TIAA Faces Suit Over 403(b) Plan Participant Loans

A new lawsuit argues the practices used by the Teachers Investment and Annuity Association (TIAA) to credit portions of interest payments made by participants on loans taken from their own retirement accounts back to the firm—rather than to the borrowing participant—violate the Employee Retirement Income Security Act (ERISA).

The complaint, which names as defendant the Teachers Investment and Annuity Association, was filed in the U.S. District Court for the Southern District of New York. It seeks to recover money that TIAA “unlawfully took” from retirement accounts similarly situated in the Washington University Retirement Savings Plan and across its U.S. business.

Background information included in case documents shows the lead plaintiff borrowed money from her retirement account on four separate occasions. She has completely repaid two of the loans, she claims, plus interest, and is currently repaying the other two loans. All of the interest the plaintiff paid in connection with those loans “should have been credited to plaintiff’s account,” the suit argues.

According to the compliant, TIAA did not credit the full amount of paid interest to plaintiff’s account and instead “credited a smaller amount of interest to her account and kept the remainder for itself.”

The allegations go further and suggest the conduct at issue is systematic. “Defendant is retaining interest paid by similarly situated investors across the country,” the suit contends. “The amount of defendant’s ill-gotten gains exceeds $50 million per year.”

The action cites violations of ERISA Sections 502(a)(2) and 502(a)(3), along with the corresponding sections in the U.S. Code. 

NEXT: Examining the allegations 

The chain of events leading to the suit is recounted as follows by the plaintiff, who took four loans from her Washington University Plan individual account. The suit takes pains to argue that retirement plan loans are a normal and even healthy part of retirement planning, making the roundabout case that taking a loan from a retirement plan account is actually a positive for retirement security if it occurs before a market selloff.  

“Plaintiff took the first loan on May 10, 2011 in the principal amount of $ 1,612.01. The loan carried an interest rate of 4.42%. She repaid the loan in full on August 29, 2014. Plaintiff took the second loan on January 8, 2013 in the principal amount of $1,000.00. That loan carried an interest rate of 4.22%. She repaid the loan in full on March 10, 2015. Plaintiff took the third loan on September 2, 2014 in the principal amount of $8,500. That loan has a variable interest rate that is currently set at 4.44%. Plaintiff is in the process of paying off the third loan. Plaintiff took the fourth loan on March 17, 2015 in the principal amount of $7,500. The fourth loan has a variable interest rate that is currently set at 4.17%. Plaintiff is in the process of paying off the fourth loan.”

The case goes on to suggest the way interest was tracked/credited in the loan program violated ERISA’s standards of loyalty.

“Ordinarily, when a plan participant borrows from a plan account, the participant is deemed to have invested a portion of his or her account in the loan,” plaintiff suggests. “The loan proceeds are derived from liquidating the participant’s investments, and the loan effectively becomes a fund in which the participant has invested. As an example, suppose that a participant has a current plan account balance of $60,000, allocated equally among three different mutual funds, Fund A, Fund B, and Fund C, and the participant elects to borrow $6,000 from the plan account. The plan trustee will liquidate $2,000 from each of the three investment funds and will distribute the $6,000 to the participant in exchange for a note signed by the participant, obligating the participant to repay the loan at a stated rate of interest.”

The plaintiff argues that this is how many firms process loans, citing specifically the process in place at Charles Schwab. As the case lays out, the fact the plan (as with many TIAA clients) invests heavily in annuities complicates the picture.

“[TIAA] does not follow this loan process,” the argument continues. “Instead, defendant requires a participant to borrow from defendant’s general account rather than from the participant’s own account. In order to obtain the proceeds to make such a loan, defendant requires each participant to transfer 110% of the amount of the loan from the participant’s plan account—in our example, Fund A, Fund B, and Fund C—to defendant’s ‘Traditional Annuity,’ as collateral securing repayment of the loan. The Traditional Annuity is a general account product that pays a fixed rate of interest, currently 3% … The Traditional Annuity is a general account product, which means that all of the assets are held in defendant’s general account and are owned by defendant. Therefore, defendant also owns all the assets transferred to its general account to ‘collateralize’ the participant loan.”

NEXT: Claims for damages 

The plaintiff goes on to suggest that “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, 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 … As noted above, plaintiff currently has two outstanding loans from her Washington University Plan account. The first loan bears a current interest rate of 4.44%, and the second bears a current interest rate of 4.17%. The interest rate for both loans, in another break from standard plan loan policy, is variable.”

Allegations continue: “Defendant has engineered a retirement loan process that enables it to earn additional income at the expense of retirement plan participants equal to the spread between the loan interest rate paid by participants and the interest rate received by participants for investment in the Traditional Annuity (or, now, a Retirement Loan certificate). The loan process that is the subject of this lawsuit is the epitome of self-dealing.”

The text of the lawsuit goes on to lay out in detail the TIAA loan processing practices as understood by the plaintiff, accusing the firm of permitting a number of conflicts impermissible under ERISA. Plaintiff is seeking class action status “on behalf of the Washington University Plan and all other similarly situated retirement plans that are serviced by defendant and that offer participant loans.” Such a proposed class includes hundreds if not thousands of 403(b) plans.

Plaintiff asks the district court judge to “declare that defendant breached its fiduciary duties to plaintiff and the class; enjoin defendant from further violations of its fiduciary responsibilities, obligations, and duties and from further engaging in transactions prohibited by ERISA; order that defendant restore to plaintiff and the class all losses resulting from its serial breaches of fiduciary duty; award plaintiff reasonable attorney’s fees and costs of suit incurred herein … and/or for the benefit obtained for the class; order defendant to pay prejudgment interest; and award such other and further relief as the court deems equitable and just.”

A TIAA spokesperson shared the following statement with PLANSPONSOR regarding the complaint: “This case is without merit and all allegations of wrongdoing are unfounded. The participant loan services we provide are for the benefit of participants and beneficiaries, and are fully compliant with ERISA. We will vigorously defend against these claims.” 

The full text of the compliant is here.