District Court Soundly Dismisses Washington University 403(b) Lawsuit
The court holds that bundling services or revenue sharing are common and acceptable investment industry practices that frequently inure to the benefit of ERISA plans.
The U.S. District Court for the Eastern District of Missouri, Eastern Division, has ruled against plaintiffs in a consolidated 403(b) lawsuit alleging a variety of breaches of the Employee Retirement Income Security Act (ERISA).
The case was initially filed in June 2017 and names as defendant Washington University in St. Louis, Missouri, alleging multiple violations of ERISA over the school’s selection and monitoring of its 403(b) plan investments, selection and monitoring of plan recordkeepers and the plan’s loan program. Of note, this lawsuit was consolidated with a second complaint similarly alleging that plan officials “utterly abdicated their fiduciary duties to act prudently and loyally” by turning the plan over to TIAA and Vanguard Group.
The consolidated complaint contends that because the marketplace for retirement plan services is competitive and the plan is large, Washington University has “tremendous bargaining power to demand low-cost administrative and investment management services and well-performing investment funds.” The complaint notes that the university’s plan has more than $3.8 billion in assets and more than 24,000 participants as of December 31, 2015.
According to the plaintiffs, one piece of evidence of a flawed fiduciary management process was “the inclusion of a dizzying array of 35 TIAA-CREF and more the 80 Vanguard investment options.” The complaint notes that of the 83 Vanguard funds available to participants, for 41 of those choices, the university has designated only the retail “investor” share class as available investment alternatives offered under the plans. Of the other 42 available Vanguard funds offered by the plans, either Admiral Shares are offered with substantially lower fees or the funds offer only one share class.
The ruling against the plaintiffs comes on the school’s motion to dismiss for failure to state a claim. The decision highlights the fact that plaintiffs objected to the defense’s inclusion in their motion to dismiss of some 30 exhibit documents detailing the 403(b) plan’s investment disclosures and operations. The plaintiffs argued that these documents should not be considered because they “are not referred to in the complaint, they are not central to plaintiffs’ claims, and they are not the types of documents for which judicial notice would be appropriate.”
The decision notes that the court generally would not at this stage consider matters outside the pleading standards set out by Rule 12(c)(d)—i.e., it would not consider these defense-provided documents. But at the same time, the court explains it is free to “consider matters of public record and materials that are necessarily embraced by the pleadings.” Because plaintiffs have not here contested the authenticity of any documents cited, and because plaintiffs’ consolidated complaint references returns data for the TIAA and Vanguard funds, the court deems it proper to considers such items as TIAA and Vanguard prospectuses, fact sheets, and the like.
From this starting point, the decision sides strongly with the defense.
“The court holds that plaintiffs fail to allege a breach of fiduciary duties based upon plan participants’ payment of purportedly excessive fees and recordkeeping fees,” the decision states. “Here, the consolidated complaint pleads no facts sufficient to raise a plausible inference that defendants took any of the actions alleged for the purpose of benefitting themselves or a third-party entity with connections to Wash U, at the expense of the plan participants, or that they acted under any actual or perceived conflict of interest in administering the plan. Instead, plaintiffs start with the false premise that just because the plan’s fees could have been lower that necessarily defendants’ breached their fiduciary duties.”
The decision states that plaintiffs “fail to allege that the process of choosing the investment options was flawed, other than a mere inference of fiduciary wrongdoing. These allegations are insufficient to allege a breach of fiduciary duties based upon excessive fees.”
The court further concludes that “the diverse selection of funds available to plan participants negates any claim that defendants breached their duties of prudence simply because cheaper funds were available.”
On the recordkeeping claims the court is equally skeptical.
“Courts have disallowed claims premised on a plan’s choice to allow recordkeepers to be paid on an asset-based basis instead of on a flat fee basis,” the decision explains. “This is a pure question of where the burden of recordkeeping costs should be placed—a question open to the discretion of a reasonable plan administrator. Likewise, plaintiffs provide no basis for removing the discretion afforded to plan administrators and mandating recordkeeping fee caps or single recordkeepers.”
The decision indicates that the CREF Stock Account and CREF Money Market Account were not, as plaintiffs allege, “locked in to the plan” and could in fact be removed due to performance concerns.
“Rather, these two options were merely bundled with the TIAA Traditional Annuity, and that bundle could be removed,” the decision says. “The court holds that bundling services or revenue sharing are common and acceptable investment industry practices that frequently inure to the benefit of ERISA plans. Therefore, the court holds that plaintiffs’ allegations regarding the purported locking in of any TIAA investment options does not state a claim for breach of fiduciary duty as a matter of law.”
Turning to more specific allegations that several funds on the menu underperformed, the court again voices skepticism.
“Initially, the court gives deference to plan administrators in their investment decisions,” the decision explains. “Moreover, even if these funds underperformed, plaintiffs have failed to state a cause of action under ERISA for their purported lack of performance. The court holds that it cannot isolate these two funds to determine whether defendants breached their fiduciary duties. The court further holds that plaintiffs’ claim against the TIAA Traditional Annuity also fails to state a claim for breach of fiduciary duty. As stated, plaintiffs complain that the TIAA Traditional Annuity requires that withdrawals occur over then annual installments and charges 2.5% for taking a lump-sum distribution (as opposed to annuity payments). However, plaintiffs’ complaints are misplaced, given that these features are inherent in a guaranteed fixed annuity fund.”
On the final counts pertaining to alleged prohibited transactions in the plan’s loan program, the court again concludes the complaint “fails to allege any factual allegations articulating a plausible violation of ERISA,” and thus the court grants defendants’ motion to dismiss on this basis. Emphasizing the point, the court confirms that ERISA specifically exempts participant loans from the prohibited-transaction rules.”
The full text of the lawsuit can be downloaded here.
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