Another University Wins 403(b) Suit

“If a cat were a dog, it could bark. If a retirement plan were not based on long-term investments in annuities, its assets would be more immediately accessed by plan participants. These two truisms can be summarized: cats don’t bark and annuities don’t pay out immediately.” With those words, the plaintiffs in a university 403(b) plan suit found their claims resoundingly rebuffed in federal court.

“This type of lawsuit seems to have taken higher education by storm, with suits brought all over the country,” wrote U.S. District Judge Rosemary M. Collyer, going on to note (and concur) that “Georgetown moves to dismiss, arguing that Plaintiffs have no standing to make some of their claims and that others fail to state a claim on which relief can be granted.”

The Claims

The suit (Wilcox v. Georgetown Univ.D.D.C., No. 1:18-cv-00422), filed not quite a year ago in the U.S. District Court for the District of Columbia, alleged – as this generation of cases typically has – that rather than “…leveraging the Plans’ substantial bargaining power to benefit participants and beneficiaries, Defendants failed adequately to evaluate and monitor the Plans’ expenses and caused the Plans to pay unreasonable and excessive fees for investment and administrative services.”

More specifically, “Plaintiffs summarize their allegations thusly,” Judge Collyer noted – that the plan “retained not one, but three separate recordkeepers” that “charge asset-based fees,” that the defendants “…ignored the abysmal historical investment performance” of the CREF Stock Account and the TIAA Real Estate Account,” that they offered “an overwhelming 300 investment options” and that they “…failed to provide accurate reporting … in reports filed with the DOL,” and finally that they “approved a loan program that … violated federal regulations”; and the TIAA Traditional Annuity violates regulations “that all contracts be terminable on reasonably short notice without penalty.”

In the course of the 28-page ruling, Collyer took the plaintiffs to task for:

  • not appreciating the difference in standing between defined benefit and defined contribution plans (“for either Plaintiff to have standing to sue about their defined contribution Plan, he must show fiduciary breaches that impair his individual account’s value”);
  • applying 401(k) plan standards to 403(b) (“It may be that Plaintiffs want to force Georgetown to reconsider its entire strategy behind the Plans and to have them become more like corporate plans…” she wrote. “However, it is not a breach of fiduciary duty to maintain the Plans as established tax-deferred vehicles under the particular protections of § 403(b).”); and
  • 20/20 hindsight in evaluating investment decisions (“While an unhappy participant would improperly rely on hindsight to complain that his investments underperformed others, the question regarding appropriate prudence by a fiduciary necessarily depends on “information available to the fiduciary at the time of each investment decision.”).

Other Elements

As for specific elements of the case, Judge Collyer noted that with regard to the TIAA Real Estate Account (in which only plaintiff McGuire invested), while plaintiffs complain about the “excessive expenses” of the former, “…comparing the TIAA Real Estate Account to the Vanguard REIT, net of fees, the TIAA Real Estate Account still performed better,” she wrote. Moreover, she noted not only that but that “the question is whether Mr. McGuire suffered an injury-in-fact,” and that, “during the relevant time period, his funds remained in the better-performing TIAA Real Estate Account rather than the Vanguard REIT Account,” and that he “therefore experienced no loss or injury from that investment.”

As for the requirement of the TIAA Traditional Annuity requirement that funds be re-allocated over a ten-year period – Judge Collyer dismissed those claims “because Mr. McGuire has never invested in the TIAA Traditional Annuity” and that he “lacks standing to represent other Plan Participants who did.”

As for the allegation that “Defendants and TIAA-CREF identified the Russell 3000 index as the appropriate benchmark to evaluate the CREF Stock Account’s investment results,” Collyer said that “…oversimplifies and misstates the facts and governing law” – not to mention what she said the defendants actually put forth as the benchmark of the composite fund.

‘Under’ Performance

As for the plaintiffs’ argument that the fund underperformed “other, lower-cost actively and passively managed investments that were available to the Plans,” she first noted that “ERISA does not provide a cause of action for “underperforming funds,” going on to remind them that “a fiduciary is not required to select the best performing fund,” and that while “the CREF Stock Account, with its deliberate mix of foreign and domestic investments, may not have performed as some purely domestic accounts with different investments does not indicate imprudence on the part of Defendants.” Collyer noted that not only had Morningstar rated the fund five stars, but – again invoking the 401(k) reference, that “plaintiffs ignore the facts of this case in apparently adopting allegations from other cases that are unsuited to the Plans.”

As for the recordkeeping fees, Collyer wrote that “Plaintiffs provide no factual support at all for their assertion that the Plans should pay only $35/year per participant in recordkeeping fees,” and that while the Plans could be “transformed from what they are to something else. But Plaintiffs provide no evidence that the three entirely different current investment platforms – TIAA, Vanguard, and Fidelity – would agree to continue the same offerings at a lesser, or combined, recordkeeping price; nor have they identified any college or university that has accomplished that feat.” She went on to explain, “the mere allegation that Georgetown could continue to offer the same Plans and the same associated services for $35/year has no factual support, is entirely speculative, contrary to caselaw and common sense, and does not warrant discovery.”

The case is Wilcox et al. v. Georgetown University et al., case number 1:18-cv-00422, in the U.S. District Court for the District of Columbia.

What This Means

While there have been roughly two dozen of these 403(b) university lawsuits filed since 2016, Georgetown is now the fifth university to prevail at trial, joining New York UniversityNorthwestern University, the University of Pennsylvania and Washington UniversityThe University of Chicago settled a similar suit in May 2018, as did Duke University about a month ago.

The bottom line seems to be that the defendants willing – and able – to go to trial stand a pretty good chance of success.However, that bar is not so low as to permit an easy summary judgment dismissal of the claims made.

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