Plaintiffs in one of the first university 403(b) suits to be filed will get their day in court.
The suit against Yale University was one of the first to be filed in this area—and by Schlichter Bogard & Denton LLP, the law firm that led the litigation charge against 401(k) plan fees—in August 2016. As has been the case with most in this genre, it alleged that employees paid excessive recordkeeping fees in addition to selecting and imprudently retaining funds which the plaintiffs claim have historically underperformed for years. Moreover, the complaints challenge the use of multiple recordkeepers, rather than a single recordkeeper—a practice that they claim “… caused plan participants to pay duplicative, excessive, and unreasonable fees for plan recordkeeping services.”
The suit claimed that the defendants here (Yale University, Michael A. Peel, Yale’s Vice President of Human Resources during the class period, and the Retirement Plan Fiduciary Committee) breached their fiduciary duties of prudence and loyalty under ERISA (three counts) by carrying out transactions prohibited by ERISA (three additional counts), and with respect to Yale and Peel, by failing to monitor Committee members. For its part, the defendants moved to dismiss all seven counts for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) and for being time-barred.
Count ‘Down?’
As recounted (Vellali v. Yale Univ., 2022 BL 378084, D. Conn., No. 3:16-cv-01345, 10/21/22) by Judge Alvin W. Thompson in the U.S. District Court for the District of Connecticut, the plaintiffs here allege that the defendants violated ERISA in three ways:
(1) by breaching their fiduciary duties of prudence and loyalty (Counts I, III, and V);
(2) by engaging in transactions prohibited by ERISA (Counts II, IV, and VI); and
(3) with respect to Yale and Peel, by failing to monitor members of the Retirement Plan Fiduciary Committee to ensure compliance with ERISA's standards (Count VIII). (There is no Count VII.)
Judge Thompson dismissed the plaintiffs' claims for breach of the duty of loyalty in Counts I, III, and V, and the claim in Count V for the breach of the duty of prudence based on the Plan offering too many investment options to participants and the Plan failing to reduce fees with respect to several investments offered by The Teachers Insurance and Annuity Association of American ("TIAA").
The Bottom Line
Yale, Peel and the Retirement Plan Fiduciary Committee (the "defendants" or "Yale") have moved for summary judgment on all remaining claims. For the reasons set forth below, the defendants' motion for summary judgment is being granted with respect to Counts II, IV, VI, and VIII, and otherwise denied. Said another way, Judge Thompson agreed with the fiduciary defendants on four of the seven issues claimed—but allowed the remaining three to be resolved at trial.
Now, as you may remember from previous reviews of motions to dismiss, "the court must draw all reasonable inferences in favor of the nonmoving party . . . even though contrary inferences might reasonably be drawn." That said, the case still has to be made to a level sufficient to be viewed as worth going on to trial.
Multiple Recordkeepers?
Here, Judge Thompson determined that the plaintiffs “have created genuine issues of material fact with respect to each aspect of these contentions by the defendants.” He went on to explain that while they didn’t dispute the reality that TIAA didn’t allow other recordkeepers to recordkeep its products, but did dispute the degree to which that was an obstacle to having another provider perform recordkeeping services for TIAA products. There was evidence presented that TIAA provides data to other providers “allowing for tracking of TIAA annuities' gains, losses, and account balances on the recordkeeping platforms of those providers, and that such information is all that an investment manager typically provides a recordkeeper”—as well as examples of other recordkeepers “regularly recordkeep the fixed annuities of other investment managers and have the ability to develop code for their own products or for whatever products they need to recordkeep.” That, and other evidence presented to Judge Thompson’s eyes undermined the assertion that multiple recordkeepers were required (not to mention evidence that TIAA itself had promoted advantages of single recordkeepers.
On another issue, Judge Thompson noted that the plaintiffs had put forth evidence that creates a genuine issue of material fact with respect to Yale's failure to obtain competitive bids; notably evidence that "[i]industry professionals, including Defendants' advisors and expert in this case, and the Department of Labor recommend that fiduciaries conduct a RFP or other competitive bidding process for a plan's recordkeeping fees every three to five years,” not to mention “evidence which suggests that the defendants' conduct was inconsistent with Yale's own policies, under which "[p]urchases for University business must be made through standard methods," and "[t]he University's competitive bidding threshold is $10,000, at which competition via bids and quotes from multiple vendors is required before purchase of a good or service." And, if that weren’t enough, Judge Thompson commented that “it is undisputed that the Plan's fees for recordkeeping dropped considerably after Yale issued an RFP.” And finally, there was apparently no evidence that the Yale fiduciaries had engaged in “informal search activities [that] were the functional equivalent [of an RFP].”
