It’s said that reasonable minds can differ — and that turns out to be the case in another university 401(k) suit.
The plaintiffs in this case are five employees of Massachusetts Institute of Technology (MIT) and participants in the MIT Supplemental 401(k) Plan. The suit — filed a little more than a year ago in the U.S. District Court for the District of Massachusetts — alleged breaches of the ERISA duties of loyalty and prudence based on the plan’s inclusion of retail class options, rather than institutional class options in the funds provided by Fidelity.
The suit alleged that Fidelity was paid excessive compensation for its recordkeeping services, and that MIT never engaged in a competitive bidding process for those services — and, in a claim unique to these 403(b) excessive fee cases, the plaintiffs alleged that this amounted to an illicit kickback scheme whereby Fidelity received inflated fees at the expense of the plan’s participants in exchange for: (1) making donations to the MIT endowment, and (2) Fidelity CEO Abigail Johnson’s seat on MIT’s board of trustees.
The Case Thus Far
In response to the lawsuit, defendants had filed a motion to dismiss for failure to state a claim upon which relief can be granted, and on Aug. 31, 2017, Magistrate Judge Marianne B. Bowler entered a “Report and Recommendation” to dismiss, in part, aspects of that complaint — to which both parties filed objections.
Recommendation Review
In considering that recommendation, District Court Judge Nathaniel M. Gorton noted that to survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to “state a claim to relief that is plausible on its face,” and that the court was required to “accept all factual allegations in the complaint as true and draw all reasonable inferences in the plaintiff’s favor.”
Judge Gorton noted that the plaintiffs had alleged that the MIT fiduciary-defendants selected and retained plan investment options with excessive investment management fees instead of identical, lower-cost share classes of the same funds, but that the defendants responded that no breach of duty occurred in that the plan included a wide array of options with different levels of expense. Magistrate Judge Bowler found that the conduct regarding the excessive management fees did not plausibly state a claim of violation of the duty of loyalty because plaintiffs’ theory was “speculative,” and Judge Gorton accepted and adopted that conclusion, noting that “plaintiffs rely on untenable claims such as that Abigail Johnson, CEO of Fidelity, sits on MIT’s Board of Trustees,” even though they did not allege that Johnson was involved with the plan, nor was she on the Board when Fidelity was selected as the investment provider.
Though the MIT defendants contend that their 2015 investment plan reconfiguration (which eliminated hundreds of options and retained only one Fidelity option out of 37), demonstrates that the duty of loyalty was not breached, and though that argument was accepted by the magistrate judge, it was “discounted” by Judge Gorton because, he wrote, “ameliorative measures taken after disloyal actions do not absolve defendants of their breach.” Nevertheless, he decided to “accept and adopt” the recommendation to dismiss the loyalty claim in Count I as speculative.
He noted that Magistrate Judge Bowler found that the allegations with respect to the excessive management fees plausibly state a claim for breach of the duty of prudence, and decided to accept and adopt that conclusion. Judge Gorton said that, looking at the claims in the plaintiffs’ favor, “they plausibly allege that defendants failed to obtain identical lower-cost investment options.” He noted that if defendants did, in fact, include higher fee options when identical lower fee options were available, they failed to act with the “care, skill and prudence required by ERISA.”
Judge Gorton also decided to accept and adopt Magistrate Judge Bowler’s recommendation to dismiss the duty of loyalty claim but not the duty of prudence claim. He noted that while defendants had argued that ERISA does not require fiduciaries to seek competitive bids and that plaintiffs’ loyalty claim was “mere speculation.”
However, Magistrate Judge Bowler recommended that the duty of prudence claim arising from the administrative fees be allowed to proceed, and here Judge Gorton concurred. “Defendants’ response that ERISA does not require a fiduciary to solicit competitive bids is unpersuasive,” he wrote, going on to note that, “as part of the ‘prudent man standard’ one would expect a fiduciary to obtain bids at some point during the extensive period of managing the fund, considering that the fees amount to millions of dollars per year.” He also dismissed the notion that just because the plan hadn’t paid Fidelity as much as it might have, that “does not disprove that they overpaid in the first place.”
Judge Gorton noted that a claim under Section 1106(a)(1)(D) (which defines certain prohibited transactions involving ERISA retirement plan assets) “requires that plaintiff demonstrate that the fiduciary subjectively intended to benefit a party in interest.” Consistent with his determination on the alleged kickback claims above, he rejected the magistrate judge’s conclusion that the plaintiffs plausibly alleged subjective intent because Fidelity and its CEO contributed millions of dollars to MIT, but accepted her recommendation that the claims regarding the plan’s non-mutual fund options should proceed.
Gorton concurred with Bowler’s observation that ordinarily, a duty to monitor other fiduciaries is derivative of plaintiffs’ other claims, and noted that, to the extent that plaintiffs have plausibly alleged that defendants breached their fiduciary duties directly, the plaintiffs here have also plausibly alleged that defendants have breached their duty to monitor.
There is, of course, a difference between refusing to dismiss out of hand claims that have yet to have their day in court and prevailing on those issues once they have. But for now, anyway, the charges remain to be decided that MIT fiduciaries charged excessive recordkeeping fees and failed to choose the least expensive share classes for some of the plan’s investment options.
If you’re having trouble keeping track of these suits, it’s no wonder. The list now includes plans at Cornell University, Northwestern University, Columbia University and the University of Southern California, as well as New York University and Yale. Meanwhile, some of the earlier suits are just getting to hearings on motions to dismiss, specifically Emory University and Duke University — both of which are currently proceeding to trial — and the University of Pennsylvania, which just prevailed in a similar case.
