TIAA Loan Practices Questioned in Latest ERISA Lawsuit

A participant who drew four loans from a retirement account over the years argues her provider inappropriately kept portions of interest payments that should have been credited back to her account. 

A new lawsuit argues the practices used by the Teachers Investment and Annuity Association (TIAA) to credit portions of interest payments made by participants on loans taken from their own retirement accounts back to the firm—rather than to the borrowing participant—violate the Employee Retirement Income Security Act (ERISA).

The complaint, which names as defendant the Teachers Investment and Annuity Association, was filed in the U.S. District Court for the Southern District of New York. It seeks to recover money that TIAA “unlawfully took” from retirement accounts similarly situated in the Washington University Retirement Savings Plan and across its U.S. business.

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Background information included in case documents shows the lead plaintiff borrowed money from her retirement account on four separate occasions. She has completely repaid two of the loans, she claims, plus interest, and is currently repaying the other two loans. All of the interest the plaintiff paid in connection with those loans “should have been credited to plaintiff’s account,” the suit argues.

According to the compliant, TIAA did not credit the full amount of paid interest to plaintiff’s account and instead “credited a smaller amount of interest to her account and kept the remainder for itself.”

The allegations go further and suggest the conduct at issue is systematic. “Defendant is retaining interest paid by similarly situated investors across the country,” the suit contends. “The amount of defendant’s ill-gotten gains exceeds $50 million per year.”

The action cites violations of ERISA Sections 502(a)(2) and 502(a)(3), along with the corresponding sections in the U.S. Code. 

NEXT: Examining the allegations 

The chain of events leading to the suit is recounted as follows by the plaintiff, who took four loans from her Washington University Plan individual account. The suit takes pains to argue that retirement plan loans are a normal and even healthy part of retirement planning, making the roundabout case that taking a loan from a retirement plan account is actually a positive for retirement security if it occurs before a market selloff.  

“Plaintiff took the first loan on May 10, 2011 in the principal amount of $ 1,612.01. The loan carried an interest rate of 4.42%. She repaid the loan in full on August 29, 2014. Plaintiff took the second loan on January 8, 2013 in the principal amount of $1,000.00. That loan carried an interest rate of 4.22%. She repaid the loan in full on March 10, 2015. Plaintiff took the third loan on September 2, 2014 in the principal amount of $8,500. That loan has a variable interest rate that is currently set at 4.44%. Plaintiff is in the process of paying off the third loan. Plaintiff took the fourth loan on March 17, 2015 in the principal amount of $7,500. The fourth loan has a variable interest rate that is currently set at 4.17%. Plaintiff is in the process of paying off the fourth loan.”

The case goes on to suggest the way interest was tracked/credited in the loan program violated ERISA’s standards of loyalty.

“Ordinarily, when a plan participant borrows from a plan account, the participant is deemed to have invested a portion of his or her account in the loan,” plaintiff suggests. “The loan proceeds are derived from liquidating the participant’s investments, and the loan effectively becomes a fund in which the participant has invested. As an example, suppose that a participant has a current plan account balance of $60,000, allocated equally among three different mutual funds, Fund A, Fund B, and Fund C, and the participant elects to borrow $6,000 from the plan account. The plan trustee will liquidate $2,000 from each of the three investment funds and will distribute the $6,000 to the participant in exchange for a note signed by the participant, obligating the participant to repay the loan at a stated rate of interest.”

The plaintiff argues that this is how many firms process loans, citing specifically the process in place at Charles Schwab. As the case lays out, the fact the plan (as with many TIAA clients) invests heavily in annuities complicates the picture.

“[TIAA] does not follow this loan process,” the argument continues. “Instead, defendant requires a participant to borrow from defendant’s general account rather than from the participant’s own account. In order to obtain the proceeds to make such a loan, defendant requires each participant to transfer 110% of the amount of the loan from the participant’s plan account—in our example, Fund A, Fund B, and Fund C—to defendant’s ‘Traditional Annuity,’ as collateral securing repayment of the loan. The Traditional Annuity is a general account product that pays a fixed rate of interest, currently 3% … The Traditional Annuity is a general account product, which means that all of the assets are held in defendant’s general account and are owned by defendant. Therefore, defendant also owns all the assets transferred to its general account to ‘collateralize’ the participant loan.”

