The second of the university excessive fee cases has gotten a hearing on motions to dismiss – and it’s a definite case of win some, lose some.
This suit involved Duke University, which had been charged with a series of fiduciary breaches, including providing “…a dizzying array of duplicative funds in the same investment style,” relying on the services of four recordkeepers, carrying actively managed funds on its plan menu when passives were available, having recordkeeping charges that were asset-based, rather than per participant, and not using its status as a “jumbo” plan to negotiate a better deal for plan participants, among other things.
SOL ‘Stance’
In a recent hearing (Clark v. Duke Univ., M.D.N.C., No. 1:16-cv-01044-CCE-LPA, 5/11/17), Judge Catherine C. Eagles of the U.S. District Court for the Middle District of North Carolina dismissed two of the claims that she said were barred by ERISA’s six-year statute of limitations, and two others because she found that there were “insufficient facts alleged to make them plausible.” However, she left in place several key arguments of the plaintiff, including the claim that offering too many investment options – leading to “decision paralysis” by participants, and proliferating options that made the investments more expensive – could constitute a fiduciary breach. A similar claim was dismissed last week in a case involving Emory University, though the Emory plans had 111 funds, and the Duke plan more than 400. The judge in the Emory case said that “Having too many options does not hurt the Plans’ participants, but instead provides them opportunities to choose the investments that they prefer.”
With regard to the engagement that “locked” Duke in to both offering the specified TIAA-CREF products and to using TIAA-CREF’s recordkeeping services, Judge Eagles noted that such claims were subject to a six-year limitations period, shortened to three years if the plaintiff had actual knowledge of the breach. She noted that the plaintiffs did not allege a specific date as to when Duke entered into the agreement with TIAA-CREF which “locked” Duke in to both offering the specified TIAA-CREF products and to using TIAA-CREF’s recordkeeping services, though “they do allege facts indicating that Duke had entered into the arrangement with TIAA CREF by 2010.”
However, the Duke defendants noted that the plan’s 2009 Form 5500 showed TIAA-CREF was an “investment carrier” in that year. The court held that the action in question was “the locking-in provision and Duke’s decision to “commit[] the Plan to an imprudent arrangement,” that allowed the plan to be “locked into an unreasonable arrangement,” and to “shackle[]the Plan,” and noted that this occurred no later than 2009, or, considering only the allegations in the complaint, no later than 2010. Either way, the suit was filed in January 2017, more than six years after 2010, and so is “…barred by the statute of limitations, and will be dismissed.” In the recent decision involving Emory University, a similar position was expressed, though the plaintiffs were allowed to bring claims based on activity that fell outside that six-year window.
In the sixth cause of action, the Judge Eagles noted that the plaintiffs alleged that TIAA-CREF, VALIC, Fidelity and Vanguard are parties-in-interest “as the plan’s providers of investment services,” and further that they engaged in prohibited transactions “[b]y placing investment options in the Plan in investment options managed by TIAA-CREF, VALIC, Fidelity, and Vanguard.” However, she held that, to the extent the plaintiffs are alleging that it was a prohibited transaction to invest in mutual funds because the entities providing the mutual funds are parties-in-interest by virtue of making mutual funds available for investment, the statute precludes that argument,” and that if it were on some other basis – well, that wasn’t clear from their amended complaint – and thus, dismissed the claim.
Still to Come
As for the claims that Judge Eagles left intact, those included allegations that hiring multiple recordkeepers (and the expense associated with that). Judge Eagles also allowed plaintiffs to proceed with their claim that Duke retained the allegedly underperforming CREF Stock Account in the plan, noting that defendants “insufficiently explained” why that claim should be dismissed.
A decade ago, the law firm of Schlichter, Bogard & Denton launched a dozen excessive fee lawsuits against a multibillion-dollar 401(k). They launched the latest wave last fall, including seven in the higher education sector, both 403(b) and 401(k).
