A case involving allegations of a fiduciary breach related to a rollover recommendation provides some interesting perspectives on a number of operational issues.
Here plaintiffs John Carfora, Sandra Putnam, and Juan Gonzales (represented by Schlichter Bogard & Denton, LLP) have filed suit against Teachers Insurance Annuity Association of America (TIAA) and TIAA-CREF Individual & Institutional Services, LLC—“asserting a variety of claims under the Employee Retirement Income Security Act of 1974.”
The variety of claims notwithstanding, Judge Katherine Polk Failla of the U.S. District Court for the Southern District of New York said it was “predicated in large measure on the Court finding that Defendants were not ERISA fiduciaries during the relevant timeframe.” And, noting that she concurred with that conclusion, she granted the TIAA defendants motion to dismiss (Carfora v. Teachers Ins. Annuity Assn. of Am., 2022 BL 343104, S.D.N.Y., No. 1:21-cv-08384, 9/27/22).
Quick Summary
Along the way, she essentially ruled:
- That under the “old” fiduciary definition (the five-part test and Deseret letter) TIAA’s actions would not have been considered a fiduciary act.
- The “new” fiduciary definition (which set aside the Deseret letter and, while keeping the five-part test, allowed that rollover advice could be the first step in an ongoing relationship, and thus a fiduciary act) was not in effect during the period in question, and thus not applicable.
- Confirmed that a number of jurisdictions have consistently held that plan data is not a plan asset (and thus, its use didn’t make TIAA a fiduciary).
She explained that the plaintiffs here are current or former researchers and university professors who are participants in ERISA-governed defined contribution retirement plans. She further explained that TIAA "historically has heavily marketed to the higher education market,” and “for years, TIAA has provided recordkeeping functions for over 15,000 institutional clients, which clients' plans count over 5 million participants.” She further commented that alongside its recordkeeping services, TIAA also provides "TIAA-affiliated investment options in which participants can invest, including fixed and variable annuities and mutual funds,” as well as an individual advisory business.
Portfolio Advisor Program
She then noted that “beginning in 2011, TIAA became aware of the fact that its institutional retirement plan business faced two potentially existential threats”—specifically a loss of market share due to "aggressive competition from industry giants such as Vanguard and Fidelity,” and that TIAA’s “institutional business appeared to be losing favor with the baby-boomer generation, which continued to move its retirement assets to other providers.” All of which, she noted, meant that TIAA had projected that it would have negative asset flows by 2018 if it did not take action.
“Faced with this stark realization, TIAA sought to expand its individual advisory business, which commanded higher fees—and thus higher revenues—and could potentially attract new assets,” she wrote. The centerpiece of the strategy was to aggressively market Portfolio Advisor, a managed account program. And she noted that between 2011 and 2017, “as part of its efforts to expand the individual advisory side of the business, TIAA tripled the number of ‘wealth management advisors’ who were responsible for selling Portfolio Advisor services (‘Advisors’), from 300 to 900.”
TIAA next began cold-calling participants in TIAA-administered retirement plans, allegedly using information it had access to target prospects for the service. That led to “discovery” meetings, where “pain points” were uncovered, all of which was designed to lead to a conversation about a rollover to the Portfolio Advisor program[i] which the plaintiffs alleged was both poorer performing and more expensive than the investments in the employer retirement plan.
The Decision
After restating the legal requirements in considering a motion to dismiss (basically giving the party that is NOT seeking to dismiss the case the benefit of the doubt, and accepting their factual assertions as true, but requiring that they present a “plausible” case for injury.
Judge Failla explained that the plaintiffs here brought three claims under ERISA, based on “the premise that Defendants acted as ERISA fiduciaries towards Plaintiffs in connection with their solicitation of Plaintiffs into the Portfolio Advisor program.” She noted that the plaintiffs here “do not seriously dispute that their claims depend on whether TIAA is deemed a fiduciary”—leading her to decide whether TIAA was, in fact, an ERISA fiduciary.
