TIAA Wins Most – But Not All – Claims on 403(b) Loan Process

Most, but not all, of the claims alleging that a plan provider’s loan process generated “ill-gotten” gains that exceed $50 million per year have been dismissed.

In the case, Haley v. Teachers Inv. & Annuity Assoc. (S.D.N.Y., No. 1:17-cv-00855, complaint filed 2/3/17), plaintiff Melissa Haley filed suit to recover money that she claims Teachers Investment and Annuity Association (TIAA) unlawfully took from her retirement account in the Washington University Retirement Savings Plan. Haley claimed to have borrowed money from her retirement account on four separate occasions, and fully repaid two of the loans, plus interest. She is currently repaying the other two loans. However, citing what she outlines as standard practice among 401(k) plans, she alleges that all of the interest paid in connection with those loans should have been credited to her retirement account.

Loan Arrangement

Instead, she claims that a participant who wants to borrow money from the plan is forced to borrow from TIAA’s general account rather than from the participant’s own account, and that participants are required to transfer 110% of the amount of the loan from the participant’s plan account as collateral securing repayment of the loan. The Traditional Annuity is a general account product that pays a fixed rate of interest, currently 3%, and as a general account, the defendant owns all of the assets, as well as the assets transferred to its general account to “collateralize” the participant loan. Then, because “…the participant loan is made from Defendant’s general account, the participant is obligated to repay the loan to Defendant’s general account, and the general account earns all of the interest paid on the loan,” a practice that the suit claims is “…in contrast to the loan programs for virtually every other retirement plan in the country, where the loan is made from and repaid to the participant’s account and the participant earns all of the interest paid on the loan.”

In reviewing the motion to dismiss by the TIAA defendants, Judge J. Paul Oetken of the U.S. District Court for the Southern District of New York note that in order to survive a motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” He also noted that TIAA, the defendant here, had moved to dismiss for lack of Article III standing under Federal Rule of Civil Procedure 12(b)(1) and for failure to state a claim under Rule 12(b)(6). Specifically, TIAA contended that Plaintiff has failed to plausibly allege injury-in-fact, and that, in fact, the plaintiff was not actually injured because she actually saved money on fees by using TIAA, rather than Vanguard, to administer her loans. Indeed, Oekten noted that, according to TIAA’s calculations, Vanguard’s retirement loan program, which charges participants fixed fees, would have cost Plaintiff approximately $500-$600 more in total.

Proper Benchmarks?

That assertion notwithstanding, Judge Oekten noted that “because TIAA contests standing based on evidence beyond the pleadings,” at this stage “TIAA’s evidence of Vanguard’s fees is insufficient to “contradict [Plaintiff’s] plausible allegations.” More specifically, he concluded that “TIAA’s evidence that Vanguard’s fees would have been higher is not enough, standing alone, to negate Plaintiff’s allegations that TIAA’s fee structure caused her injury-in-fact.” Moreover, and as the plaintiff here asserted, “…Vanguard’s fees are not necessarily the proper baseline for evaluating whether TIAA’s fees were actually unreasonable, as Defendant has introduced no evidence that Vanguard’s more expensive fees are themselves ERISA-compliant.”

Judge Oekten noted that TIAA also moved to dismiss for failure to state a claim, contending that the plaintiff here “has not plausibly alleged that TIAA was an ERISA fiduciary with respect to its retirement loan program.” In considering the details of the program, specifically its ability to set and reset fees, Jdge Oekten noted that “the absence of a nexus between TIAA’s discretion over the Rate Schedule and the challenged fee structure precludes Plaintiff from establishing fiduciary status on this basis,” and that the plaintiff’s other attempts to establish fiduciary status “also fail for similar reasons.” He noted that, “in short, TIAA may have had some discretion to raise its own compensation by effectively increasing the ‘spread,’ but Plaintiff fails to allege that TIAA ever exercised such discretion, to Plaintiff’s detriment or otherwise,” and that “Counts I through IV, which are all asserted against TIAA as a fiduciary, must be dismissed.”

Nonfiduciary Breach?

However, Count V charged TIAA as a nonfiduciary, based on Washington University’s alleged breach of its fiduciary duty in agreeing to TIAA’s loan procedures. Here Judge Oekten noted that the plaintiff sought “disgorgement of the proceeds” of TIAA’s allegedly illegal retirement loan program and to “[e]njoin Defendant from … further engaging in transactions prohibited by ERISA” – and concluded that the plaintiff had alleged facts sufficient to support a claim.

Moreover, after outlining the case history that established the boundaries for these considerations, he noted that the plaintiff had identified two specific vendors, Charles Schwab and Vanguard (the latter of which Washington University also used as a retirement loan administrator until July 2016), which she said follow the “normal” procedure (i.e., do not require an asset transfer and do not compensate themselves from the interest earned by participants’ collateral) – but concluded that “these allegations are insufficient to state a claim for knowingly excessive compensation in violation of § 406(a)(1)(C) and § 408(b)(2).” He acknowledged the defendants’ point (as articulated in Sweda v. Univ. of Penn., E.D. Pa., No. 2:16-cv-04329-GEKP, 9/21/17) that “there is no prima facie reason to think that “asset-based fees,” like those charged by TIAA, are inherently more expensive for participants.

Prohibited Transaction?

Turning to the issue of a claim for equitable relief to redress TIAA’s alleged violations of § 406(a)(1)(D) (which prohibits fiduciaries from causing the plan to engage in a transaction “if [they] know[] or should know that such transaction constitutes a direct or indirect transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan”), and since the funds were deemed to be “plan assets” by Judge Oekten under the relevant regulation, and since he determined that the plaintiff has adequately alleged that the transfer of these assets to a party in interest was a prohibited transaction under ERISA, the claim survived the motion to dismiss.

And, ultimately, even though Judge Oetken rejected the notion that TIAA’s role in the loan program was that of a fiduciary, the claims against them for retirement plan mismanagement survived. He also gave the plaintiff here leave to file an amended complaint, “provided that she does so within 30 days.”

The case is Haley v. Teachers Ins. & Annuity Assoc. of Am., S.D.N.Y., No. 1:17-cv-00855-JPO, granting in part motion to dismiss 3/28/18.

Add Your Comments

One Comment

  1. Fred Bloodgood
    Posted April 4, 2018 at 2:52 pm | Permalink

    TIAA is notorious for their far from Industry Standard lack of Benefit sensitivity at the participant level of their Guaranteed and General account Investment offerings.
    their proving a 10 year payout option is not adequately communicated up front to unwary participants or Plan Sponsors .
    Such deceptive practices should be highlighted to the Marketplace !

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