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Sacerdote v. New York University

United States District Court, S.D. New York

August 25, 2017

DR. ALAN SACERDOTE, et al., Plaintiffs,

          OPINION & ORDER


         Plaintiffs, individually and as the representatives of a class, have alleged that defendant New York University (“NYU”) has violated sections 404 and 406 of the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. §§ 1104 and 1106 (2012). The instant action against NYU is one of a number of cases filed in district courts across the country by the same counsel alleging that university pension plans, known as “403(b) plans, ” typically with significant assets, have not been managed prudently or for the exclusive purpose of providing benefits to participants and their beneficiaries, in violation of ERISA. Here, plaintiffs allege a wide array of acts or omissions by NYU that they assert amount to serious ERISA violations with regard to two 403(b) plans.

         ERISA requires, inter alia, that NYU comply with its fiduciary obligation to administer the Plans solely in the interest of Plan participants and to act prudently. As discussed below, while plaintiffs have adequately plead certain claims, the Court finds that a number of the bases upon which they rely as support for other claims could not-even if proven-result in a favorable judgment. For the reasons set forth below, NYU's motion to dismiss is GRANTED in part and DENIED in part.

         I. BACKGROUND

         NYU sponsors two defined contribution retirement plans (together, the “Plans”), which are qualified under 26 U.S.C. § 403(b)(1)(A). (ECF No. 39, Plaintiffs' Amended Complaint (“Am. Compl.”) ¶¶ 26, 70.) Both the New York University Retirement Plan for Members of the Faculty, Professional Research Staff, and Administration (“Faculty Plan”) and the NYU School of Medicine Retirement Plan for Members of the Faculty, Professional Research Staff and Administration (“Medical Plan”) are defined contribution, individual account, employee pension benefit plans. (Id. ¶¶ 9, 13.) The Faculty Plan covers substantially all members of NYU's faculty, professional research staff, and administration, other than employees of the School of Medicine, who are covered by the Medical Plan. (Id. ¶¶ 11, 15.)

         Under the terms of both Plans, participants may contribute a discretionary amount of their annual compensation to the Plans, and NYU makes a matching contribution. (Id. ¶ 17.) The Plans' fiduciaries choose the investment Options for the Plans, but it is the participants themselves who direct their contributions into a particular investment option (“Option”). (Id. ¶ 18.) There is no allegation that any Plan participant was required to invest in any particular investment Option. Rather, plaintiffs allege that Defendant included expensive or imprudent options among the array of choices, allowed the service providers to mandate inclusion of their own investment products and recordkeeping services, failed to remove poorly performing funds, and engaged in prohibited transactions.

         As of December 31, 2014, the Faculty Plan offered 103 total investment Options-25 TIAA-CREF investment Options and 78 Vanguard Options. (Id. ¶ 107.) As of that same date, the Medical Plan offered 11 TIAA-CREF investment Options and 73 Vanguard Options, for a total of 84 Options. (Id. ¶ 108.) Both Plans offered the TIAA Traditional Annuity, which is a fixed annuity contract that returns a contractually specified minimum interest rate. (Id. ¶ 112.) TIAA-CREF requires plans that offer the TIAA Traditional Annuity to also offer the CREF Stock and Money Market accounts and to use TIAA as a recordkeeper for its proprietary products. (Id. ¶ 110.) The other TIAA-CREF investment Options in the Plans include variable annuities, an insurance separate account (the TIAA Real Estate Account), and mutual funds. (Id. ¶¶ 114-19.) The remaining investment Options in the Plans are Vanguard mutual funds, which charge investment management, distribution, marketing, and other fees. (Id. ¶ 119.)

         The Amended Complaint alleges that the named plaintiffs were invested in a number-but by no means all-of the investment Options, including: the CREF Bond Market, CREF Global Equities, CREF Growth, CREF Stock, TIAA Real Estate, Vanguard Energy, Vanguard Explorer, Vanguard GNMA, Vanguard Health Care, Vanguard High-Yield Corporate, Vanguard Inflation-Protected Securities, Vanguard Institutional Index, Vanguard Long-Term Treasury, Vanguard Morgan Growth, Vanguard Prime Money Market, Vanguard Small Cap Value Index, Vanguard Target Retirement 2015, Vanguard Target Retirement 2050, Vanguard Total Bond Market Index, Vanguard Total International Stock Index, and Vanguard Windsor II accounts. (Id. ¶ 8(c).)

         Both TIAA-CREF and Vanguard are recordkeepers for the Faculty Plan, and NYU did not consolidate the Medical Plan to a single recordkeeper (TIAA-CREF) until late 2012. (Id. ¶ 126.) Plaintiffs point to three other Plans, as well as industry reports, to support their assertions that many other Plans have implemented systems with single recordkeepers. (Id. ¶¶ 87-103.)

