KEY POINT: This ruling causes significant prejudice to plan sponsors like Boston College who have an intentional and conscientious fiduciary process, because they are essentially guilty of fiduciary imprudence under this summary judgment standard until proven innocent at trial. It turns fiduciary law into a liability trap when the trial bar can challenge any fiduciary discretionary decision, knowing the court will assume that proof of fiduciary prudence is inherently a fact question that cannot be dismissed in motions practice.
The fiduciaries of Boston College’s defined contribution plans engaged in a deliberative process to manage plan investments and fees. They were guided by the committee’s investment consultant Fiducient, whose annual benchmarks validated that the plan’s recordkeeping fees were reasonable. Plan fiduciaries conducted a comprehensive request-for-proposal in 2018 to evaluate whether to consolidate to one recordkeeper and whether it was possible to reduce plan administrative fees. Fiducient also provided plan fiduciaries with detailed quarterly analyses of the performance of all plan investments, including watchlists to track whether an investment should be replaced. Plan fiduciaries tracked all plan investments, and had a track record of replacing certain investments that were underperforming. This is all textbook best-in-class fiduciary process.
But when the Boston College plans were sued in 2022 for alleged excess recordkeeping fees and deficient investment performance of two popular TIAA investment options – including supposedly ignoring “red flags” from the twenty-plus previous excess fee cases filed against other jumbo university plans – the court denied its motion for summary judgment in an April 11, 2023 decision. Boston College has to defend its fiduciary process in an evidentiary trial, not because it failed to follow fiduciary processes, but because the court held that “it is difficult for a fiduciary to show that as a matter of law it did not violate its duty-of-prudence.” In other words, you are guilty until proven innocent at trial in ERISA breach of fiduciary duty lawsuits – at least in the First Circuit Court of Appeals where over 90% of all cases survive a motion to dismiss. And now the District of Massachusetts in the Boston College case goes one step further, proclaiming that summary judgment is inappropriate for all fiduciary imprudence claims, because they are fact-intensive and fiduciaries have a “heavy burden” to prove fiduciary prudence and disprove loss causation.
This ruling opens conscientious plan fiduciaries to unfair public ridicule of complex fiduciary decisions, not to mention potential liability for even routine fiduciary investment choices. Look what happened to Boston College. After deriding the university for failing to act on “red flags” from other universities sued on the same TIAA investments, discovery showed that the plan fiduciaries were closely tracking the very same litigation and trying to learn from what other plan sponsors might have done wrong. But plaintiffs mocked the Boston College fiduciaries for creating a bad faith “paper trail” when the university’s fiduciary committee meeting minutes reflected deliberation over how to avoid being sued like so many other universities. Plaintiffs further second-guessed why Boston College did not consolidate to one recordkeeper after a 2018 request-for-proposal, and why Boston College maintained investments that were challenged in other lawsuits. But Boston College had a documented fiduciary record on all of these decisions. The Boston College fiduciaries intended to follow best fiduciary process, but nevertheless face a trial in which they are being second-guessed on their fiduciary decision-making.
Under this court’s ruling, ERISA is not a law of process as designed, but a liability trap that allows the trial bar to challenge any process-based decision they think can be leveraged into settlements and legal fees. This case is worth a deep dive to understand how plan fiduciaries can face liability for discretionary plan decisions despite following a best-in-class process that is guided by a knowledgeable investment advisor. Specifically, it should inform plan sponsors that they face increased liability if they retain investments placed on a watchlist for even a single quarter. Plan sponsors are also at a higher risk of liability if they retain investments that are challenged in other excess fee cases, even if those lawsuits are meritless. None of this is fair, but it is the reality in the current litigation environment tolerated by the federal court system.
