Malone et al v. Teachers Insurance and Annuity Insurance Association of America

Filing 55

MEMORANDUM AND ORDER granting 43 Motion to Dismiss. Plaintiffs have not pled facts sufficient to establish that defendant was a fiduciary of the Plans with respect to its role as service provider, a condition precedent for all of plaintiffs 9; claims for legal relief. Equitable relief is not appropriate in this case. Defendant's motion to dismiss is thus GRANTED. The Clerk of the Court is directed to enter judgment for defendant TIAA. (As further set forth in this Order.) (Signed by Judge P. Kevin Castel on 3/7/2017) (cf) Modified on 3/7/2017 (cf).

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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ELAINE MALONE and PATRICIA
MCKEOUGH, on Behalf of The University of
Chicago Retirement Income Plan for Employees,
Nova Southeastern University 403(b) Plan, and
All Other Similarly Situated Plans,
Plaintiffs,
-against

15-cv-08038 (PKC)
MEMORANDUM
AND ORDER

TEACHERS INSURANCE AND ANNUITY
ASSOCIATION OF AMERICA,
Defendant.
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CASTEL, U.S.D.J.
Plaintiffs Elaine Malone and Patricia McKeough bring this action on behalf of
The University of Chicago Retirement Income Plan for Employees (the “UC Plan”) and the
Nova Southeastern University 403(b) Plan (the “Nova Plan,” and, along with the UC Plan, “the
Plans”) alleging that Defendant Teachers Insurance and Annuity Association of America
(“TIAA”) breached its fiduciary duty to the Plans under section 404(a) of the Employee
Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1104(a) and engaged in
prohibited transactions in violation of sections 406(a)(1) and 406(b), 29 U.S.C. § 1106(a)(1) &
1106(b). This putative class action seeks monetary and equitable relief for the Plans and all
similarly situated defined contribution pension plans. Based on the facts alleged in the Amended
Complaint (“AC”), the Court concludes that TIAA is not a fiduciary of the Plans, thus
foreclosing the legal and equitable relief requested. Defendant’s motion to dismiss the AC is
granted.

BACKGROUND
Malone is a member of the UC Plan for Employees and McKeough is a member
of the Nova Plan. (AC ¶¶ 1, 15-16.) The Plans are designed to provide participants, like
plaintiffs, income in retirement. (Def.’s Mem. in Supp., May 6, 2016, Dkt. No. 44 at 3.) The
employers who sponsor the Plans, the University of Chicago and Nova Southeastern University,
entered into agreements under which TIAA agreed to perform certain services for the Plans.
(Id.) TIAA provides two types of services to the Plans: (1) investment services; and (2) custodial
and record keeping services. (AC ¶ 3.) The custodial and recordkeeping services are
administrative services necessary to the operation of the Plans, while the investment services
involve the actual investment of Plan assets. (Id.) TIAA is paid an investment fee by the Plans
for its investment services. (Id.) As part of the investment services that TIAA provides to the
Plans, TIAA offers Group Annuity Contracts to Plan members, which include various pooled
fund investment offerings, such as pooled accounts and mutual funds, all of which have a tenyear contract period. (AC ¶¶ 3, 31.) All of Malone’s assets in her UC Plan account are invested
in a TIAA Traditional Annuity (Contract D055634-2). (AC ¶ 33). Almost all of McKeough’s
assets in her Nova Plan account are invested in a TIAA Traditional Annuity (Contract D1235359). (AC ¶ 34).
Payment for the recordkeeping associated with these Group Annuity Contracts is
provided for with a “recordkeeping offset,” whereby TIAA allocates a portion of the investment
fee to pay for these recordkeeping services. (AC ¶ 3.) This practice is common throughout the
industry and is known as “revenue sharing.” (Id.) This “recordkeeping offset” is paid to
defendant pursuant to the Custodial and Recordkeeping Agreements (“RSAs”), which have a
five-year contract period. (AC ¶ 27.)

