The U.S. District Court for the Southern District of New York ruled this week to certify a sizable class of plaintiffs in the Employee Retirement Income Security Act (ERISA) lawsuit targeting two 403(b) retirement plans at New York University.
The claims in the case are similar to those filed against many other 403(b) retirement plans run by U.S. universities and colleges large and small. According to the third amended complaint—the one ruled on here—instead of using the NYU plans’ bargaining power to reduce expenses and exercising independent judgment to determine what investments to include in the plans, the defendants squandered that leverage away by allowing the plans’ conflicted third-party service providers—TIAA-CREF and Vanguard—to dictate the plans’ investment lineup, to link their recordkeeping services to the placement of investment products in the plans, and to collect unlimited asset-based compensation from their own proprietary products.
There are seven named plaintiffs, members of the NYU faculty and research staff, and with this week’s ruling these seven will represent a putative class of at least 20,000 individuals, defined as follows: “All participants and beneficiaries of the NYU School of Medicine Retirement Plan for Members of the Faculty, Professional Research Staff and Administration and the New York University Retirement Plan for Members of the Faculty, Professional Research Staff and Administration from August 9, 2010, through the date of judgment, excluding the defendant and any participant who is a fiduciary to the plans.”
The mechanics of these retirement plans and the participants’ allegations are examined in some depth in prior coverage of the initial filing of the case and the subsequent filing of multiple amended complaints. Considered in more depth in this decision are the requirements of what it takes to establish class certification and standing under ERISA’s strict terms.
As the court lays out, it is merely a “preponderance of evidence” standard against which a plaintiff seeking preliminary certification of a class must prove that its proposed class meets the requirements of ERISA Rule 23(a) and, if those requirements are met, that the class is maintainable under at least one of the subdivisions of ERISA Rule 23(b). Ruling precedence on these matters is given in two previous decisions, Wal-Mart Stores, Inc. v. Dukes (2011), and Teamsters Local 445 Freight Div. Pension Fund v. Bombardier Inc. (2008).
Because the plaintiffs here seek certification under Rule 23(b)(1), they had to prove the following, again merely by the preponderance of the evidence available at this still-early juncture: “(1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.”
Once this is established, Rule 23(b)(1) allows certification if the following condition(s) is also met: “Prosecuting separate actions by or against individual class members would create a risk of (A) inconsistent or varying adjudications with respect to individual class members that would establish incompatible standards of conduct for the party opposing the class; or (B) adjudications with respect to individual class members that, as a practical matter, would be dispositive of the interests of the other members not parties to the individual adjudications or would substantially impair or impede their ability to protect their interests.”
Per the Walmart case, plaintiffs here bear the burden of demonstrating affirmative compliance with the requirements of Rule 23. According to the district court decision, they have done this effectively. Without repeating all the detail available in the text of the decision, the basic conclusion of the court is that the participants amply establish that these 20,000-plus participants are numerous enough to make individual trials an impossibility, and that they are “common” and “typical” enough in their positioning with respect to the relevant questions of fact and law to make common remediation or rejection of the claims a proper outcome.
One quote from this numerosity/commonality/typicality deliberation certainly bears repeating, laying out in quite clear language what is really at stake here: “The core questions in this lawsuit are common to all participants—whether defendant breached its fiduciary duties by taking actions or failing to take actions that resulted in improperly high fees, and whether certain investment options were properly included. In addition, plaintiff has proffered sufficient facts supporting that the discovery at issue in this case will ‘generate common answers apt to drive the resolution of the litigation.’”
The decision goes into some detail when considering the defendants’ arguments that the plaintiffs here do not “adequately” represent the class they have successfully established.
“NYU and the co-defendants put forth three arguments in support of their assertion that the named plaintiffs are not adequate representatives,” the decision states. “First, NYU argues that plaintiffs’ Amended Complaint proposes a flat-fee payment system for the plans rather than a revenue-sharing system; as a result, the recordkeeper’s compensation would not change due to an increase in assets. Defendant contends that a flat-fee structure would create class conflicts, since members of the class with lower salaries than the named plaintiffs might not benefit from this type of payment structure, as $30 (or some other flat fee) might be more than they would pay in a revenue-sharing arrangement.”
The court is not much convinced: “The Amended Complaint does not simply propose this structure as the preferred outcome. Rather, it alleges that a flat fee structure does ‘not necessarily mean that every participant in the pan must pay the same $30 fee.’ Instead, the fiduciary could implement a ‘proportional asset-based charge,’ for which each participant pays the same percentage of his or her account balance. As such, the suggestion of a flat-fee system as one of several ways to bring the plans into compliance with ERISA does not, in and of itself, create a conflict between the named plaintiffs and other class members, as there are several variations of this system, some of which may not create conflicts. And in any case, this speculation on the part of NYU does not defeat adequacy, as it does not present a ‘fundamental’ conflict, per Denney v. Deutsche Bank AG (2006).”
NYU further argues that removing the CREF Stock and TIAA Real Estate Accounts from the Plans—two accounts that plaintiffs allege were imprudently included in the plans—would create class conflicts because some participants would be hurt by the funds’ removal. However, the court has ruled, “defendant here focuses on the merits of the breach of fiduciary duty claim. It argues: (1) that those funds are important for diversification, as they offer some features that other funds do not; and (2) the CREF Stock and TIAA Real Estate Accounts had strong returns at different points in time, and the variance in performance was beneficial for some participants. That may well be the case, but those arguments go to the merits of the funds’ inclusion in the plans and whether or not they were prudent inclusions. If, in fact, plaintiffs are correct that the inclusion of these funds was a breach of the duty of prudence, then no plan participant would have a legal interest in continuing to invest in a plan that was adjudged imprudent.”
Finally, NYU claims that the named plaintiffs are inadequate representatives because they are unaware of the facts underlying the dispute. For example, NYU relies on deposition testimony to demonstrate that a number of the named plaintiffs do not know what their investments are or how they have performed; what revenue sharing is; and whether NYU attempted to negotiate fees. Instead, the named plaintiffs rely on counsel for information.
The court rules simply on this matter that plaintiffs “are entitled to rely on their counsel for advice.” As long as the class representatives “fairly and adequately protect the interests of the class,” adequacy is satisfied.
The full text of the decision includes detailed discussion of the plaintiffs’ successful effort to meet the subsequent requirements of ERISA Rule 23(b)(1)—as well as consideration of some important issues of standing and ERISA’s statute of limitations, all of which the plaintiffs have overcome at this early juncture.