The Boston College Excess Fee Case
It is well documented that Schlichter Bogard and other law firms sued twenty large university plan sponsors for alleged excessive plan fees and imprudent investments from 2016 to 2018. The cases largely involved similar excess fee claims involving (1) multiple recordkeepers with uncapped fees based on a percentage-of-assets with revenue sharing from plan investments; and (2) challenges to the same TIAA annuities and investments. Out of the 20 original cases filed against university plans, fifteen cases have settled for a total of $152.9M – an average settlement over $10 million. With one case voluntarily dismissed [against Rochester University], and the Georgetown dismissal affirmed on appeal just this month, only three cases are still pending, with the Yale’s jury victory on appeal; Cornell’s summary judgment victory on appeal to the Supreme Court; and Northwestern’s remand from the Supreme Court pending back in the Illinois district court. These results show how plaintiff law firms had significant success on these initial wave of university cases, with plan sponsors prevailing in just a few of the cases after significant time and defense expenses, with two of the three victories still subject to appellate review.
We would be the first to admit that many of these cases raised concerning fact patterns, including the uncapped revenue sharing and multiple recordkeepers. But if you study these cases more closely, however, it reveals that university plans have unique features that make them more complex to manage than typical jumbo 401k plans. This includes the TIAA annuity offering in all of these plans. TIAA has restrictions that makes it difficult to move to another recordkeeping platform. These annuities are also very popular with university participants, and thus difficult for fiduciaries to remove from their investment offerings or consolidate into a single platform. The trial bar may not like some of these TIAA annuity and real estate investments, but university-plan participants want these investments in their retirement portfolios.
The other key issue demonstrated from the Yale, Cornell, and Northwestern cases that have developed factual records from discovery is that many of these university plans made significant plan changes over time. Maybe the changes were not fast enough to satisfy the Schlichter law firm who filed the first cases, but the evidence developed in these cases has demonstrated that, at least for most of the plans sued, plan fiduciaries started investigating as early as the 403b fiduciary law changes in 2010 whether it was feasible to consolidate to one recordkeeper, how to reduce plan recordkeeping and investment fees, and how to best streamline investment lineups to leverage plan size to reduce fees. We believe that the plan changes that Yale made over time, including changes before it was sued in 2016, were instrumental in their jury verdict. The collective evidence from these lawsuits is that many of the universities made deliberate, but consequential changes to their plans that benefited plan participants. If Northwestern continues to defend the excess fee case that has spanned over eight years, including a trip to the Supreme Court, we believe the plan fiduciaries will be able to demonstrate that they made significant changes to the plan structure that reduced fees for plan participants. These changes demonstrate fiduciary diligence that rebuts the central premise of the excess fees cases that the plan fiduciaries “were asleep at the wheel.”
Against this backdrop, Boston College was one of four additional universities that were sued in the subsequent years after the initial blitzkrieg against university plans. In the 2022 fiduciary imprudence complaint filed against Boston College, the Fair Work P.C. law firm alleged that Boston College fiduciaries “ignored public red flags about TIAA and Fidelity contrary to participants’ interests.” The specific “red flags” were the “court decisions concluding that specific investments in the Plans were imprudent.” For example, the complaint alleged that the Third Circuit in Sweda v. Univ. of Pennsylvania, 923 F.3d 320, 331 (3d Cir. 2019), held that “a complaint plausibly alleged that the fiduciaries of the University of Pennsylvania’s retirement plans breached their fiduciary duties in part because their plan offered the TIAA Real Estate Account and the CREF Stock Account.” And in 2018, “a Court within the First Circuit—the District of Rhode Island—similarly concluded that participants in Brown University’s retirement plan stated a claim based on the underperformance and costly nature of the TIAA Real Estate Account and the CREF Stock Account.” See Short v. Brown Univ., 320 F. Supp.3d 363, 372 (D.R.I. 2018). Nevertheless, the complaint alleged that both TIAA investment options remained in the Boston College plan. The complaint also highlighted the joint investigation by the Securities and Exchange Commission and New York’s Attorney General Letitia James that “brought to light disturbing information about a TIAA subsidiary’s marketing practices” that scared plan participants with a “false and misleading marketing pitch to convince investors to roll over assets from low-fee employer-sponsored retirement plans to individual managed accounts in TIAA Services’ Portfolio Advisor program, on which TIAA Services charged lucrative management fees.” In re Investigation by Letitia James of TIAACREF Individual & Institutional Services, LLC, Assurance of Discontinuance at 1, 21-035 (July 13, 2021). We mention these “red flags” that the committee supposedly ignored, because the same plaintiff lawyers mocked Boston College fiduciaries in their summary judgment response for tracking the very same litigation.