The plaintiffs in this case are five employees of Massachusetts Institute of Technology (MIT) and participants in the MIT Supplemental 401(k) Plan. The suit — filed a little more than a year ago in the U.S. District Court for the District of Massachusetts — alleged breaches of the ERISA duties of loyalty and prudence based on the plan’s inclusion of retail class options, rather than institutional class options in the funds provided by Fidelity.
The suit alleged that Fidelity was paid excessive compensation for its recordkeeping services, and that MIT never engaged in a competitive bidding process for those services — and, in a claim unique to these 403(b) excessive fee cases, the plaintiffs alleged that this amounted to an illicit kickback scheme whereby Fidelity received inflated fees at the expense of the plan’s participants in exchange for: (1) making donations to the MIT endowment, and (2) Fidelity CEO Abigail Johnson’s seat on MIT’s board of trustees.
The Case Thus Far
In response to the lawsuit, defendants had filed a motion to dismiss for failure to state a claim upon which relief can be granted, and on Aug. 31, 2017, Magistrate Judge Marianne B. Bowler entered a “Report and Recommendation” to dismiss, in part, aspects of that complaint — to which both parties filed objections.
Recommendation Review
In considering that recommendation, District Court Judge Nathaniel M. Gorton noted that to survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to “state a claim to relief that is plausible on its face,” and that the court was required to “accept all factual allegations in the complaint as true and draw all reasonable inferences in the plaintiff’s favor.”
Judge Gorton noted that the plaintiffs had alleged that the MIT fiduciary-defendants selected and retained plan investment options with excessive investment management fees instead of identical, lower-cost share classes of the same funds, but that the defendants responded that no breach of duty occurred in that the plan included a wide array of options with different levels of expense. Magistrate Judge Bowler found that the conduct regarding the excessive management fees did not plausibly state a claim of violation of the duty of loyalty because plaintiffs’ theory was “speculative,” and Judge Gorton accepted and adopted that conclusion, noting that “plaintiffs rely on untenable claims such as that Abigail Johnson, CEO of Fidelity, sits on MIT’s Board of Trustees,” even though they did not allege that Johnson was involved with the plan, nor was she on the Board when Fidelity was selected as the investment provider.
Though the MIT defendants contend that their 2015 investment plan reconfiguration (which eliminated hundreds of options and retained only one Fidelity option out of 37), demonstrates that the duty of loyalty was not breached, and though that argument was accepted by the magistrate judge, it was “discounted” by Judge Gorton because, he wrote, “ameliorative measures taken after disloyal actions do not absolve defendants of their breach.” Nevertheless, he decided to “accept and adopt” the recommendation to dismiss the loyalty claim in Count I as speculative.
He noted that Magistrate Judge Bowler found that the allegations with respect to the excessive management fees plausibly state a claim for breach of the duty of prudence, and decided to accept and adopt that conclusion. Judge Gorton said that, looking at the claims in the plaintiffs’ favor, “they plausibly allege that defendants failed to obtain identical lower-cost investment options.” He noted that if defendants did, in fact, include higher fee options when identical lower fee options were available, they failed to act with the “care, skill and prudence required by ERISA.”
Judge Gorton also decided to accept and adopt Magistrate Judge Bowler’s recommendation to dismiss the duty of loyalty claim but not the duty of prudence claim. He noted that while defendants had argued that ERISA does not require fiduciaries to seek competitive bids and that plaintiffs’ loyalty claim was “mere speculation.”
However, Magistrate Judge Bowler recommended that the duty of prudence claim arising from the administrative fees be allowed to proceed, and here Judge Gorton concurred. “Defendants’ response that ERISA does not require a fiduciary to solicit competitive bids is unpersuasive,” he wrote, going on to note that, “as part of the ‘prudent man standard’ one would expect a fiduciary to obtain bids at some point during the extensive period of managing the fund, considering that the fees amount to millions of dollars per year.” He also dismissed the notion that just because the plan hadn’t paid Fidelity as much as it might have, that “does not disprove that they overpaid in the first place.”
Judge Gorton noted that a claim under Section 1106(a)(1)(D) (which defines certain prohibited transactions involving ERISA retirement plan assets) “requires that plaintiff demonstrate that the fiduciary subjectively intended to benefit a party in interest.” Consistent with his determination on the alleged kickback claims above, he rejected the magistrate judge’s conclusion that the plaintiffs plausibly alleged subjective intent because Fidelity and its CEO contributed millions of dollars to MIT, but accepted her recommendation that the claims regarding the plan’s non-mutual fund options should proceed.
Gorton concurred with Bowler’s observation that ordinarily, a duty to monitor other fiduciaries is derivative of plaintiffs’ other claims, and noted that, to the extent that plaintiffs have plausibly alleged that defendants breached their fiduciary duties directly, the plaintiffs here have also plausibly alleged that defendants have breached their duty to monitor.
There is, of course, a difference between refusing to dismiss out of hand claims that have yet to have their day in court and prevailing on those issues once they have. But for now, anyway, the charges remain to be decided that MIT fiduciaries charged excessive recordkeeping fees and failed to choose the least expensive share classes for some of the plan’s investment options.
If you’re having trouble keeping track of these suits, it’s no wonder. The list now includes plans at Cornell University, Northwestern University, Columbia University and the University of Southern California, as well as New York University and Yale. Meanwhile, some of the earlier suits are just getting to hearings on motions to dismiss, specifically Emory University and Duke University — both of which are currently proceeding to trial — and the University of Pennsylvania, which just prevailed in a similar case.
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