Participants in the New York University and related plans are making a second attempt to sue fiduciaries for excessive fees.
After a federal district court judge found most claims in an earlier complaint were not plausibly alleged by the plaintiffs, they filed a second complaint in the U.S. District Court for the Southern District of New York. This case was filed against NYU Langone Hospitals, NYU Langone Health Systems, the retirement plan committee, and several named defendants.
As with the first case, which included the university’s Faculty Plan, the participants allege that instead of using the plans’ bargaining power to reduce expenses and exercising independent judgment to determine what investments to include in the plans, the defendants squandered that leverage by allowing the plans’ conflicted third-party service providers—TIAA-CREF and Vanguard—to dictate the plans’ investment lineup, to link its recordkeeping services to the placement of investment products in the plans, and to collect unlimited asset-based compensation from their own proprietary products.
In the new complaint, the plaintiffs attempted to offer more evidence that their claims were plausible.
For example, previously, U.S. District Judge Katherine B. Forrest dismissed all of the plaintiffs’ loyalty claims, finding that the plaintiffs failed to plead sufficient facts to support the loyalty-based claims. “A plaintiff does not adequately plead a claim simply by making a conclusory assertion that a defendant failed to act ‘or the exclusive purpose of’ providing benefits to participants and defraying reasonable administration expenses; instead, to implicate the concept of ‘loyalty,’ a plaintiff must allege plausible facts supporting an inference that the defendant acted for the purpose of providing benefits to itself or someone else,” she wrote in her opinion.
She noted that plaintiffs’ allegations are principally based on NYU purportedly allowing TIAA-CREF and Vanguard to include their proprietary investments in the plans without considering potential conflicts, which favored TIAA-CREF’s and Vanguard’s own interests through the provision of allegedly bundled services. “As pled, these allegations do not include facts suggesting that defendant entered into the transaction for the purpose of (rather than merely having the effect of) benefitting TIAA-CREF,” Forrest wrote in her opinion.
Funds offered for the benefit of recordkeepers
As noted in both complaints, TIAA-CREF offered its products and services strictly on a bundled basis. If a plan offers the TIAA Traditional Annuity, TIAA-CREF required that the plan also offer the CREF Stock and Money Market account, and to also use TIAA as recordkeeper for its proprietary products. The new complaint says TIAA’s financial interests were also served insofar as TIAA was able to use its position as recordkeeper to obtain access to the plans’ participants, acquiring information about their ages, length of employment, contact information, the size of their accounts, and choices of investments, and then used this information for its benefit in marketing lucrative investment products and wealth management products to participants as they neared retirement and before retirement. For this argument, they cite multiple recent reports in the New York Times.
In addition, the complaint states, “By allowing the Plans to enter such a bundled arrangement with TIAA-CREF, Defendants agreed to lock the Plans’ participants into funds which Defendants did not analyze. It can never be prudent to lock funds in a plan for the future and to keep them in because of recordkeeping. Defendants thus failed to discharge their duty to independently evaluate whether each investment option was prudent for the Plans, and to determine whether the use of TIAA as a plan recordkeeper was prudent, reasonably priced, and in the exclusive interest of participants. Instead of acting solely in the interest of participants, Defendants allowed TIAA’s financial interest to dictate the Plans’ investment selections and recordkeeping arrangement.”
The plaintiffs also say that because the defendants allowed the CREF Stock to be locked into the plans, they could not satisfy their duty to remove investments that are no longer prudent within a reasonable time. “As a result of Defendants’ breach in allowing CREF Stock to be retained in the Plans because TIAA-CREF demanded it and not based on an independent and ongoing assessment of the merits of the option, the Plans suffered massive losses compared to prudent alternatives,” the lawsuit says.
Plaintiffs also note the TIAA Traditional Annuity has severe restrictions and penalties for withdrawal if participants wish to change their investments in the plans. For example, some participants who invest in the TIAA Traditional Annuity must pay a 2.5% surrender charge if they withdraw their investment in a single lump sum within 120 days of termination of employment. The only way for these participants to withdraw or change their investment in the TIAA Traditional Annuity is to spread the withdrawal over a ten-year period, unless this substantial penalty is paid. Thus, any of these participants who wish to withdraw their savings without penalty can only do so over ten years.