On page 20 of the mammoth 126-page summary judgment decision, the judge explains the key premise of his decision to deny summary judgment is that the Congressional intent of ERISA was “to offer enhanced protections for employees” and not employers. According to the court, “[t]his congressional intent, coupled with the fact that duty-of-prudence inquiries involve reasonableness determinations, which are more appropriately decided at trial, is telling: it is difficult for a fiduciary to show that as a matter of law it did not violate its duty-of prudence.” (emphasis added). In other words, fiduciaries have a heavy burden to prove that their process is prudent, because fiduciary prudence is fact intensive and not appropriate for summary judgment. We note that the judge had no citation to his misguided notion that ERISA was designed only to protect employees. To the contrary, ERISA was intended to serve as a balance between protecting participants and providing employers with a uniform fiduciary standard to encourage formation of employee benefit plans. The true purpose of ERISA from fifty years ago has been lost in this type of participant-biased decision.
The specific issues on summary judgment involved the fiduciary imprudence claims alleging (1) excessive recordkeeping fees and (2) alleged fiduciary imprudence of the CREF Stock Fund and the TIAA Real Estate Fund. Summary judgment was denied on the proof of the fiduciary process, but split on the issue of loss causation. The recordkeeping claims ended up being evaluated in two phases: before the 2018 RFP, which were dismissed for lack of proof of loss because plaintiffs had no proof to support their $50 fee benchmark; and then 2018 forward, which the court held were viable because the RFP established a comparator from the Fidelity consolidation bid. Similarly, the investment fee claims involved two separate investments: (1) whether it was imprudent to keep the TIAA CREF Stock Fund (which claim survived summary judgment); and (2) whether it was imprudent to maintain the TIAA Real Estate Fund (which claim was dismissed on loss causation).
As we discuss below, the judge ended up dismissing half of the case, despite professing to only slightly “trimming” the case in his epilogue against the use of summary judgment in fact-intensive fiduciary imprudence cases. But Boston College still faces the substantial expense of a trial and high risk of liability on the remaining claims, notwithstanding demonstrating process-based reasons for not consolidating to one recordkeeper after the 2018 RFP, and maintaining the two challenged TIAA investments that were very popular with its plan participants. The decision on both of these claims allows hindsight second-guessing of discretionary fiduciary decisions that is not supposed to be allowed under a process-based statute like ERISA.
ISSUE #1: RECORDKEEPING FEE CLAIMS: The plans’ investment consultant Fiducient confirmed that the plans’ recordkeeping fees were reasonable based on annual benchmarking. But the court nevertheless denied summary judgment by allowing participants to claim that plan fiduciaries were potentially negligent in declining to consolidate the plan recordkeeping with Fidelity for $31 based on the 2018 RFP results. The fiduciary best practice of conducting a RFP is used against the plan fiduciaries to credit plaintiff’s loss argument.
Boston College sponsors two defined contribution plans. TIAA is the long-time recordkeeper for Plan I, and Fidelity is the recordkeeper for Plan II. Plan I contains the TIAA annuity option, which prevents Boston College from transferring annuity assets without the direction of the plan participant. Recordkeeping for university plans is complicated by the TIAA annuity product, which is included in nearly every plan. University employees want and value the TIAA annuity.
The summary judgment record confirmed that the Boston College plan committee reviewed and discussed recordkeeping fee analyses prepared by Fiducient on at least an annual basis. The Fiducient fee analyses and benchmarking validated based that the plans fees were reasonable.
