TIAA Wins Dismissal of Prohibited Transaction Challenge

An ERISA lawsuit filed against TIAA by employees of the University of Chicago and Nova Southeastern University has been dismissed by a federal judge, who ruled TIAA should not be considered a fiduciary to the plans. 

By John Manganaro | March 10, 2017
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Plaintiffs in a proposed class action lawsuit accusing TIAA of permitting and profiting from prohibited transactions under the Employee Retirement Income Security Act (ERISA) have been rebuffed by a federal district court judge.

Plaintiffs in the suit included Elaine Malone and Patricia McKeough, who brought the action in the U.S. District Court for the Southern District of New York respectively on behalf of The University of Chicago Retirement Income Plan for Employees (the UC plan) and the Nova Southeastern University 403(b) Plan (the Nova Plan). They had alleged that TIAA breached its fiduciary duty to the plans under ERISA Section 404(a) “and engaged in prohibited transactions in violation of sections 406(a)(1) and 406(b).”

The class action sought monetary and equitable relief for the plans and all similarly situated defined contribution pension plans—but that will not happen. Based on the facts alleged in an amended complaint, the court “concludes that TIAA is not a fiduciary of the plans, thus foreclosing the legal and equitable relief requested.” The effect is that TIAA’s motion to dismiss is granted.

Case documents show TIAA provides both investment services and recordkeeping/custodial services to both plans. TIAA is paid a standalone investment fee by the plans for its investment services, while payment for the recordkeeping is provided for with a “recordkeeping offset,” whereby TIAA allocates a portion of the investment fee to pay for these recordkeeping services.

As part of the investment services that TIAA provides to the plans, case documents show, TIAA offers group annuity contracts to plan members, which include various pooled fund investment offerings, such as pooled accounts and mutual funds, all of which have a ten-year contract period. All of Malone’s assets in her UC Plan account are invested in a TIAA Traditional Annuity, and “almost all” of McKeough’s assets in her Nova Plan account are likewise invested in a TIAA Traditional Annuity.

The crux of the pair’s complaint argued that, unlike standard “revenue sharing” agreements of this nature, “TIAA will not allow this revenue sharing to be paid to a recordkeeper other than itself.”

“Thus, if the plans were to change recordkeepers for the group annuity contracts, they would no longer have the benefit of revenue sharing, i.e., they would continue to pay the investment fee to TIAA, none of which would be used to offset the recordkeeping fees charged by the new recordkeeper, such that the plans would be required to pay the new recordkeeper in full,” plaintiffs suggested. “In essence, the plans would have to pay double fees for recordkeeping, both to the new recordkeeper and to TIAA as part of its investment fee.”

Plaintiffs further suggested that that TIAA denied the plans access to information needed to evaluate the presence of a conflict of interest arising from TIAA providing the group annuity contracts, as well as recordkeeping services.

NEXT: Reading into the judge’s dismissal