Participant Pricing
As for the per participant versus asset-based recordkeeping fees, Judge Thompson noted that, “While the defendants are correct that ERISA does not require a per-capita fee structure, it does require that a fiduciary ensure that ‘fees paid to recordkeepers are not excessive relative to services rendered.’" On that point, he noted that, “The defendants maintain that Yale's prudence is demonstrated by Yale's periodic negotiations with TIAA. They point out that TIAA began discussing pricing with its largest clients in early 2011 and initially proposed lowering the asset-based fee from 20 bps to 12 bps,” later engaging Aon Hewitt as a consultant to assess the reasonableness, with TIAA ultimately agreeing to a rate of 9.5 bps and applied a rebate retroactive to January 2011, which resulted in a $1.9 million refund.
On the other hand, the plaintiffs presented evidence that TIAA promoted plan-specific pricing to Yale in August 2010 but "Yale did nothing until TIAA unilaterally approached it with an offer in February 2012." Judge Thompson further noted that the plaintiffs have created a genuine issue as to whether Yale's "motivation in accepting this agreement was to obtain a revenue credit account as quickly as possible to reimburse expenses and employee salaries." Moreover, he explained that the plaintiffs “also proffer evidence that there was no process to evaluate Yale's recordkeeping fees from 2007 until an Aon Hewitt analysis of TIAA's fees, which was performed in 2012. They proffer evidence that no analysis or evaluation of Vanguard's fees was ever conducted despite Aon Hewitt's September 2013 recommendation that ‘a review of Vanguard would be a good idea that would likely also generate savings.’”
Cross-Selling
The plaintiffs contend that TIAA's role as recordkeeper gave it access to demographic information about Plan participants, which TIAA was free to use to "aggressively market lucrative products outside of the Plan.” In fact, Judge Thompson notes that “Yale did not take any action to limit TIAA's cross-selling until 2016, while making no effort to obtain information about TIAA's revenues from cross-selling. Thus, the plaintiffs claim that in this context the defendants breached their fiduciary duty by imprudently failing to prohibit TIAA from cross-selling.” However, Judge Thompson noted that “the plaintiffs' claim is not that the defendants were imprudent because they disclosed confidential information or because they failed to leverage cross-selling to negotiate a better deal. Rather, the plaintiffs' claim is that Yale's failure to prohibit TIAA from cross-selling was imprudent because Yale made no effort to obtain information about TIAA's cross-selling revenues and thus could not make an informed decision about whether TIAA's total compensation, including that from cross-selling, was no more than reasonable.”
Plan Losses
Judge Thompson explained that the Yale defendants claimed to be entitled to summary judgement on this point (Count III) because there is no evidence that the claimed acts of imprudence resulted in any loss to the Plan. But after a little discussion, Judge Thompson stated simply “…if a plaintiff proved that it was imprudent to pay $100 for something but that it would have been prudent to pay $10, it is not the plaintiff's burden to prove that it would also have been imprudent to pay every price between $11 and $99. It is on the defendant to prove that there is some price higher than $10 that it would have been prudent to pay.”
Cunningham Connection?
Judge Thompson noted that Yale had claimed that the recordkeeping fees that Plan participants paid were reasonable in light of the package of services that TIAA offered and industry standards during the class period—but countered with a “genuine dispute” contending that “the combination of evidence indicating that consolidation with a single recordkeeper was possible and the fact that Yale achieved a significant rate reduction once it moved to a single recordkeeper” supported an “inference that Yale could have transitioned to a cheaper, single-recordkeeper model earlier in the class period, and therefore the fees Plan participants paid prior to the recordkeeper consolidation were unreasonable.”
Now the Yale defendants tried to draw a connection to the Cunningham case, “where the court found that the plaintiffs had failed to create a genuine issue of material fact with respect to loss and granted summary judgment on a claim that the defendants' process to monitor recordkeeping fees was a breach of the duty of prudence.” But Judge Thompson distinguished the two, explaining that here “the plaintiffs proffer much more in the way of evidence” with regard to the ability to negotiate fees (apparently not taken), data that suggested a lower fee could have been negotiated and the experience of plans said to be comparable in size that did negotiate lower fees—as well as a comparison to the fees paid by the top quartile of TIAA clients.
