Investment Adviser Added as Defendant in NYU 403(b) Suit

Participants in New York University’s (NYU) retirement plans have filed a Third Amended Complaint, for the first time naming Cammack LaRhette Advisors as a defendant in the lawsuit.

Allegations in the complaint are basically the same as in the last one: that instead of using the plans’ bargaining power to reduce expenses and exercising independent judgment to determine what investments to include in the plans, the defendants squandered that leverage away by allowing 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.

The new complaint says Cammack LaRhette Advisors—now known as Cammack Retirement Group—has served as investment adviser to the plans since 2009. The plaintiffs contend Cammack is a fiduciary to the plan because it rendered investment advice for a fee.

In a statement, Cammack said, “We believe the claims have no merit and will be vigorously defending them.”

The complaint alleges Cammack gave plan fiduciaries “flawed advice.” It says the use of Morningstar weighted averages is an inappropriate benchmark for evaluating fees charged by the investment options offered in the plans because these averages include mostly retail share classes of funds that carry far higher fees than those appropriate for inclusion in massive jumbo plans, like the NYU Plans. “To use the Morningstar blended average to evaluate the appropriateness of the fees in the Plans would produce distorted results that give the incorrect appearance that high-fee funds in the Plans had reasonable fees compared to industry averages that fail to account for the massive size and bargaining power of the Plans,” the complaint says.

Plantiffs contend that Cammack’s vice president, Jan Rezler, has admitted that the use of Morningstar averages as a fee benchmark is inappropriate for large plans such as NYU’s. Yet, they allege, when Cammack actually became the plans’ investment consultant, Rezler has conceded under oath that Cammack used those Morningstar fee averages to evaluate each of the plans’ funds. “This use of an improper benchmark masked the excessive fees in the Plans’ funds and reveals a flawed benchmarking process,” the complaint says.

In addition, plaintiffs allege that despite their long histories of dramatic underperformance and exorbitant fees, Cammack never recommended removing the CREF Stock or TIAA Real Estate Accounts. They say the Retirement Plan Committee’s co-chair, Margaret Meagher, admitted that the committee never considered removing the CREF Stock Account and never asked Cammack whether they considered the prudence of the CREF Stock Account since TIAA required its inclusion in the plans.

According to the allegations, had Cammack conducted a comprehensive analysis of the TIAA Real Estate Account when Cammack was first engaged as the plans’ adviser, the fund’s exorbitant fees and decade’s worth of substantial underperformance for the period leading up to December 31, 2009 (and continuing thereafter), would have provided Cammack with all the necessary information to recommend the fund’s removal.

“As a result of Cammack’s imprudent investment advice failing to recommend the removal of the imprudent TIAA Real Estate and CREF Stock Accounts despite their high fees and histories of abysmal performance, the Plans suffered tremendous losses,” the complaint says.