A federal court decision in an excessive fee case starts off by noting that “the late, renowned attorney-investor Charlie Munger once quipped that ‘the big money is not in the buying and selling, but in the waiting.’”
In case you were wondering, U.S. District Judge Nathaniel M. Gorton goes on to explain that the case “arises out of allegations that plaintiff, Oscar Brookins (Brookins or plaintiff), while waiting for ‘big money’ to compound in his retirement account, has been short-changed by defendants, Northeastern University (Northeastern) and Northeastern University 403(b)-Investment Committee (‘the Committee’ and collectively, ‘defendants’), in their management of the Northeastern University Retirement Plan (the Plan).”
The Suit
The reference may be a bit tortured, but the facts alleged here are a familiar litany in the excessive fee litigation genre; that “defendants’ mismanagement of the Plan has cost participants millions of dollars, leading to their paying excess fees and losing out on retirement income.” They did that by limiting “…the Plan’s participants to low-performing, high-cost investment options such as the consistently underperforming CREF Stock Account (which by itself accounts for over 10% of the Plan’s assets invested) or the costly TIAA Real Estate Account. They also subjected participants to dramatically high recordkeeping costs over several years in the class period, well higher than similar plans. Moreover, many of these options were flagged as imprudent in prior ERISA litigation of which Defendants could and should have been aware,” the suit concludes—commenting (in case the judge hearing the case wasn’t aware) that “courts have frequently concluded that such conduct is sufficient to state a claim for breach of fiduciary duty.”
The suit (Brookins v. Northeastern University et al., case number 1:22-cv-11053, in the U.S. District Court for the District of Massachusetts) filed in July 2022 goes on to state that, overall, “the Plan includes over 60 options, of which 13 are Fidelity ‘Freedom’ Target Date Funds and 11 are TIAA’s ‘Lifecycle’ Target Date Funds,” and that “the vast majority of options are either Fidelity or TIAA funds, variable annuities, or investment contracts, with only 11 funds from outside of the two families”—and also a self-directed brokerage account option.
Motion to Dismiss
In considering the motion by the defendants to dismiss the case, Judge Gorton explained a motion to dismiss (without a trial) as follow: that the subject pleading “must contain sufficient factual matter to state a claim for relief that is actionable as a matter of law and “plausible on its face,” and that “a claim is facially plausible if, after accepting as true all non-conclusory factual allegations, the court can draw the reasonable inference that the defendant is liable for the misconduct alleged.” He also noted (as every federal court does in such cases) that “when rendering that determination, a court may consider certain categories of documents extrinsic to the complaint “without converting a motion to dismiss into a motion for summary judgment.”
Recordkeeping Fees
Judge Gorton first noted that the plaintiff “contends that defendants failed to conduct a competitive bidding process for recordkeeping services and thus, breached the duty of prudence”—and then, he commented that the fiduciary defendants, “relying on two out-of-circuit decisions, defendants rejoin that they were not required to conduct a competitive request for proposal (RFP) process and that failure to conduct such a process is insufficient to state a claim for imprudence.” And while the latter argument has been sustained on more than one occasion at trials, Judge Gorton stated that “This session as well as two other sessions of this Court have taken a different approach, holding that failure to conduct a competitive bidding process for a substantial period could plausibly constitute imprudence”…and having said that, noted “Competitive bidding ensures that fees are kept as low as the market will permit, enabling plan participants to earn better returns. It is certainly plausible that failure to conduct such a process could constitute imprudence.” Here again, though, Judge Gorton took pains to note that this determination was—at this stage in the proceedings—“a viable theory of breach.”
Revenue Sharing
Judge Gorton noted that the plaintiff also alleged that the plan’s use of a revenue-sharing recordkeeping fee model “forced Plan participants to pay excessive recordkeeping fees in breach of the duty of prudence.” He then commented that the defendants essentially said that the conclusion on excessive fees was “speculative,” and that the plaintiff hadn’t sufficiently alleged that the fees were excessive relative to the services provided. While the latter argument has been sustained in a number of other court decisions, Judge Gorton noted the plaintiff’s argument that “…information related to specific costs is unascertainable because fee information under the revenue sharing model is undisclosed in the disclosure form (Form 5500),” and concluded that the plaintiff had established a plausible claim for excessive recordkeeping fees.
“The Court accepts as true plaintiff’s assertion that the recordkeeping fees determined by a revenue-sharing model are not publicly disclosed and remain within defendants’ possession. The parties and the Court agree that use of a revenue-sharing model is not per se imprudent but other allegations in the complaint are sufficient for the Court to determine that a claim for imprudence based on the revenue-sharing recordkeeping fee model here is plausible.”