Other Issues
Judge Thompson noted that there were two issues remaining in Count V, “namely, the plaintiffs' claims that the defendants breached their duty to monitor the Plan's investments and remove imprudent investments because they failed to remove underperforming investments (the "investment-monitoring claim") and because they failed to offer lower-priced institutional shares rather than higher-priced retail shares (the "share-class claim").
With regard to the former, the Yale defendants had argued a lack of standing to bring suit (because the plaintiffs didn’t invest in all of the funds challenged, and with regard to the second, because the plaintiffs have failed to create a genuine issue of material fact as to whether Yale's decision to not offer lower-cost share classes of certain investments earlier than it did was imprudent. As the suit challenging Yale’s flawed monitoring process applied to the entire plan, Judge Thompson set aside the standing argument. While Yale argued it “regularly reviewed the Plan's lineup to ensure that participants could choose from an appropriate menu of low-cost, diversified investment options” and, beginning in 2012 “reviewed the Plan's investment lineup at annual review meetings, which often lasted several hours."
Despite that, Judge Thompson found that on this issue the plaintiffs raised material questions of fact—evidence that prior to the formation of the plan committee, only one individual actually reviewed the funds, and he reported to the plan administrator, alongside “evidence that industry professionals believe that it is not possible to effectively monitor over 100 funds, even with assistance from a professional” (and that against a reality that the Yale Investments Office assigned a staff of four people to monitor a much smaller number of investments), evidence that the committee didn’t seek solicit the advice from that Investments Office that they claimed, and emails that commented “on the need for an investment committee, including a March 2011 email in which he refers to the fact that "the need for more formal and regular oversight is necessary to meet Yale's fiduciary obligations under ERISA." Not to mention a 2014 email where one of the defendants observed that "[i]t took 5 years to convince leadership we needed a committee."
Monitoring Claims
Beyond that, Judge Thompson commented that they also “created genuine issues of material fact as to whether Yale acted imprudently in monitoring investments after the Committee was chartered and began meeting in 2012. They proffer evidence that during the relevant period Yale's investment review process consisted of annually reviewing reports from its recordkeepers about their own products.” Judge Thompson also cited evidence that Yale's process was also deficient because the defendants relied on benchmark and peer group choices provided by an interested party as opposed to "look[ing] at assigned peer groups to determine whether it might be a good idea to use a different peer group." Here it was pointed out that the process between the 403(b) plan committee and the Yale Investments Office was different with regard to frequency and duration (“[t]he Committee met on an ad hoc basis and reviewed investments once a year"). He also noted that whereas the plaintiffs submitted evidence that it is an accepted practice in the industry “‘to have an investment policy statement to guide investment review’—Yale did not adopt an investment policy statement until November 2018.”
However, Judge Thompson agreed with the defendants that the plaintiffs failed to create a genuine issue of material fact as to whether the defendants engaged in self-dealing or other disloyal conduct with intent to benefit a party of interest. “While the plaintiffs proffer evidence that ‘Penney was conflicted because of his relationships with TIAA,’ that evidence falls short of creating a genuine issue of material fact as to these claims,” he wrote—and granted the Yale defendants’ motion for summary judgment on Counts II, IV, and VI. As for the failure to monitor the acts of the committee members, Judge Thompson found that the plaintiffs failed to present a genuine issue of material fact here—“the plaintiffs' response to the defendants' assertion that the plaintiffs have no evidence is merely that ‘Defendants have presented no evidence that they ever monitored Penney's performance or determined whether he was sufficiently capable of overseeing the Plan's fees and investments.’"
On the other hand, Judge Thompson found that there were “genuine issues of material fact as to whether Yale breached its fiduciary duty to monitor and avoid unreasonable recordkeeping fees with respect to the plaintiffs' contentions that Yale imprudently (i) delayed consolidating to a single recordkeeper, (ii) failed to obtain competitive bids, (iii) used asset-based pricing, and (iv) failed to prohibit TIAA from cross-selling; and also with respect to (v) whether the claimed acts of imprudence resulted in loss to the Plan.”
What This Means
While the suit is proceeding to trial—and a jury trial at that—only about half the claims alleged by the plaintiffs survived the Yale defendants’ motion to dismiss. It’s tough from this writer’s vantage point to assess the quantitative (or qualitative) depth of evidence presented here compared with that in other recent cases that were dismissed (specifically the Cunningham case cited above). Ultimately, we seem to be left with what (still) seems to be relatively fluid (if not subjective) standards for what constitutes “genuine issues of material fact.”
