The fiduciary defendants in a 403(b) university excessive fee suit say the plaintiffs have not only failed to make their case—but that they’ve taken actions in their own account(s) that undermine their arguments.
The suit (Latasha Davis et al. v. Washington University in St. Louis et al.) was originally filed in June 2017 by Latasha Davis and Jennifer Elliott on behalf of the plan’s more than 24,000 participants and beneficiaries. In October 2018, those claims were dismissed by Judge Ronnie L. White of the U.S. District Court for the Eastern District of Missouri, basically holding that the plaintiffs failed to state a claim. However, nearly a year ago, noting that, “at this point, the complaint only needed to give the district court enough to infer from what is alleged that the process was flawed,” the Eighth Circuit Court of Appeals breathed new life into some of the claims brought against the fiduciaries of St. Louis-based Washington University’s $3.8 billion 403(b) plan.
And now, the defendants in that case have challenged the ability of the plaintiffs to adequately represent the interests of the plan’s 27,000 current and former workers.
As a reminder, the suit claimed that the defendants violated ERISA by:
- allowing Plan participants to pay excessive fees for recordkeeping services (Count I); and
- offering certain investment options they say were too expensive for one reason or another (Count II).
The Response(s)
In response, the Washington U. defendants note (Davis et al. v. Washington University in St. Louis et al., case number 4:17-cv-01641, in the U.S. District Court for the Eastern District of Missouri) that the “plaintiffs lump their disparate theories together and ask the Court to certify a class that indiscriminately includes everyone who ever participated in the Plan since April 28, 2011.” Now, while that type of claim isn’t all that unique, the defendants say it’s based on a “flawed premise: that no matter what claim or injury they have personally, they can fairly and adequately represent the 27,000 current (and many more former) Plan participants for any alleged fiduciary breach, at any time, simply because they sue “on behalf of the Plan” under ERISA § 502(a)…”
On that point, however, they say that the plaintiffs “scarcely even try, citing almost no actual evidence, relying instead on generic conclusions coupled with allegations in their SAC,” referencing the plaintiffs’ Second Amended Complaint (SAC). And in so doing, the defendants claim that the plaintiffs “offer no insight into their own circumstances, alleged injury, interests, or any other facts that would allow the Court to assess their ability to protect the rights of absent class members, as Rule 23[i] requires.”
The defendants start by noting that the burden of proof on Rule 23 is on the plaintiffs—and they claim the plaintiffs here have not met that burden, and then state that they have failed to demonstrate “that their claims and interests align sufficiently with those of absent class members, who invested in different funds and paid different fees at different times.” Specifically, they claim that no factual basis has been provided for “finding they have a sufficient stake in claims related to the 100-plus investments they never held or fees they never paid. In fact, no Plaintiff invested in any Vanguard fund before June 2016, when Vanguard was removed as a Plan recordkeeper—meaning no named Plaintiff paid any fee to Vanguard over that critical period.” Speaking of differences, the defendants say the plaintiffs failed to meet the criteria because they are subject to “unique, individualized Defenses,” notably that that they had “actual knowledge” of an alleged breach more than three years before the case was filed (and thus outside the statute of limitations for such claims).
And finally, they state that, even if the Court certifies a class (“which it should not,” they comment), any such class should be limited to the funds in which the named Plaintiffs invested or their challenges to TIAA’s recordkeeping fees, the only such fees any proposed class representative ever paid.
Questionable Assertions?
As for the essence of the case itself, the defendants here also challenge other assertions made: “the Plan’s investment line-up has not remained static”—that “many key factual predicates to Plaintiffs’ claims have changed materially over the past decade, which their Motion obscures by relying almost entirely[ii] on the SAC’s allegations.”
That while the plaintiffs alleged excessive fees resulted from the plan’s retention of two recordkeepers (TIAA and Vanguard)—but that that couldn’t have been the case after 2016 when they consolidated to TIAA, nor “to the many who joined over the past five years, who could never have paid Vanguard a recordkeeping fee.” In fact, aside from the difference in services between the two, the defendants claimed that “none of the Plaintiffs invested in any Vanguard fund before June 2016, meaning they never paid Vanguard any recordkeeping or investment fee, leaving absent class members who did pay such fees without any representative possessing such a claim.”
As for the “dizzying” and “confusing array” of investment options—well, while that may have been true at one point, the defendants say that in May 2018 the plan not only streamlined its menu to around 30 options, but broadened it to other fund managers. “Plaintiffs’ proposed class thus includes many participants who never experienced the ‘confusing’ menu on which Plaintiffs’ claims rely,” they write.