Plaintiffs also allege that some expenses charged to participants were not related to services provided by the recordkeepers and are unnecessary, such as the administrative fee assessed on each variable annuity option. It is charged as a percentage of assets, rather than a flat fee per participant. As a result, as the growth in the plans’ assets outpaced the growth in participants, the fees paid to TIAA-CREF likewise increased even though the services provided did not increase at the same rate, resulting in further unreasonable compensation.
As another example, the plaintiffs say distribution expenses are charged for services performed for marketing and advertising of the account to potential investors. These services provide no benefit to plan participants and are wholly unnecessary, and being charged for these expenses causes a loss of retirement assets with no benefit.
The recordkeeping arrangements
Forrest also previously ruled that merely having a contractual arrangement for recordkeeping services does not, as a matter of law, constitute a breach of the duty of prudence—to support a claim on this basis, plaintiff must make a plausible factual allegation that the arrangement is otherwise infirm. The plaintiffs attempt to support their claim by adding a series of assertions that alternative recordkeepers—with whom NYU was allegedly precluded from contracting—could have provided “superior services at a lower cost.” But, Forrest said if this fact alone supported imprudence, the mere entry into the market of a lower-cost and superior provider would lead to a breach of fiduciary duty. “This is not the law,” she wrote.
Related to this the complaint says the retirement committee’s own publicly-available admissions unequivocally concede that the plans’ structure was imprudent and caused plan losses. Specifically, in 2009, the retirement committee recognized that in order to leverage the plans’ $3 billion in assets, improve the plans’ administrative efficiency and reduce costs, and offer a “best in class fund lineup,” it “need[ed] to streamline and reduce the fund lineup and select one vendor as sole recordkeeper.” Moreover, the retirement committee readily acknowledged that an unbundled platform was preferable to the plans’ “bundled” arrangement. It also admitted that plan consolidation would enable the plans to obtain “better share classes yielding higher returns,” which would “result in significantly lower fee structures for the participant.”
Yet, according to the complaint, more than seven years later, the defendants still have not taken the action it recognized was “needed” as of 2009. In an October 13, 2016, meeting regarding the plans—after the filing of the previous lawsuit that challenged the plans’ use of multiple recordkeepers and duplicative options—the retirement committee admitted it had still not met the goal of “reducing duplication and fees.”
The complaint adds that experts in the recordkeeping industry with vast experience in requests for proposals and information for similar plans have determined the market rate that the plans likely would have been able to obtain had the fiduciaries put the plans’ recordkeeping services out for competitive bidding would be no more than $840,000 in the aggregate for both plans combined (a rate of no more than approximately $35 for each participant in the plans per year.
Using lower-cost fund share classes
Forrest also previously said the plaintiffs’ identification of funds for which NYU included a higher-cost share class in the plans instead of an identified available lower-cost share class of the “exact same mutual fund option” does not constitute evidence of imprudence.
The complaint says that because the only difference between the various share classes is fees, prudent fiduciaries view higher-cost share classes as imprudent, because using a higher-cost share class results in the plan paying wholly unnecessary fees. “Because there is no prudent reason to pay a higher cost when the same fund is available at a lower cost, prudent fiduciaries of multi-billion dollar defined contribution plans obtain the lowest-cost share class available to the plan,” the complaint says. It also cites an article written for PLANSPONSOR by attorney Fred Reish of Drinker, Biddle and Reath, that says, “The failure to understand the concepts and to know about the alternatives could be a costly fiduciary breach.”
The complaint points out that given that defined contribution plan fiduciaries are held to the standard of a knowledgeable financial expert, if a service provider or consultant recommends a particular share class, a fiduciary cannot blindly accept that recommendation at face value, but instead must review the fund’s prospectus to determine if a lower-cost version of the same fund is available, to avoid saddling the plan with unnecessary fees.
In addition, it notes that even if a jumbo plan does not meet the minimum investment thresholds for an institutional share class, fund companies will routinely waive those minimums for billion dollar plans if merely requested, particularly if the plan’s total investment in the investment provider’s platform is significant. “Therefore, Defendants knew or should have known that investment providers would have made lower-cost share classes available to the Plans if Defendants had asked,” the complaint states.“This demonstrates a sustained failure of process on the part of the Retirement Committee to ensure that each option in the Plans was prudent.”
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