In a lawsuit that 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, U.S. District Judge J. Paul Oetken of the U.S. District Court for the Southern District of New York has dismissed most of the claims.
As background, the plan offers participants the opportunity to take out a loan against a portion of their retirement accounts. Washington University contracted with two outside vendors, TIAA and Vanguard, to administer these participant loans. For loans administered by TIAA, participants are “require[d] . . . to borrow from Defendant’s general account rather than from the participant’s own account.” Thus, participants must first “transfer 110% of the amount of the loan from the participant’s plan account . . . to Defendant’s ‘Traditional Annuity,’” a TIAA financial product that pays a fixed rate of interest. The amount transferred to a Traditional Annuity serves as the collateral securing the loan.
The participant then repays the loan to TIAA’s general account, which also earns the interest paid on the loan. The interest rate for TIAA’s participant loans is variable. TIAA retains for itself the difference, or “spread,” between the loan interest rate paid by participants and the interest rate received by participants as investment income from the Traditional Annuity. In other words, participants do not receive the full amount of the interest they earn on their collateral, because some of it is taken by TIAA as compensation for administering the loan.
In the lawsuit, Counts I through IV allege that TIAA itself violated its duties as an ERISA fiduciary, whereas Count V alleges that TIAA is liable as a nonfiduciary for breaches by the Washington University. TIAA has moved to dismiss all claims for lack of subject matter jurisdiction and for failure to state a claim.
Most motions to dismiss granted
TIAA contends that the plaintiff lacks standing because she has failed to plausibly allege injury-in-fact. It argues that the plaintiff was not actually injured because she actually saved money on fees by using TIAA, rather than Vanguard, to administer her loans. According to TIAA’s calculations, Vanguard’s retirement loan program, which charges participants fixed fees, would have cost the plaintiff approximately $500 to $600 more in total. But, Oetken said TIAA’s evidence of Vanguard’s fees is insufficient to “contradict plausible allegations,” which are “themselves sufficient to show standing.” In other words, the Oetken concluded that TIAA’s evidence that Vanguard’s fees would have been higher is not enough, standing alone, to negate the plaintiff’s allegations that TIAA’s fee structure caused her an injury-in-fact.
TIAA contends that it is not a fiduciary with respect to the design of its participant loan program or its negotiations about fees with Washington University. The judge noted that circuits have held that a plan administrator is not an Employee Retirement Income Security Act (ERISA) fiduciary when negotiating its compensation with a prospective customer and adopting contract terms. This is because an outside vendor generally “has no authority over or responsibility to the plan and presumably is unable to exercise any control over the [plan] trustees’ decision whether or not, and on what terms, to enter into an agreement with [it].”
Nonetheless, Oetken noted, a vendor can “can . . . become a fiduciary with respect to particular contract terms, such as the terms of its own compensation, if the terms grant it discretionary authority or control.” As the parties agree, TIAA is a fiduciary with respect to the loan program, and its attendant fees, only if it exercised some discretionary authority when taking the action subject to complaint. Under the contract with Washington University, participants’ collateral will earn 3% during the life of their loan, unless TIAA chooses to change the Rate Schedule. Oetken found that the initial 3% rate was not set at TIAA’s discretion, but was negotiated as part of TIAA’s contract with Washington University. He also found that there is no allegation that TIAA ever exercised its discretion to change the Rate Schedule. “The absence of such allegations is fatal to Plaintiff’s theory of fiduciary status,” Oetken wrote in his opinion.
Finally, the plaintiff contends that TIAA is a fiduciary because, once participants transfer their collateral to the Traditional Annuity, “Defendant has complete and unfettered control” over plan assets. However, Oetken noted that the plaintiff “does not allege that [TIAA] in any way mismanaged the separate account,” instead, the complaint states that TIAA merely held the plaintiff’s collateral in a Traditional Annuity, which paid 3% interest, as required under TIAA’s Retirement Loan Contract with the Washington University. “Because the actions [Plaintiff] complains of do not implicate [TIAA’s] control” over the collateral, TIAA’s control over the collateral “does not render [it] a fiduciary,” the opinion states.
Oetken granted motions to dismiss Counts I through IV.
Some relief allowed
Count V seeks equitable relief under ERISA Section 502(a)(3) against TIAA as a nonfiduciary based on Washington University’s alleged breach of its fiduciary duty in agreeing to TIAA’s loan procedures. The plaintiff seeks “disgorgement of the proceeds” of TIAA’s allegedly illegal retirement loan program and to “[e]njoin Defendant from . . . further engaging in transactions prohibited by ERISA.”
TIAA responds that Count V must be dismissed because the plaintiff effectively seeks money damages, which are not available under Section 502(a)(3). But, Oetken concluded that the plaintiff has alleged facts sufficient to support a claim for the equitable remedy of disgorgement. In addition, Oetken said, even if he were to agree with TIAA that disgorgement is an unavailable remedy, that would not, by itself, justify dismissal of Count V, because the plaintiff also seeks “other equitable . . . relief as appropriate,” including “[e]njoin[ing] Defendant . . . from further engaging in transactions prohibited by ERISA.”
He noted that Section 502(a)(3) authorizes suit by a plan participant “(A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this subchapter or the terms of the plan.” “Thus, Defendant’s contention that Count V must be dismissed as unauthorized by ERISA is incorrect,” Oetken wrote.
However, Oetken addressed whether the plaintiff has adequately alleged a claim that TIAA knowingly participated in a plan fiduciary’s violation of ERISA Section 406(a). He noted that in order to state a claim against a nonfiduciary, “a plaintiff must prove all of the elements of a § 406(a) claim . . . , including that a plan fiduciary had ‘actual or constructive knowledge of the facts’ that give rise to the § 406(a) violation.” The plaintiff alleges that Washington University, as named fiduciary, “either failed adequately to understand the details and consequences of Defendant’s loan procedures . . . or, understanding the consequences of Defendant’s unlawful loan procedure, nonetheless approved such procedure.” As to TIAA, the plaintiff likewise alleges that it “knew or should have known that its loan program violated section 406(a)” because it received “excessive and unreasonable compensation for administration of a plan loan program.”
The only point further supporting these conclusory allegations of constructive knowledge is the allegation that TIAA’s loan retirement procedures are anomalous, both in their “spread”-based fee structure and in requiring participants to transfer their assets to TIAA’s general account as collateral. The plaintiff identifies two specific vendors, Charles Schwab and Vanguard (the latter of which Washington University also used as a retirement loan administrator until July 2016), which follow the “normal” procedure (i.e., do not require an asset transfer and do not compensate themselves from the interest earned by participants’ collateral). Oetken concluded that these allegations are insufficient to state a claim for knowingly excessive compensation in violation of Section 406(a)(1)(C) and Section 408(b)(2). So, to the extent that the plaintiff’s Section 502(a)(3) claim seeks injunctive relief for violations of Section 406(a)(1)(C), he dismissed that claim.
However, Oetken did find that the collateral was drawn from the plaintiff’s contributions and were therefore “plan assets” under the relevant regulation, and the plaintiff adequately alleged that the transfer of these assets to a party in interest was a prohibited transaction under ERISA Section 406(a)(1)(D).The court offered the plaintiff the opportunity to amend her complaint considering findings related to Count V.