In 2018, Fiducient assisted the plan committee with a Request for Proposal, a competitive bidding process to allow the committee to explore its recordkeeping options: whether to retain its two incumbent recordkeepers, replace either recordkeeper, or consolidate into a single recordkeeper. The committee reviewed proposals from TIAA, Fidelity, Empower, Vanguard, and Transamerica. TIAA and Fidelity’s recordkeeping proposals provided certain non-core services for which other proposals required additional fees, waived contract termination fees, and provided a fee guarantee for five years. The lowest bid submitted during the 2018 RFP was $31 for a single recordkeeping arrangement under Fidelity or Empower. The committee nevertheless ultimately decided to keep both TIAA and Fidelity as its recordkeepers, and decided not to consolidate to a single recordkeeper for both plans. Based on committee meeting minutes, the final decision was based on factors such as preserving participant choice of the TIAA annuities, and avoiding disruption to participants. But there was a deliberate process in making the decision that was documented – exactly what every plan committee is trained to do.
The court started the analysis by confirming that there was no genuine dispute that the Boston College fiduciary committee engaged in annual negotiations to lower recordkeeping fees. The committee also received annual benchmarking from Fiducient of plan fees, and committee members discussed these reports at meetings at least on an annual basis. Participants tried to argue that the committee members did not know what comparator plans were included in the Fiducient benchmarking report. And plaintiff’s expert cynically attempted to argue that the benchmarks were cherry-picked from “a very limited set of overpriced” university plans, and did not include the entire market of plans. But the court did not allow this type of nitpicking, especially because the Fiducient benchmark report included over 500 plans. Importantly, Fiducient’s benchmark reports showed that Plan I’s fees were lower than comparable plans in all but one year.
Plaintiffs next argued that the plan fiduciaries were imprudent by turning down a $31 per participant bid from Fidelity to consolidate the recordkeeping for both plans with one recordkeeper. Plaintiffs argued that the committee’s beliefs regarding consumer choice and disruption were inappropriate considerations in deciding not to consolidate. Plaintiffs argued that the plan fiduciaries turned down an opportunity for what they claimed was considerable costs savings of $31 compared to $51 for Plan I and $47 for Plan II.
[Encore Note: It is often lost in these excess fee cases that the fiduciary malpractice claims often involve about $20 per year – an almost inconsequential amount. With all of the feverish recordkeeping fee litigation, it is important to remember that well over 80% of the fees in a defined contribution plan involve the actual investments. Recordkeeping fee deviations when charged on a fixed-fee basis often constitute nominal amounts that have no material impact on a participant’s retirement prospects. The investment fees are more consequential. The entire dispute over $31 versus $47 or 51 for an annual recordkeeping fee is absurd. $20 barely buys you the #1 mean combo at Chick-Fil-A these days. It is not going to change the retirement timeline for any Boston College professor.]
Participants also contended that the BC committee was confused as to TIAA’s recordkeeping fees: whether they were $90 or $59 before the RFP (which was then reduced to $79 overall and $51 for Plan I after the 2018 RFP). This was because BC’s entire relationship with TIAA was referred to as the “unique participant fee,” referring to all plans administered by TIAA, whereas the fee specific to Plan I was referred to as the “per participant fee.”
Finally, plaintiffs argued that the committee members had potential conflict of interests with incumbent recordkeepers, and thus there was reason to doubt the committee’s objectivity during the 2018 RFP. For example, one committee member admitted to accepting sporting event tickets from TIAA and Fidelity, but did not recuse himself from the 2018 RFP vote, nor did he disclose this potential conflict with other members of the committee. Another committee member was on the TIAA-Nuveen investment council, which provided Zona access to networking opportunities and consisted of TIAA clients. The court thus held that there is a genuine dispute of fact whether there was a conflict of interest with respect to the RFP decision.
Despite the committee’s fiduciary process, however, the court found that there was a genuine issue of material fact as to whether the committee prudently decided not to consolidate. But the court was more circumspect of plaintiffs’ claims on loss causation. Plaintiffs argued that recordkeeping fees should have been $50 prior to 2018, and then $31 after the 2018 RFP, because that was the low bid in the RFP.
