Judge Gives Parties in Cornell 403(b) Suit Options for Proceeding

The Employee Retirement Income Security Act (ERISA) lawsuit against Cornell University could face a time delay due to the COVID-19 pandemic.

The case, filed in 2016, has been pared down quite a bit. It originally contained allegations similar to those in other lawsuits challenging university 403(b) plans—alleging excessive fees, imprudent investments, too many investments and imprudent use of more than one recordkeeper. In a September 2019 decision, U.S. District Judge P. Kevin Castel of the U.S. District Court for the Southern District of New York granted summary judgement for Cornell on many counts.

Castel found that material issues of fact remain with respect to whether the Cornell defendants’ process to monitor recordkeeping fees breached a duty of prudence. However, he said that because the plaintiffs have not come forward with evidence that any breach resulted in loss, he granted summary judgment on the administrative fees and recordkeeping claim to the extent monetary damages were requested.

The September court opinion noted that, following IRS 403(b) regulations that went into effect in 2008 and 2009, Cornell took important fiduciary steps as it established an investment committee, implemented an investment policy statement (IPS), hired CAPTRUST as adviser and engaged in discussions about consolidating recordkeepers as well as a review of underperforming investments.

The plaintiffs claimed the defendants imprudently selected and retained specific investment options, including the TIAA Real Estate Account and the CREF Stock Fund Account, with high fees and poor performance relative to other readily available investment options. At the motion to dismiss stage, Castel found the combination of historical record of underperformance and inaction plausibly supported a claim. The defendants moved for summary judgment, arguing that the plaintiffs have not demonstrated that any of the challenged funds underperformed appropriate benchmarks, and even if they did, the plaintiffs offer no evidence that Cornell’s process for monitoring the underperforming fund and choosing to maintain them was imprudent.

Castel said, “Evidence of ‘discussions about the pros and cons’ of investment alternatives is ‘fatal to’ plaintiffs’ claims. A reasonable trier of fact could not conclude that fiduciaries failed to act in accordance with the IPS.” He granted summary judgement to the defendants for the count alleging imprudence in retaining the TIAA and CREF funds. Upon further discussion, he also granted summary judgment to Cornell regarding other funds the plaintiffs said were underperforming and should have been removed.

However, among claims challenging the use of retail share classes versus institutional share classes for several funds, Castel let one remain that alleged defendants breached their duty of prudence by failing to swap out the TIAA-CREF Lifecycle target-date funds (TDFs) with their identical institutional share class funds.

Many actions in ERISA cases can be done electronically, which is why there has been no slowdown of new cases filed, decisions on motions to dismiss and other orders in federal courts. However, a jury trial was requested in the case against Cornell. With courts on lockdown, judges are not taking live testimony and not doing trials.

Castel gave the parties in the Cornell case options and asked them to make a decision, noting in an order he issued that the pandemic will affect civil jury trials in the Southern District of New York “for a considerable and presently unknowable time to come.” He also pointed out that when trials do resume, priority will be given to criminal cases.

In his May 20 order, he said, “Within 21 days, the parties are directed to confer telephonically on the following subjects and report back to the court via fax to chambers: (a) waiver of trial by jury; (b) consent to trial before Magistrate Judge James L. Cott; and (c) settlement.”