Steady erosion of value
Yale offers eligible employees the opportunity to participate in a 403(b) defined contribution plan. Under the plan, participants had the opportunity to put a portion of their income into personal retirement savings accounts and invest those savings in an array of investment options. The plan's investment options included fixed and variable annuities offered by The Teachers Insurance and Annuity Association of American-College Retirement Equities Fund (TIAA-CREF) and Vanguard mutual funds.
Maintenance of a defined contribution plan involves both managing the plan's investment options and providing recordkeeping for plan participants. Plan fiduciaries typically contract with third-party vendors for both services. The process of selecting vendors and negotiating recordkeeping fees can materially affect an employee's retirement income because every dollar spent on either recordkeeping or investment management reduces the amount of money available for retirement.
Four issues remain for trial
The original complaint has been significantly trimmed since it was filed in 2016. Four issues remain, however.
The District Court found that there were genuine issues of material fact as to whether Yale breached its fiduciary duty to monitor and avoid unreasonable recordkeeping fees. The questions of fact to be considered by the jury include whether Yale:
- imprudently delayed consolidating to a single recordkeeper;
- failed to obtain competitive bids for third-party service providers;
- used asset-based (rather than per capita) pricing while failing to monitor the Plan's asset-based fees for reasonableness; and
- failed to prohibit TIAA from using confidential information to aggressively market lucrative extra services and products, including, insurance, individual retirement accounts and wealth management services - a practice known as ‘cross-selling.
Breach of fiduciary duty
ERISA Section 404 requires that plan fiduciaries act solely in the interest of participants and beneficiaries and pay the reasonable expenses of the plan. “Reasonable plan expenses” may include a variety of costs, including recordkeeping and participant communications, legally required plan updates and the cost of outsourced administrative expenses. ERISA is not specific as to what expenses are permitted and which are not.
Consequently, whether an expense is reasonable is largely evaluated in terms of process. The emphasis in fiduciary breach ERISA lawsuits tends to be on whether there is evidence that fiduciaries had a systemic process for reviewing investment results and expenses. Evidence about the practices of similar plans may be useful.
Yale’s plan had assets of roughly $5 billion as of the December 31, 2021, so the comparison would be with other large plans. The plaintiffs in this case can be expected to offer evidence that the administrative functions of the plan appear to have been understaffed for years. One person seems to have been charged with monitoring the performance of more than 100 funds.
It is notable that the Complaint in Vellali focuses specifically on the fact that plan managers did not issue a new Request for Proposal for administrative services for a substantial period. With no RFP, the fiduciaries had no opportunity to review competing bids for services. They appear to have simply let established arrangements roll on for years and years.
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A bottom-line evaluation
Because ERISA does not specifically outline which practices violate a plan fiduciary’s duty of prudence in the management of the participants’ savings, the court’s analysis will be very fact and context driven. The ultimate proof of whether there was a breach of legal duty will likely depend on whether there is evidence of individual losses.
This is rightfully a task for a jury because juries are the ultimate authority on facts. Their analysis will likely be driven by the question of whether there is convincing evidence that these practices ultimately cost individual participants and retirees the money they had set aside to live on in their later years.