         In terms of assets, the Faculty Plan is among the largest 0.04% and the Medical Plan is among the largest 0.06% of defined contribution plans in the United States. (Id. ¶¶ 12, 16.) According to plaintiffs, plans of such size are referred to as “jumbo plans, ” and their large size affords them “enormous bargaining power” to command low investment management and recordkeeping fees for their participants. (Id.)

         Plaintiffs allege that NYU breached its fiduciary duties of loyalty and prudence by failing to use “the Plans' bargaining power to reduce expenses and failing to exercise independent judgment to determine what investments to include in the Plans.” (Id. ¶ 4.) Plaintiffs further allege that defendant allowed the Plans' “conflicted third party service providers-TIAA-CREF and Vanguard-to dictate the Plans' investment lineup, to link its recordkeeping services to the placement of investment products in the Plans, and to collect unlimited asset-based compensation from their own proprietary products.” (Id.) In addition, to the extent defendant delegated any of its fiduciary responsibilities to another fiduciary, plaintiffs allege that defendant breached its duty to monitor. (Id. ¶¶ 236-39.)

         Plaintiffs further allege that NYU engaged in prohibited transactions because plaintiffs, through their investments, “paid a portion of the Plans' excessive administrative and recordkeeping fees, [costs] which would not have been incurred had defendants discharged their fiduciary duties to the Plan.” (Id. ¶ 8.) They also list the particular funds in which each named plaintiff was invested, noting that each paid a portion of these “excessive” fees through revenue sharing payments. (Id.) They further allege that by “allowing the Plans to be locked into an unreasonable arrangement that required the Plans to include the CREF Stock Account and to use TIAA as the recordkeeper for its proprietary products, ” (id. ¶ 203), allowing the service providers to collect “unreasonable fees, ” (id. at ¶ 215), and including Options that cost more than identical alternatives, (id. at ¶ 232), the defendants engaged in exchanges of property prohibited under § 406.


         A. Motion to Dismiss

         When resolving a motion to dismiss, a court must construe the complaint liberally, accepting all factual allegations in the complaint as true and drawing all reasonable inferences in favor of the nonmoving party. Gregory v. Daly, 243 F.3d 687, 691 (2d Cir. 2001), as amended (Apr. 20, 2001). A complaint survives a motion to dismiss under Rule 12(b)(6) if it “contain[s] sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id.

         Where, as here, a complaint alleges that a defendant failed to act prudently within the meaning of ERISA § 404(a), a failure to plead factual allegations “referring directly to [defendant's] knowledge, methods, or investigations at the relevant times” is not, by itself, “fatal to a claim alleging a breach of fiduciary duty” if the process was flawed. Pension Ben. Guar. Corp. ex rel. St. Vincent Catholic Med. Centers Ret. Plan v. Morgan Stanley Inv. Mgmt. Inc. (PBGC), 712 F.3d 705, 718 (2d Cir. 2013) (emphasis in original). ERISA affords such leeway because plaintiffs “generally lack the inside information necessary to make out their claims in detail unless and until discovery commences.” Id. (quoting Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 598 (8th Cir. 2009)).

         At the motion to dismiss stage, “application of th[e] ‘plausibility' standard to particular cases is ‘context-specific', and requires assessing ‘the allegations of the complaint as a whole.'” Id. at 19 (2d Cir. 2013) (first quote quoting Iqbal, 556 U.S. at 679) (second quote quoting Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 47 (2011)). A complaint must therefore “be read as a whole, not parsed piece by piece to determine whether each allegation, in isolation, is plausible.” Braden, 588 F.3d at 594.[1] Here, plaintiffs' complaint contains seven counts, each of which include several categories of allegations regarding purported breaches and violations. (See Am. Compl. ¶¶ 195-240.) Defendant argues that the individual allegations supporting each count fail to state a claim. But to the extent one or more allegations plausibly enable the Court to infer that plaintiffs have stated a claim under a particular count, the Court need not assess whether the remaining allegations in such a count could independently support that claim.

