The U.S. District Court for the District of Massachusetts has issued a preliminary ruling on an Employee Retirement Income Security Act (ERISA) lawsuit alleging mismanagement and disloyalty on the part of Massachusetts Institute of Technology (MIT) defined contribution retirement plan fiduciaries.
Readers may recall how this suit was introduced alongside a series of others targeting big-ticket U.S. universities—all of them filed by Schlichter, Bogard & Denton seeking various damages and remedies for many tens of thousands of employees enrolled in the universities’ defined contribution (DC) retirement plans. The suits contend these universities, as ERISA fiduciaries, breached their duties under the law to protect the retirement assets of their employees and retirees. Common to all three complaints are allegations that each of these universities “breached their duties of loyalty and prudence under ERISA by causing plan participants to pay millions of dollars in unreasonable and excessive fees for recordkeeping, administrative, and investment services of the plans.”
In the MIT case, plaintiffs allege breaches of the ERISA duties of loyalty and prudence arising out of the plan’s inclusion of retail class options instead of institutional class options in the funds provided by Fidelity Investments. In addition, plaintiffs allege that Fidelity was paid excessive compensation for its recordkeeping services and that MIT never engaged in a competitive bidding process for those services. According to plaintiffs, the plan was structured to fund “an illicit kickback scheme whereby Fidelity received inflated fees at the expense of the plan’s participants in exchange for making donations to the MIT endowment.”
Carefully considering the arguments at hand, as well a report and recommendation from Magistrate Judge Marianne B. Bowler, the district court has “approved the dismissal of the duty of loyalty claim under §1104(a)(1)(B) in Count I but not the duty of prudence claim under §1104(a)(1)(A) in the same count.”
This was in fact the recommendation from Judge Bowler, as laid out in the district court order: “Magistrate Judge Bowler found that the conduct regarding the excessive management fees did not plausibly state a claim of violation of the duty of loyalty because plaintiffs’ theory was speculative. This court will accept and adopt that conclusion. Plaintiffs rely on untenable claims such as that Abigail Johnson, CEO of Fidelity, sits on MIT’s Board of Trustees. Plaintiffs do not allege that Ms. Johnson was involved with the plan, however, and she was not on the Board when Fidelity was selected as the investment provider.”
Important ERISA caveats
The district court decision spells out a number of key caveats impacting this type of ERISA litigation, explaining why it is dismissing some aspects of the various claims while permitting others to go to a full trial. As an example, the court makes the following distinction: “Defendants contend that MIT’s 2015 investment plan reconfiguration, which eliminated hundreds of options and retained only one Fidelity option out of 37, demonstrates that the duty of loyalty was not breached. That argument, although accepted by the magistrate judge, is discounted because ameliorative measures taken after disloyal actions do not absolve defendants of their breach.” This line of thinking stems directly from Tussey v. ABB, in which the Eight U.S. Circuit Court of Appeals concluded that although the fiduciaries “did not always favor Fidelity as much as they could, or seize every opportunity to send Fidelity more of the participants’ money such conduct does not satisfy one’s fiduciary duties.” Nevertheless, the district court will accept and adopt the recommendation to dismiss the loyalty claim in Count I as speculative.
The district court’s order continues by noting that Magistrate Judge Bowler found the allegations with respect to the excessive management fees plausibly state a claim for breach of the duty of prudence. This district court “will accept that conclusion.”
“Reading the amended complaint in plaintiffs’ favor, they plausibly allege that defendants failed to obtain identical lower-cost investment options,” the decision states. “Defendants dispute that those options were identical but, at this stage, plaintiffs’ allegations state a claim. If defendants did, in fact, include higher fee options when identical lower fee options were available, they failed to act with the care, skill and prudence required by ERISA. The court will accept and adopt the magistrate judge’s recommendation that the prudence claim in Count I may proceed.”
Turning to some of the additional allegations, Magistrate Judge Bowler recommended dismissal of the duty of loyalty claim under §1104(a)(1)(B) in Count II but not the duty of prudence claim under §1104(a)(1)(A) in the same count. “The district court will accept and adopt that recommendation,” the decision confirms. Further, Magistrate Judge Bowler “recommended denying defendants’ motion to dismiss plaintiffs’ claim for a prohibited transaction involving assets of the plan under §1106(a)(1)(D). She recommended dismissing the §1106(a)(1)(C) claim arising from mutual funds in the Plan but allowing the claim as to non-mutual fund options to proceed. The district court will reject the former recommendation but accept and adopt the latter.”
Additional details and argumentation on claims that will be dismissed versus allowed are available in the text of the district court order, here.