Like most cases, plaintiffs had no basis for their purported benchmark that $50 was a reasonable fee. The court noted that the same expert testified in the Cornell excess fee case (Ty Minnich) and used his purported “experience” rather than actual evidence. He could not identify a single plan with his purported reasonable fee. Minnich had the same flaws in the Boston College case. He had no indication, aside from this “experience,” as to how he came up with a reasonable fee of $50 from 2016 to 2018. The court was further persuaded that Minnich was unable to identify any plan with a $50 recordkeeping fee during the same time period. The court thus excluded his $50 “reasonable” fee testimony.
From 2018 onward, however, Minnich argued that the reasonable recordkeeping fee was $31, because that was the tailored bid from Fidelity, an incumbent recordkeeper, in the 2018 RFP. The court held that this was a legitimate alternative or benchmark from which to judge potential loss causation. Minnich had no evidence of any comparable plan with a $31 recordkeeping fee, but used the plan’s diligence against it.
The issue of loss causation as to whether Boston was imprudent in failing to consolidate to one recordkeeper to achieve the $31 reduced recordkeeping fee gives interesting statistics as to what peer large university plans have done on the exact issue. Boston College’s expert Steven Gissiner set forth data on the 28 universities with assets over $500 million, 12 have a single recordkeeper (without “frozen” providers) and 14 use multiple recordkeepers for their active investments. The remaining two universities selected a single recordkeeper for future contributions, but still have legacy assets retained by TIAA. Thus, 14 university plans opted to use a single recordkeeper and 14 opted to use multiple recordkeepers. Boston College did what half – fifty percent — of its peers did.
But the court nevertheless held that this only showed that a hypothetical fiduciary could have opted not to consolidate plans; it does not serve as incontrovertible evidence on summary judgment that a hypothetical prudent fiduciary would have chosen not to consolidate the plans. The court acknowledged that Boston College provided “compelling evidence that a hypothetical fiduciary would have made the same choice,” but Boston College failed to meet the “heavy burden under ERISA of disproving causation.” This is a harsh ruling considering that Fiducient opined that plan fees were reasonable after the RFP, even though the plans were not consolidated. It was a legitimate judgment call that fifty percent of peer plans made, but one the court held participants can challenge as fiduciary imprudence.
In summary, the court found no admissible loss before the 2018 RFP, but denied summary judgment based on genuine dispute from 2018 onward based on (1) whether it was prudent for the committee to not consolidate the plans to a single recordkeeper; and (2) whether the committee was aware of the distinction between the unique participant fee and the per participant fee; and (3) whether some committee members had conflicts of interests that warranted recusal during the 2018 RFP vote.
If you step back, you will realize that plaintiffs never provided any reliable benchmarks to show that Boston College’s recordkeeping fees were unreasonable at any time – before or after the 2018 RFP. The only reason that the court denied summary judgment for the post-2018 excess recordkeeping fee claim is based on the $31 RFP that Boston College conducted on its own initiative, as part of its fiduciary due diligence. Most excess fee cases allege that it is circumstantial proof of a deficient fiduciary process because a plan sponsor did not conduct a RFP. By contrast, Boston College is subject to liability because it affirmatively conducted a RFP: it is being held accountable for a $31 benchmark that it created itself. In other words, its own due diligence in conducting an RFP is being used against it. Even though Fiducient opined annually that its recordkeeping fees were reasonable – before and after the RFP – Boston College will be on trial to defend the result of its own fiduciary process.
ERISA is supposed to allow discretion to make decisions, like choosing between reasonable providers. But this court is holding the RFP against Boston College. It creates the perverse lesson that you will be at risk of liability any time you decline a lower-cost opportunity. Even if you document your decisions as to why you declined lower fees, and even if it is consistent with what many of your peer fiduciaries have done, a court can rule that this is an issue of fact that cannot be dismissed before trial – a process that takes millions of dollars and a waste of significant time for plan sponsors. This is results-based liability that is exactly the opposite of the process-based fiduciary liability standard that ERISA intended.
