Pension & Benefits News Georgetown fiduciaries withstand challenge to management of investment options under 403(b) plans
Tuesday, March 5, 2019

Georgetown fiduciaries withstand challenge to management of investment options under 403(b) plans

By Pension and Benefits Editorial Staff

Allegations that fiduciaries of 403(b) plans sponsored by Georgetown University imprudently selected and retained investment options, including a Teachers Insurance and Annuity Association (TIAA) annuity, College Retirement Equities Fund (CREF) Stock Account, and a TIAA Real Estate Account, were dismissed by a federal trial court in the District of Columbia because plan participants suffered no injury in fact warranting relief. Claims that the fiduciaries failed to monitor and control excess fees by allowing for multiple recordkeepers were also dismissed as without factual support.

403(b) plans featured multiple investment platforms and recordkeepers. Georgetown University maintains two 403(b) plans: a Defined Contribution Retirement Plan (DC Plan) and a Voluntary Contribution Retirement Plan. Participants have their own accounts in each plan and are empowered to invest their account funds across a wide array of investment options. Georgetown is the designated administrator for both plans. The university is also responsible for the management of the plans and their assets, including the selection, monitoring, and removal of investment options.

Among the investment options, are fixed and variable annuities offered by the TIAA and mutual funds offered by TIAA, Vanguard, and Fidelity. The three investment platforms maintain their own recordkeepers and separately assess fees to the plan.

The TIAA investment options included a traditional fixed annuity, a CREF Stock Account, and a TIAA Real Estate Account.

The TIAA traditional annuity is available to participants through either the DC Plan or the Voluntary Plan. However, a participant who elects the traditional annuity through the Voluntary Plan may withdraw funds at any time without penalty, while a participant who elects a traditional annuity through the DC plan may not withdraw funds until leaving employment with Georgetown and paying a 2.5% surrender charge. Participants in the DC plan may, alternatively, redirect investments, during their employment, in ten annual installments.

The CREF Stock Account is a variable annuity investment fund. The Stock Account is a globally diversified, holding 65-75% domestic equities and 25-35% foreign equities. The benchmark for the Stock Account is a composite index, comprised of the Russell 3000 Index and the MCI All Country World ex USA Investable Market Index. However, because ERISA Reg. 2550.404a-5(d)(1)(iii) precludes the use of composite benchmarks in certain disclosures, the CREF Stock Account references only the domestic Russell 3000 benchmark. Accordingly, the performance of the Stock Account cannot be fully measured by comparison exclusively to the Russell 3000 benchmark.

The TIAA Real Estate Account is a variable annuity that invests primarily in commercial real estate. The TIAA Real Estate Account is distinguished from a Real Estate Investment Trust (REIT), under which securities are generally publicly traded and exposed to market risk and potentially significant price volatility due to changes in the market, such as interest rate fluctuations. Returns on the TIAA Real Estate Account, by contrast are driven by fair value of the real property it holds and the income generated by those properties.

Individual employees invested in the plans' various investment options brought suit under ERISA Sec. 502(a) to enforce the fiduciaries' personal liability under ERISA Sec. 409(a). Specifically, the participants charged that the fiduciaries: subjected the plans to excess costs by improperly allowing TIAA, Vanguard, and Fidelity to separately provide recordkeeping services (each charging asset-based fees) for investments on their platforms; offered investment options that were more expensive than other available investment options; should have eliminated the CREF Stock Account because of underperformance as measured by the Russell 3000 Index; should have removed the TIAA Real Estate Account in favor the Vanguard REIT Index (Institutional) mutual fund; and unreasonably retained the TIAA traditional annuity despite the 2.5% surrender charge.

The Georgetown fiduciaries filed a motion to dismiss, essentially contending that the participants had not suffered an injury in fact, traceable to the fiduciaries' actions, that was sufficient to establish Constitutional standing. The trial court granted the motion to dismiss in an opinion that stressed the unique nature of 403(b) plans and the annuities held therein.

No injury in fact precludes standing. In arguing that the participants had not sustained an injury-in-fact, the fiduciaries noted that: neither of the participants bringing suit had invested in the Vanguard mutual funds; the TIAA Real Estate Account (in which one of the employees participated) performed well (despite high fees) during the relevant class period, outperforming the Vanguard REIT Account; and the one participant who invested in the TIAA traditional annuity did not attempt to withdraw funds or change investments (thereby avoiding application of the restrictions on redirected investments and the 2.5% surrender charge). The participants, however, countered that, because they were bringing suit under ERISA Sec. 502(a)(2) and (3) on behalf of the plans, they were not required to allege injury with respect to their individual benefit payments.

The court agreed with the fiduciaries that the participants suffered no injury in fact from: investment in the Vanguard funds, the 2.5% withdrawal charge under the TIAA traditional annuity, or participation in the TIAA Real Estate Account. In addition, the court dismissed the claims regarding the condition in the TIAA traditional annuity, restricting funds to reallocation over a 10-year period, because the participants never invested in the annuity and, therefore, lacked standing to represent other employees who did participate in the program.

CREF Stock Account fees. The participants charged that the CREF Stock Account carried excessive fees and historically underperformed the Russell 3000 and other lower-cost actively and passively managed investments. Specifically, it was alleged that the fiduciaries failed to conduct an analysis of the CREF Stock Account's performance and investment fees, thereby neglecting to discover that the Stock Account could not be expected to outperform the large cap retirement plan investment performance index, after fees.

The court was not persuaded, first noting that the participants' argument was based on a false premise, because the Russell 3000 Index (by itself) was not an appropriate benchmark by which to measure the performance of the CREF Stock Account, which consisted of domestic and foreign assets. Thus, the argument that the CREF Stock Account underperformed the Russell 3000 failed to state a plausible claim for relief.

Further, the court stressed that ERISA does not authorize a cause of action for underperforming funds. Fiduciaries, the court explained, are not required to select the best performing funds, but only to discharge their duties with care, skill, prudence, and diligence under the prevailing circumstances. Accordingly, the fact that the globally diversified CREF Stock Account may not have performed as well as some purely domestic accounts with different investments did not, the court ruled, indicate imprudence by the fiduciaries.

Multiple recordkeeping fees reasonable because of services provided. Finally, the participants alleged that the fiduciaries breached their ERISA duties by inviting the unnecessary expense and complexity of allowing TIAA, Vanguard, and Fidelity to provide separate recordkeeping services. According to the participants, the fiduciaries, by alternatively arranging for the recordkeeping services for the TIAA annuities and the Vanguard and Fidelity mutual funds to be provided by a single entity, could have ensured recordkeeping services across all three investment platforms for a reasonable annual fixed fee in the range of $35 per plan participant.

The fiduciaries maintained that the fact that TIAA, Vanguard, and Fidelity kept separate records for their own accounts did not warrant an inference of fiduciary mismanagement. Moreover, the fiduciaries argued that their approach to recordkeeping was typical of university 403(b) plans, which have traditionally been implemented through multiple-provider recordkeeping platforms.

In rejecting the participants' claim, the court noted the lack of factual support for the assertion that the plans should limit recordkeeping fees to $35 per participant. Accordingly, the court dismissed the case, concluding that the mere allegation that Georgetown could continue to offer the same plans and the same associated services for the annual fee of $35 per participant had “no factual support, is entirely speculative, contrary to case law and common sense, and does not warrant discovery.”

SOURCE: Wilcox v. Georgetown University (DC DC).

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