A university which prevailed on some claims in an excessive fee suit and settled others, only to have the plaintiffs try to resurrect the dismissed claims—now has some trade group support for its motion to dismiss these claims… again.
The suit—one of the first of the genre of 403(b) university excessive fee suits filed four years ago—was filed on behalf of some 28,000 current and former plan participants (represented by the persistent law firm of Schlichter Bogard & Denton LLP) in Cornell’s 403(b) plan, a plan that, as of December 2014, had $1.9 billion in assets.
Case History
The Cornell University defendants had successfully fended off most of the claims in 2019 in the U.S. District Court for the Southern District of New York, when Judge P. Kevin Castel ruled that the plaintiffs had plausibly argued that it was imprudent to pay annual recordkeeping fees of more than $115 per participant—but presented no evidence that this caused the plan to suffer losses. Judge Castel also found in favor of the Cornell defendants on charges that specific plan investments underperformed or were too expensive, noting that Cornell’s retirement plan committee reviewed these investments and weighed the pros and cons of retaining them in the plan. Indeed, as recently as May, Judge Castel encouraged the parties to either settle the case or consider waiving the jury trial, citing the impact COVID-19 has had on civil jury trials—a trial that was slated to start next week.
The one remaining claim—and the one item that was addressed in the September 2020 settlement (albeit for a relatively small $225,000)—was the issue of the plan’s utilization of retail class mutual funds (TIAA-CREF Lifecycle target-date funds) when less expensive, institutional class shares were available.
Entering the Fray
Enter the U.S. Chamber of Commerce and the American Benefits Council, which have now filed a friend of the court brief (Cunningham et al. v. Cornell University et al., case number 21-88, in the U.S. Court of Appeals for the Second Circuit) in support of the Cornell fiduciary defendants and the decision rendered by Judge Castel in 2019. The issue: Who bears the burden of proof once an injury has been alleged.
The parties speaking on behalf of the fiduciary defendants here note that “a key element of that carefully balanced system is the provision in 29 U.S.C. § 1109(a) making a fiduciary liable for losses to an ERISA plan only to the extent those losses ‘result[ed] from’ the fiduciary’s own ‘breach’ of duty—i.e., that the fiduciary did not make an ‘objectively prudent’ decision.”
They contrast that with the “plaintiffs’ proffered standard”—one that would effectively shift the burden of proof to an ERISA defendant and would, in contrast, permit an ERISA plaintiff to “simply assume the objective imprudence of a fiduciary’s decision after a procedural breach.” That, they argue, “could allow plaintiffs to recover millions in damages even for objectively prudent” decisions—decisions that a prudent fiduciary could have made. That is just the type of rule that “would impose high insurance costs upon persons who regularly deal with and offer advice to ERISA plans, and hence upon ERISA plans themselves.”
And that, they argue, “…would undermine a primary purpose of ERISA, which was to encourage employers to voluntarily offer retirement plans to their employees. Plan sponsors and plan fiduciaries alike, including Amici’s members, have a strong interest in averting such a result.”
Loss Causation
The brief notes that “ERISA makes fiduciaries liable only for losses that actually ‘result[ed] from’ a breach of fiduciary duty. 29 U.S.C. § 1109(a).” That requirement—known as “loss causation”—is “the crucial element that prevents a windfall recovery by participants beyond the benefits promised under a plan”—and they argue that it “…also protects fiduciaries from being forced to insure the plan against anything that might go wrong following a lapse in process, without regard to whether the lapse actually caused a loss. Congress adopted the loss causation requirement because, as in court, some errors are harmless.”
Indeed, they comment that the plaintiffs here argue that they need only show an undefined “prima facie loss”—and at that point, they claim that the burden of persuasion must then shift to the fiduciary to disprove loss causation. That said, the Chamber/ABC brief notes that the “majority of circuits—including this one”—disagree and follow the “ordinary default rule” that the Supreme Court has applied to federal statutory claims for decades: Unless the statute says otherwise, the “burden of persuasion lies where it usually falls, upon the party seeking relief.”
‘File First and Build Claims Later’
Instead, by requiring loss causation, the Chamber/ABC brief notes, Congress gave courts a powerful tool to weed out ERISA strike suits. The brief argues that not only would the result the plaintiffs suggest essentially eliminate the element of loss causation for procedural-prudence claims, it also “would encourage plaintiffs’ attorneys to ‘file first and build claims later’ in hopes of a windfall judgment whenever the market drops.”
The Chamber and ABC comment that, “even if the market is thriving, plaintiffs’ attorneys will be incentivized to rush to court so long as they can identify some alternative investment with better returns, or some service provider that charges lower fees, and assert fiduciary-breach claims against a plan sponsor that counsel believes can pay a judgment, or even a settlement.
“For the large number of plan sponsors that are small or mid-sized businesses, there is a real risk that these additional undue administrative and litigation costs may discourage them from offering, or continuing to offer, benefits under ERISA—just as Congress feared.” Moreover, they note that “the risk and expense that Plaintiffs’ loss-causation standard would create threatens harm to the sponsors, fiduciaries, and beneficiaries of every plan subject to that rule—harm from crimping investment decisions; raising the costs of services, indemnification, and insurance; and ultimately diverting resources from other key aspects of employee-benefit programs, such as 401(k) matching contributions or subsidization of healthcare premiums. That result is thoroughly at odds with Congress’s design.”
Will the court heed their “friendly” advice? We shall see.
