Pension & Benefits News Third Circuit removes ERISA liability shield, subjecting university 403(b) plan fiduciaries to suit for excess fees
Wednesday, September 4, 2019

Third Circuit removes ERISA liability shield, subjecting university 403(b) plan fiduciaries to suit for excess fees

By Pension and Benefits Editorial Staff

Rejecting a bright line standard that would allow fiduciaries to insulate themselves from liability by merely offering a mix and range of investment options, the U.S. Court of Appeals in Philadelphia (CA-3) has allowed participants in a university-sponsored 403(b) plan to advance fiduciary breach claims involving excess administrative fees, retention of underperforming investment options, and other alleged violations of the duty of prudence. However, the participants could not sustain prohibited transaction claims absent allegations of the fiduciaries’ specific intent to benefit service provider parties in interest.

Excess fees from locked in investment options. The University of Pennsylvania maintained a 403(b) plan that, at the close of 2014, had $3.8 billion in net assets and 21,142 participants. The plan offered 78 investment options, structured along four tiers, geared to the varying investment sophistication and comfort level of individual participants.

The options were made available to plan participants and beneficiaries by the plan’s exclusive providers, TIAA-CREF and Vanguard. At the end of 2014, Vanguard managed 48 mutual fund options (totaling $1.3 billion) and TIAA-CREF managed 30 options (totaling $2.5 billion). In addition, Vanguard and TIAA-CREF served as the recordkeeper for their respective offerings.

Plan participants brought suit under ERISA, alleging breaches of fiduciary duty, prohibited transactions, and failure to monitor other fiduciaries. Specifically, the participants claimed that the plan fiduciaries breached their duties under ERISA by: “locking” the plan into the two investment companies; subjecting the plan to unreasonably high administrative costs by failing to seek competitive bids; and permitting underperforming funds to remain in the plan.

A federal trial court dismissed the participants’ complaint in its entirety, ruling that the participants failed to state a claim because the underlying factual allegations could also indicate rational conduct. The plan offered a reasonable mix and range of investment options that, in the court’s estimation, afforded plan participants with sufficient options from which to make investment choices. In addition, the court dismissed the participants’ prohibited transaction claims, explaining that the service agreements could not constitute prohibited transactions absent evidence that the fiduciaries harbored the subjective intention to benefit a party in interest.

Applicable pleading standard. Initially, the appeals court addressed the pleading standard required to state a plausible claim for relief sufficient to withstand a motion to dismiss. As the first appeals court to address the issues underlying one of the many ERISA lawsuits filed challenging the alleged mismanagement of university-sponsored 403(b) plans, the court’s analysis may prove very instructive.

The trial court applied the standard articulated by the United States Supreme Court in Bell Atl. Corp. v. Twombly (U.S. Sup Ct (2007), 550 U.S, 544), that required the dismissal of claims challenging fiduciary actions that were at “at least just as much in line with a wide swath of rational and competitive business strategies in the market as they are with a fiduciary breach.” The appeals court, however, found the Twombly standard to be limited to antitrust cases, and not applicable to ERISA claims for fiduciary breach. Stressing the remedial and protective purposes of ERISA, the court explained that, to the extent that the trial court required participants to rule out lawful explanations for the fiduciaries’ conduct, it erred.

The trial court also relied on the Third Circuit precedent of Renfro v. Unisys Corp. (CA-3 (2011), 671 F. 3d 314) in which the court explained that a fiduciary breach claim must be examined against the backdrop of the mix and range of available investment options. The appeals court in the instant case, however, stressed that Renfro did not establish a “bright line” standard that would allow fiduciaries to insulate themselves from liability for fiduciary breach by merely offering a meaningful mix and range of investment options. Such a bright line standard, the court noted, would hinder the evaluation of fiduciary performance as measured against contemporary industry practices.

Plausible fiduciary breach claims. Having determined the appropriate pleading standard, the court, employing a “holistic approach” that factored in the range of investment options under the plan, the reasonableness of administrative and investment fees, the selection and retention of investment options, practices of similar fiduciaries, and ERISA’s remedial scheme, concluded that the participants had plausibly alleged a breach of fiduciary duty. The participants’ complaint contained numerous factual allegations (including specific benchmark comparisons), that, taken as whole, indicated that the fiduciaries may have failed to perform their duties (including the duty to defray administrative expenses) with the required level of care, skill, prudence, and diligence. The trial court, the appeals court stressed, erred by ignoring reasonable inferences supported by the alleged facts and by requiring the participants to plead facts contradicting those misplaced inferences.

Service provider agreements did not show intent to benefit party in interest. The trial court rejected the argument that the contractual arrangements between the fiduciaries and the investment providers constituted a prohibited furnishing of services or transfer. The transactions were service provider agreements that, the trial court concluded, were not designed to benefit other parties at the expense of plan participants and beneficiaries and did not involve any illegal kickbacks.

The appeals court affirmed, declining to accept the per se rule adopted by the Seventh Circuit (in Allen v. Great Banc Trust Co., CA-7 (2016), 835 F. 3d 670), that would bar all transactions between a plan and a party in interest as a prohibited transaction. ERISA Sec. 406(a), the court reasoned, is designed to prevent transactions likely to injure the plan and self-dealing, and does not prohibit “ubiquitous” service transactions and “ordinary” service arrangements. Interpreting ERISA Sec. 406(a) to prohibit per se the furnishing of necessary goods and services, the court stressed, would be “absurd.”

Noting that the purpose of ERISA Sec. 406(a) is to prevent transactions that present legitimate risks to participants and beneficiaries, the court further explained that, absent factual allegations that support an element of intent to benefit a party in interest, plan participants cannot plausibly allege that a transaction involving the exchange of goods and services between a plan and a party in interest is a prohibited transaction. By contrast, the conclusory allegations in the participants’ complaint did not allege that the fiduciaries harbored the specific intent to benefit TIAA-CREF or Vanguard through the use or transfer of plan assets. Accordingly, the participants’ prohibited transaction claims were properly dismissed.

SOURCE: Sweda v. University of Pennsylvania (CA-3).

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