TIAA Wins Dismissal of Prohibited Transaction Challenge

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 

The judge’s decision to grant TIAA’s motion to dismiss cites a 2014 case, Coulter vs. Morgan Stanley & Co, to establish that a plan service provider “may be an ERISA fiduciary with respect to certain matters but not others,” such that “fiduciary status exists only to the extent” that the plan service provider “has or exercises the described authority or responsibility over a plan … Thus, in every case charging breach of ERISA fiduciary duty, the threshold question is whether that person was acting as a fiduciary (that is, was performing a fiduciary function) when taking the action subject to complaint.”

The plaintiffs, knowing this, argued that TIAA “became a fiduciary when it exercised discretionary control over the fee to be used as a recordkeeping offset … By exercising discretion to take these plan assets subject to its undisclosed policy that it would not share the recordkeeping offset, defendant exercised its discretion to adopt an undisclosed policy that would enable it to further exercise its discretion to take plan assets.”

As a practical matter, plaintiffs argue, this “undisclosed policy” prevents the plans from switching to another recordkeeper, which might charge less for its services: “The plans are ‘locked in’ for the full term of the mutual fund or annuity contracts that the [recordkeeping service agreements ] cover … Consequently, TIAA has used its discretion to in effect turn a 90-day RSA into a 10-year RSA, thereby using its discretion to lock up the Plans and receive additional recordkeeping compensation as a result thereof.”

The judge states “this argument is not meritorious.” The decision states that calling TIAA’s alleged “undisclosed policy” of refusing to share the recordkeeping offset “an exercise of discretion” does not make it so.

“Neither do the allegations that this policy causes the plans to be locked in to the RSA for the full length of the annuity or mutual fund contract, taken as true, establish an exercise of discretion on the part of TIAA or establish that TIAA is a fiduciary of the plans,” the ruling explains. “The fact that the fees used to pay for the recordkeeping services are collected from plan assets does not give the collector of those fees authority over plan assets.”

The decision further concludes that TIAA’s entering into the recordkeeping service agreements and its subsequent collection of fees does not make it a discretionary fiduciary.  “Plaintiffs argue that TIAA’s periodic collection of fees, by virtue of TIAA’s ‘undisclosed policy’ of not sharing the record keeping offset with potential future third party service providers, is an act of discretion. This argument is unavailing. A service provider’s periodic collection of fees is not a discretionary act giving rise to a fiduciary duty … The mere deduction of an agent’s commission from plan assets does not, in itself, create a fiduciary relationship between the agent and the plan … The fact that the service provider could, of course, refrain from collecting the fees he is due does not change this. The analysis is not altered by the existence of an underlying policy to refrain from using the fees in a way that benefits the plans it services in ways not contemplated by the relevant agreements.”

The full text of the dismissal decision is here.