NEXT: Claims for damages 

The plaintiff goes on to suggest that “because the participant loan is made from defendant’s general account, the participant is obligated to repay the loan to defendant’s general account, and the general account earns all of the interest paid on the loan, in contrast to the loan programs for virtually every other retirement plan in the country, where the loan is made from and repaid to the participant’s account and the participant earns all of the interest paid on the loan … As noted above, plaintiff currently has two outstanding loans from her Washington University Plan account. The first loan bears a current interest rate of 4.44%, and the second bears a current interest rate of 4.17%. The interest rate for both loans, in another break from standard plan loan policy, is variable.”

Allegations continue: “Defendant has engineered a retirement loan process that enables it to earn additional income at the expense of retirement plan participants equal to the spread between the loan interest rate paid by participants and the interest rate received by participants for investment in the Traditional Annuity (or, now, a Retirement Loan certificate). The loan process that is the subject of this lawsuit is the epitome of self-dealing.”

The text of the lawsuit goes on to lay out in detail the TIAA loan processing practices as understood by the plaintiff, accusing the firm of permitting a number of conflicts impermissible under ERISA. Plaintiff is seeking class action status “on behalf of the Washington University Plan and all other similarly situated retirement plans that are serviced by defendant and that offer participant loans.” Such a proposed class includes hundreds if not thousands of 403(b) plans.

Plaintiff asks the district court judge to “declare that defendant breached its fiduciary duties to plaintiff and the class; enjoin defendant from further violations of its fiduciary responsibilities, obligations, and duties and from further engaging in transactions prohibited by ERISA; order that defendant restore to plaintiff and the class all losses resulting from its serial breaches of fiduciary duty; award plaintiff reasonable attorney’s fees and costs of suit incurred herein … and/or for the benefit obtained for the class; order defendant to pay prejudgment interest; and award such other and further relief as the court deems equitable and just.”

A TIAA spokesperson shared the following statement with PLANADVISER regarding the complaint: “This case is without merit and all allegations of wrongdoing are unfounded. The participant loan services we provide are for the benefit of participants and beneficiaries, and are fully compliant with ERISA. We will vigorously defend against these claims.” 

The full text of the compliant is here

Fiduciary Rule Double-Take Leaves Retirement Industry Perplexed

The Trump White House has clearly tried to label itself as pro-business, but the effort to halt the fiduciary rule has so far injected more confusion than clarity for advisory firms. 

Late last week rumors started to swirl that Republican President Donald Trump would directly order the Department of Labor (DOL) to delay the effective implementation date of the fiduciary rule reform championed by the previous Democratic administration.

There were even reports written directly from a draft version of a presidential memorandum that would have done just that—citing a specific 180-day delay in the effective date of the rulemaking. Many reporters and businesses evidently saw this draft, because even before a final version of the memo was officially shared by the White House, scores of industry providers had already written to PLANADVISER expressing their varying opinions about what the 180-day delay meant, and about what could come next.

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In the end it would have been best to wait to see the final copy, as the 180-day delay, which was interpreted by many to be the key action-point coded into the memorandum, was removed. This left many in the industry wondering exactly what would come out of the memo, which in the end only ordered a review of the rulemaking to determine what its impacts on investors might be.    

It was particularly telling to see trusted Employee Retirement Income Security Act (ERISA) attorneys have to re-adjust commentary that had been written based on the draft memo. One firm, the Wagner Law Group, captured the unexpected change well.  

“We would like to update the ERISA LAW ALERT sent earlier today. In the Alert, which was based on a draft version of the Executive Memorandum, we stated that the DOL Fiduciary Rule would be delayed for 180 days. The final version of the Executive Memorandum, like the draft, directs the DOL to review the Fiduciary Rule, but unlike the draft, does not specify the time period for review or the length, if any, of the delay. In other words, the 180-day delay period was specifically removed. We understand that interested trade groups are working to obtain clarification from the White House as to what this means,” the law firm explains. “As it stands, the final version of the Executive Memorandum does not, in and of itself, repeal, revise or delay the Fiduciary Rule.”

As the Wagner Group attorneys explain, the DOL will have to determine whether and how a delay may or should be implemented. “This leaves financial services firms in the difficult situation, for the moment, of not knowing with 100% certainty if there will be an extended applicability date or not.”