Investment Management Fees/Performance
Commenting that the pleadings focus on the fees and performance of the TIAA Real Estate Account, CREF Stock Account and Fidelity Freedom Funds, Judge Gorton noted that the fiduciary defendants here (as has been the case in other such cases) argued that the plaintiff hadn’t compared the assets at issue to a “meaningful benchmark”—and while acknowledging that other cases had accepted that standard, he explained that the First Circuit Court of Appeals “has yet to consider the so-called “meaningful benchmark” standard and several sessions of this Court have rejected it.”
He continued by explaining that “while it may seem intuitive to a professional investor to evaluate fund performance and fees in the context of analogous “benchmark” funds, this Court agrees with District Judge William G. Young of this Court that evaluating the suitability of benchmarks is “inappropriate at the motion to dismiss stage.” Further, he noted that “to engage in meaningful benchmark analysis, this Court would be required to consider the merits substantively in a manner that would conflict with the Court’s obligation to draw all reasonable inferences in favor of the plaintiff.”
TIAA Real Estate Fund
Commenting that “the dispute over investment management of the TIAA Real Estate Fund illustrates the futility of factfinding at the motion to dismiss stage,” Judge Gorton proceeded to outline the performance claims and arguments from both sides as to the appropriate benchmark against which to evaluate the quality of that investment. Ultimately, he stated that “circumstantial evidence concerning deficiencies in defendants’ process for selecting and maintaining the investment does not warrant dismissal at this stage. While there may be appropriate grounds to discount the weight accorded to the ICI Report (as the plaintiff had argued), they are more suitably argued at summary judgment.”
He found a “similar story” concerning arguments made about the Fidelity Freedom Funds, though he commented “Defendants’ assertion that plaintiff conceded that higher-cost share classes are always permitted to generate revenue sharing is unfounded. The Court finds no such concession in the complaint and, in fact, plaintiff contends that the revenue sharing fee model in place is imprudent.”
As for the fiduciary defendants’ contention that fiduciaries aren’t required to pick passive over actively managed funds, “While that is a legally sound contention, it does not follow that maintaining the particular funds at issue, the K share class funds, was not imprudent as a matter of law.”
CREF Stock Account
Judge Gorton accepted as true the plaintiff’s contention that the three Vanguard funds have “similar underlying asset allocations” as the CREF Stock Account and thus are valid comparators, and he also concluded that performance intervals of one, three and five years are “plausibly appropriate comparison metrics at the motion to dismiss stage.” That said, and while he acknowledged the defendants’ argument that “under-performance alone is not enough to support a claim for imprudence,” he noted that “a claim for imprudence can survive dismissal if a court can reasonably infer ‘based on circumstantial factual allegations’ that the process of selecting or maintaining an investment was flawed.” And then proceeded to note that “the complaint contains several such circumstantial allegations[1] that would render plausible a claim of imprudence.”
TIAA as Custodian
Judge Gorton wrote that plaintiff alleged it was “imprudent, as a general matter, to maintain TIAA as a Plan custodian in light of the joint Securities and Exchange Commission-New York Attorney General investigation (the SEC-NYAG investigation) into a TIAA subsidiary”—an investigation that concerned alleged deceptive marketing practices related to “cross-selling” services to clients in TIAA-administered retirement plans.” As there were no allegations of cross-selling in this particular case, Judge Gorton did allow a motion to dismiss on this point.
As for the failure to monitor the fiduciary defendants, Judge Gorton noted that “to the extent plaintiff has plausibly alleged a claim for imprudence, he has also plausibly alleged a claim for failure to monitor fiduciaries.”
What This Means
Here we have yet another case (and in the same federal district court) where the standards embraced in other federal courts seem to have been set aside here. In fairness, those standards have sometimes not been embraced until trial (at which point the arguments had a chance to be more fully explored) or at a motion for summary judgement (where the plaintiff(s)—those bringing suit—will have had a chance to present more fully their side of the case).
Here instead we have another case of a federal judge noting that the thresholds for considering a motion to dismiss a case before those presentations and discovery are required to be tilted in favor of the party not pushing for dismissal—the participant-plaintiff. All of which feels uncertain in the result(s), and certainly inconsistent between federal district courts—though it’s actually just the outcome of individual judges making independent determinations, informed, though not driven, by the arguments presented thus far.
Stay tuned.
Footnote
[1] Specifically cited that it was the second largest investment in the Plan constituting almost one-eighth of the Plan’s total assets, and that it was also the subject of a recent ERISA imprudence claim that withstood a motion to dismiss in Short v. Brown University. “That modicum of evidence, combined with the relatively poor performance of the asset compared to the Vanguard funds make plausible the inference that fiduciaries were on notice and failed to re-evaluate the CREF Stock Account,” according to Judge Gorton.
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