         B. Fiduciary Duties and Prohibited Transactions

         Under ERISA, the duties owed by fiduciaries to plan participants and beneficiaries “are those of trustees of an express trust-the highest known to the law.” Donovan v. Bierwirth, 680 F.2d 263, 271, 272 n.8 (2d Cir. 1982). ERISA § 404(a)(1) imposes twin duties of prudence and loyalty on fiduciaries of retirement plans. The duty of loyalty, codified in ERISA § 404(a)(1)(A), requires fiduciaries to act “solely in the interest of the participants and beneficiaries, ” and “for the exclusive purpose of providing benefits to participants and their beneficiaries; and defraying reasonable expenses of administering the plan.” ERISA § 404(a)(1)(A). The Supreme Court has “often noted that an ERISA fiduciary's duty is ‘derived from the common law of trusts.'” Tibble v. Edison Int'l, 135 S.Ct. 1823, 1828 (2015) (quoting Cent. States, Se. & Sw. Areas Pension Fund v. Cent. Transp., Inc., 472 U.S. 559, 570 (1985)). The Restatement (Third) of Trusts, which the Supreme Court has turned to “[i]n determining the contours of an ERISA fiduciary's duty, ” id., explains that that “duty of loyalty” bars trustees from “engaging in transactions that involve self-dealing or that otherwise involve or create a conflict between the trustee's fiduciary duties and personal interests.” Restatement (Third) of Trusts § 78 (2007); see also Pegram v. Herdrich, 530 U.S. 211, 224 (2000) (“Perhaps the most fundamental duty of a trustee is that he must display throughout the administration of the trust complete loyalty to the interests of the beneficiary and must exclude all selfish interest and all consideration of the interests of third persons.”).

         The duty of prudence, codified in ERISA § 404(a)(1)(B), requires a pension plan fiduciary to act “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” ERISA § 404(a)(1)(B). The “prudent person” standard asks whether “the individual trustees, at the time they engaged in the challenged transactions, employed the appropriate methods to investigate the merits of the investment and to structure the investment.” Katsaros v. Cody, 744 F.2d 270, 279 (2d Cir. 1984) (quoting Donovan v. Mazzola, 716 F.2d 1226, 1232 (9th Cir. 1983), cert. denied, 464 U.S. 1040 (1984). Fiduciaries' prudence is measured against an objective standard, and their own “lack of familiarity with investments is no excuse” for failing to act with the care, skill, prudence and diligence required under the circumstances then prevailing. Id.

         ERISA § 406(a)(1) “supplements the fiduciary's general duty of loyalty to the plan's beneficiaries . . . by categorically barring certain transactions deemed ‘likely to injure the pension plan.'” Harris Tr. & Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 241 (2000) (quoting Comm'r Internal Revenue v. Keystone Consol. Indus., Inc., 508 U.S. 152, 160 (1993)). As is relevant here, ERISA provides:

A fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect-
(A) sale or exchange, or leasing, of any property between the plan and a party in interest; . . .
(C) furnishing of goods, services, or facilities between the plan and a party in interest;
(D) transfer to, or use by or for the benefit of a party in interest, of any assets of the plan . . . .

         ERISA § 406(a)(1). To state a claim under ERISA § 406(a)(1)(A), (C), or (D), plaintiffs must allege that the defendant is a fiduciary; the defendant caused the plan to engage in one of the prohibited transactions set forth in § 406(a)(1); the transaction was “between the plan and a ‘party in interest'” (for § 406(a)(1)(A) and (C)) or involved plan assets (for § 406(a)(1)(D)); and the defendant knew or should have known that the transaction was prohibited. See id.

         The prohibitions set forth in § 406(a)(1) are subject to a number of statutory exemptions, which are codified in ERISA § 408, and which are affirmative defenses that a defendant bears the burden of proving by a preponderance of the evidence if their applicability is in dispute. Leber v. Citigroup, Inc., No. 07 CIV. 9329 (SHS), 2010 WL 935442, at *11 (S.D.N.Y. Mar. 16, 2010); see also Lowen v. Tower Asset Mgmt., Inc., 829 F.2d 1209, 1215 (2d Cir. 1987). Thus, “on a Rule 12(b)(6) motion, it must be clear from the face of the Complaint or judicially noticed court filings that the Plan's use of proprietary funds falls within an available exemption.” Moreno v. Deutsche Bank Americas Holding Corp., No. 15 CIV. 9936 (LGS), 2016 WL 5957307, at *6 (S.D.N.Y. Oct. 13, 2016) (citing Staehr v. Hartford Fin. Servs. Grp., Inc., 547 F.3d 406, 425 (2d Cir. 2008)).


         In Counts I, III, and V, Plaintiffs allege breaches of the duties of both loyalty and prudence. These are separate claims-but pled in a single count. Loyalty claims arise under § 404(a)(1)(A) and prudence claims arise under § 404(a)(1)(B). The Court addresses alleged breaches of the duty of loyalty in this section and prudence in the following section.

         Plaintiffs' loyalty claims are based on allegations that NYU:

(1) “favor[ed] the financial interests of TIAA-CREF in receiving a steady stream of revenues from bundled services over the interest of participants” (Count I) (ECF No. 39 ¶ 198);
(2) “allow[ed] TIAA-CREF and Vanguard to put their proprietary investments in the Plans without scrutinizing those providers' financial interest in using funds that provided them a steady stream of revenue sharing payments” (Count III) (id. ¶ 209); and
(3) failed to consider the conflicts associated with offering the recordkeepers' own proprietary investments in the ...

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