Court Recommendation Highlights Difficulty in Consolidating 403(b) Providers

U.S. Magistrate Judge Stewart D. Aaron of the U.S. District Court for the Southern District of New York has recommended a district court judge deny Columbia University’s motions to dismiss claims in the lawsuit as well as to throw out some testimony by plaintiffs’ expert witnesses.

The lawsuit is now a consolidation of two that have been filed against the university alleging plan fiduciaries allowed the plan to maintain excessively high fees for investments, administration and recordkeeping. According to the recent court document, many claims have been dismissed and the suit has been certified as a class action. The remaining claims concern the allegation that by not consolidating recordkeepers, participants are paying excessive fees. Columbia University’s two plans in question are recordkept by TIAA and Vanguard.

Columbia argued that it is entitled to summary judgment because “[t]he undisputed facts demonstrate that Columbia evaluated recordkeeper consolidation, decided to consolidate from three recordkeepers to two, and was not required to consolidate to a single recordkeeper. According to Columbia, it began assessing “the wisdom of consolidating to a single recordkeeper” in 2010 and “decided consistently that such an action was not in the interests of the plans’ participants.”

However, the plaintiffs disputed that the emails cited by Columbia show actual consideration of consolidation and instead argued that the evidence shows that Columbia continually put off the issue despite being aware that consolidation was a way to reduce fees.

For example, they contended that the documents from the retirement committee cited by Columbia refer to an offer by TIAA to reduce prices by becoming the single recordkeeper, but that there are no documents showing that TIAA’s offer was discussed or considered at that time. The plaintiffs also pointed to evidence that TIAA could recordkeep all the Vanguard funds in the plans as early as 2004 or 2005, but that Columbia did not obtain a quote from TIAA regarding the cost savings that could be achieved through a single recordkeeper until 2014.

According to Aaron, there is a genuine issue of material fact as to whether Columbia could have consolidated with any recordkeeping provider other than TIAA. The university contended that no company other than TIAA could provide recordkeeping for TIAA’s annuities, but the plaintiffs pointed to evidence from expert testimony that there are other recordkeepers that regularly recordkeep other vendors’ fixed annuities. “It is a close question as to whether this evidence is sufficient to create an issue of fact, as Plaintiffs have not pointed to any other vendor who actually has recordkept TIAA annuities,” Aaron noted.

The plaintiffs also argued that, even if another vendor could not recordkeep TIAA annuities, Columbia could have “mapped” TIAA annuities to other investments. They cited that if TIAA assets could be mapped to other investments, a reasonable fee for the plans’ would be lower than the Vanguard fees.

Columbia argued that this evidence is meaningless because the individual TIAA annuity contracts prevented mapping, but Aaron found that there is a genuine issue of material fact as to whether TIAA assets could be mapped to other investments. While plan documents state that the plan administrator had the right to eliminate a funding vehicle (by transferring those investments to a successor funding vehicle) only “to the extent permitted by the funding vehicle,” the plaintiffs pointed to testimony from a TIAA corporate representative that he could not identify any provision of the applicable contracts that prevented mapping. In addition, the parties disputed whether Columbia could have mapped TIAA annuities by switching to group annuity contracts beginning in 2005 or 2006.

For these reasons, Aaron found that there are genuine issues of material fact as to whether Columbia acted prudently throughout the class period by not consolidating to a single recordkeeper.

The plaintiffs also contended that Columbia breached its duty by failing to solicit competitive bids when it was standard industry practice to conduct a request for proposals (RFP) every three to five years. In support of their motion to dismiss, Columbia argued that it was not required to conduct formal competitive bidding and the plaintiffs have not shown how such processes could have resulted in materially lower fees.

Columbia contended that the plaintiffs’ attempt to show breach by pointing to standard industry practice is untethered from the facts facing Columbia in 2010, at the beginning of the class period. At that time, more than 60% of the plans’ assets were invested in TIAA annuities. Columbia argued that an RFP would have been meaningless with respect to a large portion of the plans’ assets, i.e. the TIAA annuities. Therefore, it made a “conscious decision” to use benchmarking and an RFI process instead of an RFP.

Aaron said he recognizes that Columbia’s relationship with TIAA as of 2010 may have been “akin to a hostage-type situation.” As a result, even though Columbia realized its fees were “too high,” it may have had limited options to reduce them.

Despite that, Aaron found that the plaintiffs have adduced evidence that Columbia paid excessive fees as a result of its failure to conduct an RFP in or after the start of the class period in 2010. The plaintiffs cited evidence that, once Columbia conducted an RFI, in late 2017 to early 2018, TIAA lowered its fee by more than half per participant and Vanguard lowered its fee by over 25% per participant. Based on this evidence, Aaron found genuine issues of material fact as to whether Columbia breached its duty and caused a loss to the plans by not conducting competitive bidding earlier in the class period.

He also found that the plaintiffs have adduced evidence from which a fact-finder could conclude that the alleged breaches caused a loss to the plans.

Aaron’s recommendation is here.