ISSUE #2: CHALLENGED INVESTMENT CLAIMS: The Court finds an issue of fact on not removing the TIAA CREF stock fund, because it rules that extra diligence is required when a fund is underperforming, even temporarily. But the key fact is that Fiducient never recommended removing the CREF Stock Fund.
The summary judgment record demonstrated that the Boston College Plan committee reviewed the plans investments at each meeting, and discussed performance data provided by Fiducient. Fiducient assigned each investment a rating of “maintain,” “watch,” “discuss,” or “terminate.” During the class period, some of the plans’ investments were placed on the “watch” list, and the committee made changes to its investment lineup. Importantly, there was no evidence that Fiducient recommended that the committee terminate the two TIAA investments that plaintiffs alleged were imprudent. But the court nevertheless refused to grant summary judgment on the imprudence claim relating to the CREF Stock Account, because there were temporary periods of underperformance of plan benchmarks, and the court held that a higher level of process is needed when an investment underperforms – evidence that the court held is fact intensive and not appropriate for disposition on summary judgment. The only difference between the ruling on the CREF Stock Account and the TIAA Real Estate Account is that the imprudence claim for the latter investment was dismissed because it was never on a temporary watchlist.
The CREF Stock Account is “an actively-managed variable annuity that seeks favorable long-term returns through capital appreciation and investment income.” During the entire challenged class period, the summary judgment record showed that the plan fiduciaries deliberated on the proper benchmarks to track the performance of an investment with a mix of foreign and domestic equities. In 2020, the committee followed Fiducient’ advice to place the CREF Stock Account on the “Watch” list because of the departure of a portfolio manager and “sustained underperformance.” It remained on the “Watch” list until September 2021, when Fiducient changed the status of the investment to “Maintain.”
The court held that there was no genuine dispute of material fact that the BC committee had a prudent process in place to evaluate investments: it met regularly to review and discuss investments, generally devoted more time to items place on the watch list, and made changes to its investments lineups. The committee asked Fiducient questions about the investments and requested additional material to understand the performance. All of this is evidence of a deliberate fiduciary process in monitoring the investment. But the court held that this “prudent process, however, is not enough for Boston College to prevail on summary judgment.”
Specifically, the court found that there were factual issues regarding whether the CREF fund experienced underperformance relative to its benchmarks. The evidence showed that the fund was coded “orange” in 2016 indicating performance in the 76th-100th percentile. It was undisputed that it satisfied all criteria to be put on the watch list, but the record was disputed as to whether it was placed on the watch list. Plaintiff and defense experts also disputed whether the CREF fund had poor performance. Based on this, the court held that there was a genuine dispute as to whether the CREF Stock Account underperformed relative to its benchmarks throughout the class period. And based on this performance issue, the court ruled that “a reasonable factfinder could find that the CREF Stock Account’s performance, especially after it was put on “Watch” for sustained underperformance, should have compelled the committee to subject it to additional review and monitoring.”
The court then further held that an issue of fact remains as to whether the committee “engaged in a thorough and reasoned decision-making process in deciding to retain the CREF Stock Account.” Participants argued that the plan meeting minutes were perfunctory and thus demonstrated an imprudent process. The court did not agree that the committee minutes were insufficient, but the court still found that the record was not detailed enough given the performance issues, at least compared to the record in the excess fee case against Cornell as described in the New York court’s decision in Cunningham v. Cornell. The court held that the record was unclear whether plan fiduciaries had “specific discussions” about the CREF Stock Account’s performance and “the pros and cons of keeping it,” especially in 2020 when it was put on the Fiducient watchlist. To show you how detailed the court want the process to be documented, the court faulted the committee for failing to document in the minutes that it discussed “alternatives” to the CREF Stock Account in 2020 after it was placed on the watchlist – even though there was evidence of the committee discussing alternatives to the CREF annuities in 2019.
