Brown University 403(b) Plans Suit Moves Forward

While many claims in a lawsuit challenging administration and fees for Brown University’s 403(b) plans were dismissed, a federal district court judge allowed several claims to move forward.

The lawsuit alleges fiduciaries approved a TIAA loan program that required collateral as security for repayment of the loan, charged “grossly excessive” fees for administration of the loan, and violated U.S. Department of Labor (DOL) rules for participant loan programs. The plaintiffs in the case conceded lack of standing on counts related to the loan program because they are not borrowers under the program; therefore, Chief Judge William E. Smith of the U.S. District Court for the District of Rhode Island dismissed these counts.

Smith also found that the plaintiffs’ complaint does not provide sufficient factual allegations to state a claim for breach of the duty of loyalty. Citing a decision in the Cassell v. Vanderbilt University case, Smith said, “Because these claims do not support an inference that defendants’ actions were for the purpose of providing benefits to themselves or someone else and did not simply have that incidental effect, the loyalty claims are dismissed.”

In Count I of their complaint, the plaintiffs suggest that Brown did not engage in a prudent process for evaluating and monitoring fees and expenses that TIAA and Fidelity charged to the plans in breach of its duty of prudence under the Employee Retirement Income Security Act (ERISA). They fault Brown for: offering too many investment options, including duplicative options, rather than a “core” lineup; using more than one recordkeeper; failing to employ a competitive bidding process with respect to recordkeeping; offering investment options that charged “multiple layers of expense charges;” and offering investment options that charged asset-based fees and used revenue sharing, instead of a per-participant rate.

Smith found the plaintiffs’ failure to rebut certain of Brown’s arguments with respect to the duty of prudence claims was enough to support dismissal. “First, by offering not one word in response to Brown’s Motion with respect to their allegations that the Plans offered investments with multiple layers of fees, Plaintiffs waive this aspect of their imprudence claim, he wrote in his opinion. “Likewise, Plaintiffs fail to respond and therefore abandon their claim that it was imprudent for Brown to use asset-based fees and revenue sharing.”

For a different reason, Smith dismissed the allegation that Brown was imprudent in offering a surplus of investment options and failing to feature a set of “core” investment options. He noted that courts have repeatedly rejected, as a matter of law, identical claims in factually analogous cases, and ERISA does not impose that fiduciaries limit plan participants’ investment options. Agreeing with decisions in the Henderson v. Emory University and Sacerdote v. New York University cases, Smith said offering too many investment options for participants does not suffice for a breach of ERISA’s duty of prudence.

Some duty of prudence claims survive

However, Smith found the plaintiffs’ allegation that a prudent fiduciary would have chosen one—rather than two—recordkeepers suffices to state a plausible claim. In addition, he said the plaintiffs’ claim that a prudent fiduciary in like circumstances would have solicited competitive bids plausibly alleges a breach of the duty of prudence. “Like courts that have considered analogous arguments by defendant-universities, the Court deems unpersuasive Brown’s point that ERISA does not per se require competitive bidding,” Smith wrote in his opinion. He also found that the plaintiffs allege specific facts to support their claim regarding recordkeeping fees, including identifying what, based on various factors including the recordkeeping market, “the outside limit of a reasonable recordkeeping fee for the Plan[s] would be . . .” Again citing other court decisions, Smith said that in any event, the question whether it was imprudent to pay a particular amount of recordkeeping fees generally involves questions of fact that cannot be resolved on a motion to dismiss.

In Count II of their complaint, the plaintiffs allege that rather than “engage in a prudent process for the selection and retention of plan investment options,” Brown selected “more expensive funds with inferior historical performance.” Specifically, the plaintiffs challenge Brown’s process with respect to the CREF Stock Account, the TIAA Real Estate Account, and the TIAA Traditional Annuity. Brown argues that because “hindsight and allegations of poor performance are all that Plaintiffs offer on their claim that Brown was imprudent in the selection and retention of the three TIAA annuity investment options about which Plaintiffs complain,” that their claim should be dismissed. In addition, Brown argues that underperforming funds is alone insufficient to allege that no prudent fiduciary would have made the same choices.

Smith found that to the extent Brown suggests otherwise, or presents different benchmarks to measure the plans’ investment performance, the claim raises factual issues that cannot be decided at the pleading stage. “Brown’s argument has been considered—and rejected—by courts considering near-identical circumstances,” Smith wrote, considering the Sacerdote case.

Finally, Smith concluded that a fuller record is necessary to resolve any statute-of-limitations problems Brown University raised in its motion to dismiss.