The U.S. District Court for the District of Massachusetts has moved forward most claims in 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.
However, U.S. District Judge Nathaniel M. Gorton affirmed a motion to dismiss a claim alleging a prohibited transaction between MIT and Fidelity Investments.
The underlying claims in the suit are for a breach of the duty of prudence (failure to monitor, imprudent investment lineup and excessive recordkeeping fees) and prohibited transactions in violation of ERISA.
As background in the case, prior to July 2015, the plan consisted of four tiers of investment options. Most relevant to the claims at issue is Tier 3, the “MIT Investment Window,” which offered a wide range of investment products and was designed to give individuals with experience conducting investment research a large degree of choice. In July 2015, the plan underwent a major reorganization removing hundreds of mutual funds from Tier 3 and eliminating all but one Fidelity fund. In essence, the plan committee eliminated Tier 3 and expanded Tier 2 to include 37 core options.
Citing a U. S. Supreme Court decision in Tibble v. Edison International, Gorton said an ERISA fiduciary has an ongoing “duty to monitor trust investments and remove imprudent ones” and must review investments at “regular intervals.” With respect to MIT’s duty to monitor, which falls under the general duty of prudence, plaintiffs allege two kinds of breaches regarding MIT’s process for monitoring the plan and MIT’s inclusion of specific underperforming or excessively risky funds.
According to the court order, the plaintiffs assert that MIT’s process for evaluating investments was deficient and lacked due diligence in that the defendants ignored relevant advice from consultants and outside counsel, failed to institute a robust policy to monitor investment alternatives, and before July 2015, failed to make necessary changes to the MIT Investment Window. The defendants respond that MIT’s investment committee is composed of a variety of MIT-affiliated economic experts who diligently executed their duties by collecting data on the performance of the investment window, maintaining a “watch-list” of potentially underperforming funds, and soliciting and duly considering independent advice. They also point to the 2015 reorganization of the plan as clear evidence of the committee’s robust deliberative process and ability to implement logical adjustments.
Gorton found that with respect to the issue of whether MIT met its duty of prudence regarding its process for monitoring, the parties have set forth compelling and competing narratives. On one hand, the plaintiffs submit that MIT’s lack of action and failure to implement outside advice demonstrates its failure adequately to discharge its duty to monitor. The defendants rejoin that their monitoring strategy was reasonable under the circumstances, appropriately deliberative and well in line with its duty and industry practice. “Thus, because neither party has demonstrated as a matter of law that MIT did or did not act prudently, defendant’s motion for summary judgment with respect to the monitoring claims of Count I will be denied,” Gorton wrote in his order.
The plaintiffs, relying on expert testimony, also allege that the University retained several kinds of imprudent and underperforming funds in the plan including regional and sector funds, funds without sufficient performance history and target-date funds. They assert that if MIT had acted prudently, those funds would have been removed or replaced. The defendants dispute those assertions with expert testimony of their own and evidence regarding industry practice.
Gorton decided, “The debate over whether certain kinds of funds should have been included in the plan is a material factual dispute that will be preserved for trial. Accordingly, defendants’ motion for summary judgment with respect to the specific funds claim in Count I will be denied.”
Regarding the claim about excessive recordkeeping fees, Gorton explained that in a revenue-sharing system, the recordkeeper retains some of the investment income of the retirement plan to satisfy the plan’s administrative expenses. In Count II, the plaintiffs claim that the plan was subject to excessive recordkeeping fees in violation of ERISA’s duty of prudence because MIT knew that Fidelity’s recordkeeping fees exceeded the industry standard and MIT did nothing to reduce the fees to the market rate. They assert that MIT’s failure to solicit a request for proposal (RFP), which allegedly would have exerted competitive pressure on Fidelity, demonstrates a clear lack of prudence and that the defendants did not leverage the plan’s size as a bargaining strategy to reduce fees.
The defendants proffer contrary expert testimony that MIT’s fees were well within industry standard, especially when compared to similar university and corporate plans. They contend that the plan committee maintained adequate procedures to constrain costs and succeeded in successfully negotiating revenue sharing rebates from Fidelity, their 2014 restructuring of Fidelity’s compensation to a yearly per-participant flat rate of $33 is clear evidence that MIT took concrete steps to control recordkeeping fees, and ERISA does not rigidly require a fiduciary to submit bids for an RFP periodically because an RFP is just one of many ways to discharge its monitoring duty.
Similar to Count I, Gorton found that the opinions of the parties’ experts as to the proper industry protocol and the amount of fees that should be considered reasonable are in stark contrast. Both parties also present competing narratives surrounding the decision not to conduct an RFP.
“Because those disputes are more than superficial, the Court concludes that they are best resolved at trial. Viewing the entire record in the light most favorable to the nonmoving party, there are genuine issues of material fact as to whether defendants breached their duty of prudence with respect to recordkeeping fees. Accordingly, defendants’ motion for summary judgment on Count II will be denied,” Gorton wrote.
The plaintiffs also allege that MIT failed to monitor its appointed fiduciaries. Gorton said that ordinarily, a duty to monitor other fiduciaries is derivative of the plaintiffs’ other claims. “Thus, because the parties dispute the alleged underlying breach of fiduciary duty claims, plaintiffs’ derivative claims that defendants breached their duty to monitor will also be preserved for trial,” he wrote.
Separate from their claims for breach of the duty of prudence, the plaintiffs allege that defendants breached their statutory duty under ERISA Section 1106(a)(1), which prohibits certain transactions between a plan and a “party in interest.” Gorton found that the plaintiffs have failed to proffer any concrete evidence of self-dealing or disloyal conduct. “The Court is not convinced that plaintiffs’ non-mutual fund claims are more than conclusory.”
Moreover, Gorton said the court now finds that defendants’ non-mutual fund options fall under an exception to Section 1106. He explained that Section 1106 is subject to a number of exceptions, including Section 1108(b)(8) which exempts prohibited transactions where “the bank, trust company, or insurance company receives not more than reasonable compensation.”
In support of its position, MIT cites expert testimony stating that the expense ratios of the plan’s non-mutual fund options were comparable to or less expensive than fees of similar investments during the class period. The plaintiffs offer no rebuttal and simply rejoin that the fees on the non-mutual fund options add to the already unreasonable recordkeeping and administrative fees alleged in Count II.
“In short, plaintiffs have proffered no evidence that the fees specific to the non-mutual fund options were unreasonable or not subject to the exception in Section 1108(b)(8). Accordingly, MIT’s motion for summary judgment with respect to plaintiffs’ Section 1106(a) claim will be allowed,” Gorton wrote.
The prohibited transaction claim had previously been dismissed along with other claims recommended to be dismissed by a Magistrate Judge. However, the plaintiffs in the case filed an amended complaint reiterating their claims. Upon the Magistrate Judge’s recommendation, the court denied the request for a jury trial, which led to the recent motion for summary judgment by the MIT defendants.Gorton ordered that a pre-trial conference will be held September 11, and the bench trial will commence on September 16.