We think the criticism by the court is unfair, but all plan sponsors can learn from this decision. The court is signaling that a higher level of due diligence is required – what the court called “an additional review” that is above and beyond normal procedures and practices – when an investment is placed on a watchlist. This additional due diligence requires comparing the underperforming fund to potential alternatives, or otherwise the court may infer, like in the Jacobs v. Verizon case, that the plan fiduciary “policies and procedures in place may not have functioned as intended.” Finally, the plan minutes need to reflect a robust questioning of the investment that documents the pros and cons of the decision whether to retain or terminate the investment. This case is signaling that plan minutes must include evidence of questioning, alternative options considered, express consideration of pros and cons of every decision. None of this is found in the ERISA statute, but this is an activist court creating its own fiduciary process standards that is biased towards allowing participants to challenge discretionary decisions.
The expert testimony provides interesting statistics from which to see how fiduciaries in other jumbo university plans handled the CREF Stock Account investment. It was highly rated 4-5 stars by Morningstar during the class period. Defense expert Dr. Russell Wermers testified that at least 49 out 51 of the largest universities with over one billion in assets offered the CREF Stock Account from 2015 to 2021. Wermer’s testified that 20 of these plans discontinued offering the CREF Stock Account by freezing new contributions. The court found that the evidence of 20 other plans freezing the CREF stock account was enough to deny summary judgment on the grounds that it was not objectively prudent to continue offering the investment. This is despite further evidence that the amount of invested assets did not decline in the plans that froze the CREF Stock Account. It remained a popular choice among plan participants. The court found this “compelling evidence,” but not enough for Boston College to meet the “heavy burden” of providing objective prudence on summary judgment, primarily because of the evidence of 20 other plans making a different decision.
Whereas the court denied summary judgment on the CREF Stock Account imprudence claim, the court dismissed the imprudence claim against the TIAA Real Estate Account, because there was no evidence of underperformance that would necessitate the higher level of fiduciary process. The TIAA Real Estate Account is “a tax-deferred variable annuity account that seeks to generate favorable returns primarily through rental income and the appreciation of a diversified portfolio of directly held, private real estate-related investments” by “purchasing direct ownership interest in income-producing properties,” including residential, official, industrial, and foreign properties. The summary judgment record demonstrated that the plan committee assigned benchmarks to track the investment performance. The committee adjusted the performance of the account due to the liquidity restriction of the investment. In September 2022, Fiducient placed the Real Estate Account on “Discuss” status following the departure of the lead portfolio manager. The designation was changed back to “Maintain” by the fourth quarter of 2022. Participants argued that the plan fiduciaries failed to consider the cash drag of the investment, and argued that the fund had deficient performance based on disputed benchmarks, which caused the court to deny summary judgment on process grounds. But the court granted summary judgment on loss causation grounds because the investment never underperformed to the level of needing to be placed on a watchlist.
This ruling with respect to the CREF Stock Account places undue risk on any plan that has an underperforming investment. It suggests that plan fiduciaries need to immediately remove any investment that underperforms in the short-term. A court with a bias towards participants will rule that any fiduciary breach claim for an investment that has even temporary underperformance cannot be dismissed before trial because it is an automatic breach of fiduciary duty.
The decision is also problematic for any plan that has an investment that is challenged in any other excess fee case. Many popular target-date funds have been challenged in litigation for alleged underperformance. Fidelity Freedom funds, for example, have been challenged in many cases, along with target-date funds sponsored by JP Morgan Smart Retirement Plans, Northern Trust and Wells Fargo. If the ruling of this court is followed, a plaintiff firm can find a participant to challenge any plan with any of these previously-challenged investments, knowing they get an automatic golden ticket passed a motion to dismiss and into trial because a court will rule that the prudence of maintaining these investments is an automatic fact issue – that fiduciary prudence cannot be proven until trial. The automatic pass to trial applies even if you have the most robust fiduciary process.
