Vanderbilt University 403(b) Plans Suit Pared Down

Although a number of claims were dismissed, a federal district court judge felt some claims would be better decided at a later stage.

A federal district court has moved forward a lawsuit alleging that Vanderbilt University retirement plan fiduciaries have not managed its plan with loyalty or prudence, in violation of the Employee Retirement Income Security Act (ERISA).

Chief United States District Judge Waverly D. Crenshaw, Jr. of the U.S. District Court for the Middle District of Tennessee dismissed some claims, but moved forward others pertaining to the Vanderbilt University Retirement Plan and the Vanderbilt University New Faculty Plan.

The lawsuit claims fiduciaries of the plans breached their fiduciary duties by locking the plan into a certain stock account (CREF) and into the services of a certain recordkeeper (TIAA); engaging in prohibited transactions by locking the plan into the CREF Stock Account and the recordkeeping services of TIAA; breaching their fiduciary duties by paying unreasonable administrative fees; engaging in prohibited transactions by paying excessive administrative fees; breaching their fiduciary duties by agreeing to unreasonable investment, management, and other fees and failing to monitor imprudent investments; engaging in prohibited transactions by paying fees to certain third parties in connection with the plan’s investment in those parties’ investment options; and failing to monitor other fiduciaries.

Dismissal of loyalty and prohibited transaction claims

Crenshaw first dismissed all claims for breach of duty of loyalty, saying he found the plaintiffs have not alleged sufficient facts to show that the defendants engaged in transactions involving self-dealing or that otherwise involved or created a conflict between the defendants’ fiduciary duties and personal interests. According to Crenshaw, even though the plaintiffs allege that various third parties benefited from the defendants’ alleged mismanagement, the complaint alleges that the defendants followed an imprudent process, not that they acted disloyally.

The plaintiffs allege that the arrangement with TIAA-CREF that mandated inclusion of TIAA’s Traditional Annuity, locked the plan into using TIAA as a recordkeeper, and locked the plan into including the CREF Stock and Money Market Accounts as plan investment options restricted the plan’s ability to obtain reasonable fees and to eliminate imprudent investments. They argue that the defendants breached their fiduciary duties by failing to independently assess the prudence of each investment option on an ongoing basis, by failing to act prudently and solely in the interest of the plan’s participants in deciding whether to maintain a recordkeeping arrangement, and by failing to remove investments that were no longer prudent for the plan.

However, the Vanderbilt fiduciaries argue this claim is barred by the six-year statute of limitations under ERISA, which provides that no action may be commenced with respect to a fiduciary’s breach of any duty after the earlier of six years after the date of the last action which constituted a part of the breach or violation or three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation. Crenshaw agreed that the initial commitment of the plan to the TIAA-CREF arrangement is time-barred, because that initial commitment occurred at the latest in 2009. In addition, to the extent that the alleged prohibited transaction is the single action of committing the plan to be locked into an allegedly unreasonable arrangement with TIAA-CREF, that claim is time-barred. So these claims he dismissed.

However, plaintiffs argue that the defendants breached their fiduciary duty of prudence by maintaining this imprudent arrangement and failing to monitor and remove CREF stock. Crenshaw said this claim will be considered in connection with the plaintiffs’ claims for excessive fees, failure to monitor, and failure to remove underperforming investments. But, he noted there is no such thing as a continuing prohibited transaction because the plain meaning of “transaction” is that it is a point-in-time event.

More for the court to consider

Crenshaw found the plaintiffs have made specific factual allegations that a competitive bidding process would have benefited the plan. “It is plausible from those facts to infer that Defendants could have obtained less expensive recordkeeping services by soliciting competitive bids. The Amended Complaint sufficiently alleges that Defendants’ failure to secure competitive bids under these circumstances was not consistent with that of a prudent man or woman acting in a like capacity,” he wrote in his opinion. However, he said, “Whether it was actually imprudent involves questions of fact that the Court cannot consider at this stage of the litigation.”

Concerning the claims regarding revenue sharing, the defendants maintain that revenue sharing does not violate ERISA and is a common and accepted practice. But, Crenshaw noted that even though revenue sharing is a common industry practice, a fiduciary’s failure to ensure that recordkeepers charged appropriate fees and did not receive overpayments may be a violation of ERISA. He found the plaintiffs have sufficiently alleged that the defendants failed to adequately monitor and ensure that the plan’s recordkeepers were being paid reasonable and not excessive fees, but what is reasonable depends on the factual circumstances and on the services provided, so Crenshaw said this claim may be more appropriately addressed on summary judgment.

Likewise, the defendants contend there is no statute or regulation that prohibits fiduciaries from using multiple recordkeepers, but Crenshaw found the plaintiffs’ allegation that a prudent fiduciary would have chosen fewer recordkeepers and thus reduced costs for plan participants is sufficient to state a claim.

The plaintiffs allege that, in causing the plan to use four recordkeepers from year to year, the defendants caused the plan to engage in prohibited transactions, asserting that, as service providers to the plan, the recordkeepers were “parties in interest,” and the prohibited transactions occurred each time the plan paid fees to these recordkeepers. Crenshaw found any claim based upon the initial commitment with TIAA-CREF is barred by the statute of limitations, but when the initial decisions were made to engage the other three recordkeepers (Fidelity, VALIC and Vanguard), however, is not clear from the complaint and, therefore, is a factual issue which cannot be determined currently. However, any claims for continuing violations with any of the recordkeepers are not considered “transactions,” and those claims will be dismissed.

Investment decisions and monitoring fiduciaries

Crenshaw agreed with other court decisions regarding university retirement plans that having too many options does not hurt plan participants, but provides them with greater opportunities to choose the investments they prefer. “There is no allegation of any specific harm to any specific person caused simply by the number of options available in the Plan…, therefore, the claim that having too many options was a breach of the fiduciary duty of prudence will be dismissed,” he wrote.

While Crenshaw agreed that nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund, nonetheless, a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones. “There are numerous factors that a prudent fiduciary must consider besides the amount of the fees. Fiduciaries have latitude to value investment features other than price (and, indeed, are required to do so), as recognized by the courts,” he said. But, he determined that these issues are better suited for summary judgment, when discovery is complete and the record is more developed.

Regarding some fiduciaries’ failure to monitor other fiduciaries, the opinion notes that the plaintiffs allege only that “to the extent any of these Defendants’ fiduciary responsibilities were delegated to another fiduciary,” they had a duty to monitor those appointees. Crenshaw found this allegation suggests that the plaintiffs do not know whether the defendants in fact delegated their fiduciary duties or to whom. Additionally, he found the plaintiffs allege no facts showing what process of monitoring other fiduciaries existed or how it was deficient. So, he dismissed the claim for failure to state a claim upon which relief may be granted.