resolved on a motion to dismiss.”
As for Count II – the selection and retention of “more expensive funds with inferior historical performance” – after restating the positions of both parties, Judge Smith noted that there were presented “factual issues that cannot be decided at the pleading stage.”
Also postponed for another day was the defendants' argument that ERISA’s statute of limitation bars plaintiffs’ claims.
Brown University had argued that ERISA’s six-year statute of limitations bars the plaintiffs’ claims “because most decisions that Plaintiffs challenge (including selecting various investment accounts, using an asset-based revenue-sharing model for administrative expenses and two recordkeepers, and offering too many investment options) were decisions Brown made more than six years ago.” The plaintiffs had responded that they weren’t challenging the initial decisions, but rather “the excessive recordkeeping fees that Plaintiffs are now paying (and have been paying over the past six years), and other ongoing conduct by Brown.”
In response, Judge Smith noted that “a fuller record is necessary to resolve any statute-of-limitations problems posed by this case” – leaving most of the issues raised in this case to be resolved at a future date.