Appeals Court Revives Parts of Washington University 403(b) Lawsuit

The United States Court of Appeals for the 8th Circuit has ruled in the case known as Davis v. Washington University, reversing and remanding key parts of the litigation for further review by a lower court.

The U.S. District Court for the Eastern District of Missouri, Eastern Division, issued the initial ruling in the case, rejecting the plaintiffs’ allegations of various fiduciary breaches under the Employee Retirement Income Security Act (ERISA).

The case was filed in June 2017 against Washington University in St. Louis, Missouri, alleging multiple violations of ERISA over the school’s selection and monitoring of its 403(b) plan investments. The suit also challenged the prudence of the university’s selection and monitoring of plan recordkeepers and the plan’s loan program. The lawsuit was consolidated with a second complaint similarly alleging that plan officials “utterly abdicated their fiduciary duties to act prudently and loyally by turning the plan over to TIAA and Vanguard Group.”

The district court ruling against the plaintiffs followed the school’s filing of a motion to dismiss for failure to state a claim. The decision highlighted the fact that plaintiffs objected to the defense’s inclusion in their motion to dismiss of some 30 exhibit documents detailing the 403(b) plan’s investment disclosures and operations. The plaintiffs argued that these documents should not be considered because they “are not referred to in the complaint, they are not central to plaintiffs’ claims and they are not the types of documents for which judicial notice would be appropriate.”

The earlier decision noted that the court generally would not at this stage consider matters outside the pleading standards set out by Rule 12(c)(d)—i.e., it would not consider these defense-provided documents. But, at the same time, the court emphasized that it was free to “consider matters of public record and materials that are necessarily embraced by the pleadings.” Because the plaintiffs had not contested the authenticity of any documents cited, and because their consolidated complaint references returns data for certain contested TIAA and Vanguard funds, the court deemed it proper to consider such items as TIAA and Vanguard prospectuses, fact sheets and the like. From that starting point, the decision sided strongly with the defense.

The new appellate emphasizes that this case is “only at the pleading stage.”

“At this point, the complaint only needed to give the district court enough to infer from what is alleged that the process was flawed,” the appellate ruling states. “It did not have to go further and directly address the actual process by which the plan was managed. Circumstantial allegations about the fiduciary’s methods based on the investment choices a plan fiduciary made can be enough. The first claim clears this pleading hurdle. It alleges that fees were too high and that Washington University should have negotiated a better deal.”

The appellate ruling cites the example of Vanguard’s “mixed” lineup of funds. 

“By mixed, we mean that there were different share classes in its lineup, including institutional and retail shares,” the ruling explains. “For some investments, Vanguard offered lower cost institutional shares, which have higher initial investment requirements. Instead of offering these shares across its entire lineup, however, it offered retail shares for other funds, even though minimum investment requirements are routinely waived for individual investors in large retirement savings plans. The failure to replace these shares with their lower-cost counterparts breached Washington University’s fiduciary duty, in the plaintiffs’ view, because higher fees led to lower overall returns. They believe, in other words, that a lack of diligence cost them money. …  The complaint alleges that the marketplace for retirement plans is competitive, and with $3.8 billion invested, Washington University’s pool of assets is large. From these facts, two inferences of mismanagement are plausible from the plan’s failure to offer more institutional shares. The first is that it failed to gain access to them because, as the complaint alleges, it did not negotiate aggressively enough with Vanguard. The second is that it was asleep at the wheel: It failed to pay close enough attention to available lower cost alternatives. Either way, a failure of effort or competence is enough to state a claim for breach of the duty of prudence.”

The appeals court reaches the opposite conclusion on the plaintiffs’ other main claim, which argues that the inclusion of three specific investment options was imprudent. According to the complaint, the university “should have jettisoned them because they were poor performers and cost too much.”

“For an investment-by-investment challenge like this one, a complaint cannot simply make a bare allegation that costs are too high, or returns are too low,” the appellate ruling states. “Rather, it must provide a sound basis for comparison—a meaningful benchmark.”

The ruling then steps through the plaintiffs’ failed attempt to provide such benchmarks, thus allowing the lower court’s positive determination for the defense on this count to stand.

The full text of the appellate ruling is available here.