And if you assume that you are at risk for any investment that has been previously challenged – which is a lot of investments – then you have the perverse incentive to dump the investment from your portfolio, even if it might not be in the best interests of your plan participants. In other words, because of litigation risk, fiduciary law is forcing plan fiduciaries to prematurely dump investments that have short-term underperformance. It is also creating the perverse incentive to dump quality investments like Fidelity Freedom Funds, all because the trial bar has unfairly chosen to assert that the funds are imprudent.
We note that no trial judge has validated that any of these wholesale challenges to funds like the Fidelity Freedom funds are actually imprudent. To the contrary, recent trials like in Wood and Molina Healthcare have validated maligned funds like the FlexPATH target-date funds are objectively prudent. When put to the test, we believe most of the litigated investments that the trial bar has claimed imprudent will be proven to be objectively prudent and legitimate choices for plan fiduciaries to add to retirement plans. This is why ERISA law needs to be restored to original purpose of providing plan sponsors with a reliable, national fiduciary standard of liability that provides protection from results-based challenges if fiduciaries follow fiduciary best practices.
The Encore Perspective: Summary judgment should not be a “monumental waste of time” in an excess fee case when plan fiduciaries like Boston College have followed a diligent fiduciary process.
The Massachusetts district court added an “Epilogue” to opine gratuitously that “this entire summary judgment exercise has been a monumental waste of time.” But it was not a waste of time. Although the judge stated that he was only “slightly trimming the case,” his math is wrong. He dismissed half of the recordkeeping claim, and half of the alleged imprudent investment claim, both based on plaintiffs’ inability to prove loss. There was real value in moving for summary judgment. This judge railed against summary judgment as a “money waster,” but plan sponsors need motions practice to combat frivolous challenges to fiduciary decisions that were based on a legitimate fiduciary process. Otherwise plan fiduciaries and their fiduciary insurers need to budget anywhere from five to fifteen million to defend any fiduciary challenge if every case needs to be tried, even when it is a frivolous challenge to a plan with a deliberate fiduciary challenge. At some point, plan sponsors will decide that it is not financially feasible to offer voluntary defined contribution benefits based on the unfair liability.
The Boston College case is the typical excess fee case in which the alleged excessive recordkeeping fee claim is based on fake benchmarks from the dubious “experience” of the same plaintiff experts who serially appear in case after case, and not based on actual fees paid by actual plans. Moreover, the alleged investment underperformance claim was largely based on an argument that plan fiduciaries should have dismissed the two TIAA investments because they have been alleged to be imprudent in multiple other cases. The problem is that those other cases were based on the same dubious circumstantial evidence, and plan fiduciaries should have discretion to keep investments – which are vetted by a fiduciary process – even when the trial bar has attacked the same investments. The standard should be process, not whether plaintiff lawyers dislike an investment.
The Boston College decision should concern all plan sponsors, because it demonstrates that the fiduciary process protections for plan fiduciaries continues to be eroded by the relentless barrage of fiduciary imprudence lawsuits brought by an opportunistic trial bar. The track record of decisions is especially alarming in the District of Massachusetts and other venues in the First Circuit Court of Appeals. The district court stated many times that Boston College presented convincing evidence of a good faith deliberative process. But the court believes that ERISA is designed solely to protect participants, and repeatedly explained that plan sponsors will not be able to meet the “heavy burden” of proving fiduciary prudence and loss causation in fact-intensive ERISA fiduciary breach cases. The court even included an “epilogue” to explain that summary judgment is not appropriate in this type of case.
The disappointing ramification of this decision is that it means that plan fiduciaries are open targets for fiduciary breach litigation, and have no ability to dismiss the case before trial – even when they have followed an intentional and effective fiduciary process. Any fiduciary process is subject to challenge when treated as an automatic question of fact. This means that plaintiff lawyers can sue any plan they want, and plan sponsors are helpless. Any plan sponsor has to be ready to spend millions of dollars to defend against litigation attacks. That was not how fiduciary law was designed to work. ERISA was supposed to protect plan sponsors like Boston College who follow a diligent fiduciary process – not subject them to years of litigation in which they are presumed guilty until proven innocent at trial.