Now, the plaintiffs acknowledged that TIAA is not a named fiduciary under their plans—so they looked to declare them as a “functional fiduciary provisions of ERISA to satisfy their threshold”—and they put forth three arguments. First that TIAA made various representations that it was a fiduciary, such that it should now be equitably estopped from denying fiduciary status, that TIAA “‘render[ed] investment advice for a fee by encouraging plan participants to roll over assets to Portfolio Advisor,’” and finally that TIAA exercised discretionary authority or control over the plans' management or administration “through its use of confidential participant information and through various product design decisions.”
And then Judge Failla proceeded to dismiss each in turn—primarily because she found none of the arguments made in support of those positions sufficient to make that case. But mostly she seemed drawn back to the five-part test—and found the facts presented came up short on those points.
‘Evolving DOL Guidance’
She spent some time discussing the “evolving DOL guidance” on the subject of the fiduciary definition, along the way noting that while the new(er) definition allowed for the notion that a rollover recommendation COULD be the first in an ongoing relationship, it didn’t have to be.
“How, then, should the Court interpret the investment advice fiduciary provisions in light of DOL's shifting interpretations?,” she asks. “There is no DOL interpretation binding the Court. To the extent the Deseret Letter had the power to persuade prior to 2020, such power is undermined by the change in interpretation by DOL. The soundest approach—one that neither creates unfair surprise nor places undue weight on DOL's now-rescinded advisory opinion—is to analyze the facts under the time-tested five-part test, using the "'traditional tools of construction'" and applying deference only "after having exhausted all of them.” And proceeded to “engage in its own interpretation of ERISA's statutory provisions and the regulations promulgated thereunder, taking into account, when appropriate, the reasoning of either the Deseret Letter or the Rule.”
She then noted that the plaintiffs had failed to demonstrate that TIAA rendered investment advice on a regular basis to the plan, viewing the advice to rollover to the managed account product as a single act. “The plain meaning of ‘regular’ runs counter to advisement related to a one-time decision, even if this decision is a consequential one,” she said. That the plaintiffs failed to establish that TIAA exercised control over plan assets, and that TIAA’s use of or access to participant information did not create a fiduciary relationship—as “multiple courts have found that participant information and the like does not fall under the definition of ‘plan assets’ (the term ‘plan assets’ extends to ‘money or invested capital, but does not extend to encompass any information that may potentially benefit a servicer of the plan,’” she said) and that TIAA’s product design decisions did not create a fiduciary relationship." Oh, and as the decision to rollover into the managed account platform by two of the plaintiffs (Carfora and Gonzales) was made beyond ERISA’s statute of limitations, she ruled that their claims were time-barred as well.
What This Means
In terms of precedent, perhaps not much. The suit questioned as fiduciary decisions actions that, at the time they took place, wouldn’t have been considered fiduciary actions. While it seems arguable that the recommendation to rollover to a managed account—which then results in what would seem to be an ongoing relationship, that’s not how this court viewed it. Mostly the case offers an interesting “take” on the shift in the fiduciary definition—and perhaps an appreciation for a new definition that levels the playing field on rollover recommendations between plan advisors and those who seek to “swoop in” and encourage participants to take their money out of the plan.
[i] Alongside such representations, TIAA instructed Advisors to employ a "hat-switching" strategy during the Consultative Sales Process that Plaintiffs allege was inherently misleading—advisors were told to wear a "fiduciary hat when acting as an investment adviser representative and a non-fiduciary hat when acting as a registered broker-dealer representative." This the plaintiffs argued was also “confusing to plan participants, who were unable to differentiate the standard of advice they were receiving from Advisors from one moment to the next.” The plaintiffs also argued that the incentive structure for these advisors was "fraught with conflicts of interest” that were undisclosed to participants, with “a variety of bonuses based on asset growth and meeting sales goals”—and they did NOT receive bonuses for keeping participants invested in their employer-sponsored plans, or for moving assets to self-directed IRAs. “In addition to these carrots, TIAA also employed sticks to encourage Advisors to sell Portfolio Advisor.” And, as if that weren’t enough, the plaintiffs allege that the performance of the managed account program was “lackluster” while at the same time costing more than their investments in the employer-sponsored plan. “Further, Advisors ‘misleadingly inform[ed] participants that if they did not roll over assets...their only other option was to manage their employer-sponsored [*5] plan accounts entirely by themselves.’”