‘Class’ Claims
There were also allegations that most Vanguard options offered were “retail ‘investor’ class” versions, which had “higher fees than the ‘institutional’ class products”—though they write that the plaintiffs concede the Plan always offered the lowest-cost version of all TIAA funds. However, and to their point about representation of the class, they note that “no participant who invested solely in TIAA options even has a ‘share-class’ claim”—and “that includes all three Plaintiffs for most of the proposed class period...” And if that wasn’t enough, the defendants state that “discovery has confirmed that the Plan repeatedly moved to lower-cost share classes of Vanguard funds at different times over the class period.”
As for allegations about revenue sharing, the defendants state that “discovery confirms” that they did, in fact, cap the amount of revenue sharing payments made to recordkeepers,” and that, beyond that, “the Plan’s fee structure changed materially since 2011.”
But after four years of litigation and “well over 100,000 pages of documents,” the defendants claim that the certification attempt is “based almost entirely on the SAC’s allegations,” and that they “do not support several assertions with any citation, to the SAC or otherwise.” The defendants write that the deficiencies in their arguments “obscure critical differences in the claims, circumstances, and interests of the 30,000-plus individuals Plaintiffs seek to represent.”
More specifically, the defendants observe that the plaintiffs collectively invested in only eight of the roughly 120 options available in the plan, that all eight were offered by TIAA (none were managed by Vanguard), and that “Plaintiffs thus paid nothing to Vanguard over this period (for recordkeeping, investment management, ‘higher-cost’ share-classes, or anything else)—meaning the many absent class members who did invest through Vanguard lack any representative with similar claims.”
‘After’ Math
Beyond that, the defendants outlined a series of behaviors by the named plaintiffs that seemed at odds with their allegations. For example, they state that “…long after filing this lawsuit in June 2017, Ms. Davis and Ms. Elliott each chose to continue investing in some of the same funds they claim are too expensive and should never have been offered’ (the CREF Stock Account). Indeed, they note that “…despite alleging this actively-managed variable annuity charged 1,800% more in fees than the passively-managed Vanguard Institutional Index mutual fund, Ms. Davis not only held her existing assets in the CREF Stock Account, she increased them until she left the University in 2019.” As of that weren’t enough, they continue that “Ms. Davis indisputably knew she could choose a lower-fee option if that was her preference, because she did just that, also investing in the same Vanguard Institutional Index Fund her SAC suggests as a lower-cost alternative.
“Ms. Elliott’s decisions are even more instructive,” they continue. While the response notes that she never invested in the CREF Stock Account or TIAA Real Estate Account before filing her complaint…”in 2018, after filing suit, Ms. Elliott moved money into, and continues to hold, both the CREF Stock Account and TIAA Real Estate Account, and she is the only Plaintiff who ever invested in the TIAA Real Estate Account.
“These individuals cannot disclaim knowledge of the supposed problems with these funds after June 2017, as they had signed onto a class action claiming those very funds were so badly flawed and expensive that no reasonable fiduciary would offer them,” the response explains. “Any loss they incurred by investing in these funds thus resulted from their own informed decision-making, not action by Defendants. Indeed, this also calls into serious question the extent to which Defendants’ alleged fiduciary breaches as to these funds were the cause of losses to these Plaintiffs before the lawsuit, considering they selected them even after indisputably knowing of the supposed deficiencies.”
“Plaintiffs (as opposed to their attorneys[iii]),” the response states, “have no personal stake in such claims, meaning they lack sufficient incentive to vigorously litigate them, maximize potential recovery, or otherwise protect the rights of absent class members.”
What This Means
We’ve noted before that in litigation there are always (at least) two sides to every story, and that however factual those assertions may turn out to be, the initial lawsuit in any action is only one side, and one generally crafted toward a particular result.
This filing is, of course, the “other” side of those arguments, and—as advocacy often requires—may well be just as slanted toward the perspective of the parties defending the suit. That said, the arguments made are instructive, both as to the legal standards, the arguments in support of their application to the case, and their probative value in similar situations that you may encounter in your practice(s).
[i] Now what, you may say, is “Rule 23”? As it turns out, it sets forth the prerequisite standards for plaintiffs to quality to represent the interests of a broader class of similarly impacted individuals. At a high level, the plaintiffs have to establish that: (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.
[ii] In fairness, that actions have been taken to mitigate certain alleged wrongs wouldn’t preclude an action for the period(s) of time in which they were a reality.
[iii] Those attorneys are from Chimicles Schwartz Kriner & Donaldson-Smith LLP, Berger Montague, Schneider & Wallace LLP, and Eric Lechtzin of Edelson Lechtzin LLP and John Edgar of Edgar Law Firm LLC.