If the DOL determines that the fiduciary rule is inconsistent with Trump Administration policy, it may issue for notice and comment a proposed rule rescinding or revising the DOL fiduciary rule and the best-interest contract (BIC) Exemption. Wagner attorneys predict the DOL may also take action to stay the litigation currently challenging the DOL fiduciary rule and its exemptions, but again all this is left up in the air right now.

On the Wagner attorneys’ interpretation, one possible effect of a delay would be that the Securities and Exchange Commission (SEC) becomes more involved in the process, so that there would be a uniform definition of fiduciary and a uniform standard enforced by both the DOL and SEC.

“It is worth noting that a bill known as the Financial CHOICE Act, passed by the House Financial Services Committee in September 2016, proposes the incorporation of the DOL Fiduciary Rule into the Retail Investor Protection Act (a bill passed by the House in 2016) and requires the SEC to take the driver’s seat on fiduciary rulemaking,” the attorneys observe. “Before the review process has even commenced, it is premature to speculate as to the conclusions that the DOL will reach, although it is highly unlikely that the DOL fiduciary rule and related exemptions such as BIC will survive in their current form, in light of President Trump’s clear willingness to dismiss government officials unwilling to conform to his agenda.”

NEXT: Some still pushing for the rule 

Seth Rosenbloom, associate general counsel at Betterment for Business, an integrated 401(k) advice and recordkeeping provider, says his firm “views the fiduciary rule as an important protection for American investors.” He is very critical of the argument that implementing the rule would necessarily damage investor choice and provider flexibility—although even with the delay still to be determined, he thinks the fiduciary rule reform is most likely on the way out.

“We’re disappointed that the administration is targeting the rule, but we will continue to be an active voice in favor of it, and in favor of investors’ rights to honest investment advice more broadly,” Rosenbloom says. “There is no merit to the claim that the rule would limit investors’ choices by forcing all advisers to all recommend the same low-cost index funds.”

The text of the rule itself is clear on this point, Rosenbloom argues, suggesting the rule “simply requires advisers to make an investment recommendation that they can demonstrate is in an investor’s best interest. That may be the lowest-cost option, but not necessarily. If advisers are not able to defend the investments they are recommending, including their cost, investors will not suffer from their absence.”

Rosenbloom suggests that, if the rule is not implemented, there are a few questions that investors can ask financial professions to ensure that they are receiving sound advice: “They can still ask, are you a fiduciary and are you a fiduciary across all my accounts? How are you compensated? How am I paying you and who else is paying you? What conflicts do you have?” These all remain important even if the DOL rulemaking is stopped outright.

“Even if the rule is rolled back, the publicity around the rule over the past year has had positive impact,” he concludes. “Investors are paying attention to fees and conflicts, asking important questions, and holding financial providers to higher standards. That should continue even if the administration delays or halts the rule. In the long run, investors are going to demand fiduciary advice and we're optimistic that it will also become a legal requirement.”

Given the previously voiced concerns of the insurance industry in particular as it pertained to complying with the fiduciary rule’s prohibited transaction exemptions, it’s no surprise the Insured Retirement Institute (IRI) is in the camp applauding Trump’s attack on the rule. But even such supporters of the rule delay were left in the dark by the fiduciary double-take. Writing to PLANADVISER in advance of the final memorandum’s release, IRI President and CEO Cathy Weatherford clearly expected the memo to establish a 180-day delay. She suggested the IRI “strongly supports President Trump’s decision to delay implementation of the Department of Labor’s fiduciary rule and initiate a thoughtful and comprehensive review of the rule’s likely impact on retirement savers.”

“The rule makes sweeping changes to the existing regulatory framework that will ultimately make it harder for savers to plan for retirement by depriving them of access to affordable holistic financial advice and a wide range of investment options,” Weatherford said. “These concerns, which drove us to pursue our pending legal challenge to the rule, are further exacerbated by the overly aggressive compliance deadline provided by the DOL.” Again, as it stands Trump has not provided the relief sought by IRI and others. 

With some much lingering uncertainty around where the DOL fiduciary rule actually stands, those in the retirement industry will be eagerly awaiting nomination hearings for Andrew Puzder. Unless a major regulatory reform effort will be led by the interim secretary, Puzder will have to lead the effort to gut the rule, and first he will have to be confirmed. 

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