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Contrary to what is allegedly common practice, TIAA will not allow this revenue
sharing to be paid to a recordkeeper other than itself. (AC ¶ 4.) Thus, if the Plans were to
change recordkeepers for the Group Annuity Contracts, they would no longer have the benefit of
revenue sharing, i.e., they would continue to pay the investment fee to TIAA, none of which
would be used to offset the recordkeeping fees charged by the new recordkeeper, such that the
Plans would be required to pay the new recordkeeper in full. (See AC ¶ 4.) In essence, the Plans
would have to pay double fees for recordkeeping, both to the new recordkeeper and to TIAA as
part of its investment fee. (See id.)
This allegedly makes it financially infeasible for the Plans to switch to a different
recordkeeper and as a practical matter locks the Plans into using TIAA as recordkeeper for the
duration of the Group Annuity Contracts. (AC ¶ 41.) Consequently (and allegedly), the Plans
are prevented from receiving the most competitively priced recordkeeping services on the market
and the Plans’ participants and their beneficiaries thereby suffer monetary injury. (AC ¶¶ 46,
47.)
TIAA’s practice of refusing to share revenue with a potential third party
recordkeeper was not a subject of negotiation with the Plans and was not disclosed to the Plans at
the time the RSAs were agreed to. (AC ¶¶ 4, 38.) The RSAs themselves are silent on the matter.
(AC ¶ 4.) Plaintiffs allege that TIAA denied the Plans access to information needed to evaluate
the presence of a conflict of interest arising from TIAA providing the Group Annuity Contracts
as well as recordkeeping services. (AC ¶ 42.) In 2012, while preparing for a meeting with a
different retirement plan client who was considering alternative vendors, senior relationship
managers allegedly instructed employees to tell the representatives of the retirement plan that the
plan did not pay fees. (AC ¶ 51.) Defendant allegedly failed to disclose that it charges

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individual Plan members a fee for wealth management services after representing that those
services were part of the overall package of services provided to the Plans and included in those
fees. (AC ¶ 52.)
LEGAL STANDARD
Rule 12(b)(6), Fed. R. Civ. P., requires a complaint to “contain sufficient factual
matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570
(2007)). In assessing the sufficiency of a complaint, a court must disregard legal conclusions,
which are not entitled to the presumption of truth. Id. Instead, the Court must examine the wellpleaded factual allegations and “determine whether they plausibly give rise to an entitlement to
relief.” Id. at 679. “Dismissal is appropriate when ‘it is clear from the face of the complaint, and
matters of which the court may take judicial notice, that the plaintiff’s claims are barred as a
matter of law.’” Parkcentral Global Hub Ltd. v. Porsche Auto. Holdings SE, 763 F.3d 198, 20809 (2d Cir. 2014) (quoting Conopco, Inc. v. Roll Int’l, 231 F.3d 82, 86 (2d Cir. 2000)).
DISCUSSION
I.

The Court has Subject Matter Jurisdiction.
Defendant contends that plaintiffs’ complaint should be dismissed for lack of

subject matter jurisdiction because the harm complained of is speculative and plaintiffs’ theory
of liability is premised on actions defendant may or may not take in the future. “Standing is a
federal jurisdictional question ‘determining the power of the court to entertain the suit.’” Carver
v. City of New York, 621 F.3d 221, 225 (2d Cir. 2010) (quoting Warth v. Seldin, 422 U.S. 490,
498 (1975)). “Constitutional standing refers to the requirement that parties suing in federal court
establish that a ‘Case’ or ‘Controversy’ exists within the meaning of Article III of the United

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States Constitution.” Am. Psychiatric Ass’n v. Anthem Health Plans, Inc., 821 F.3d 352, 358
(2d Cir. 2016).
There are three Article III standing requirements: (1) the plaintiff must have
personally suffered an injury-in-fact, i.e., an invasion of a judicially cognizable interest which is
concrete and particularized as well as actual or imminent, rather than conjectural or hypothetical;
(2) there must be a causal connection between the injury and the conduct at issue such that the
injury is fairly traceable to the challenged conduct; and (3) the injury must be likely to be
redressed by a favorable decision. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61 (1992);
Valley Forge Christian Coll. v. Ams. United for Separation of Church and State, Inc., 454 U.S.
464, 472 (1982). The requirements of Article III standing necessarily extend to claims brought
by ERISA plaintiffs suing for a breach of fiduciary duty. These plaintiffs “must establish . . .
constitutional standing, meaning the plan participant must . . . assert a constitutionally sufficient
injury arising from the breach of a statutorily imposed duty.” Kendall v. Emps. Ret. Plan of
Avon Prods., 561 F.3d 112, 118 (2d Cir. 2009) (citation omitted), abrogated on other grounds by
Am. Psychiatric Ass’n, 821 F.3d 352.
Plaintiffs allege the Plans are being overcharged for defendant’s services as the
Plans’ services provider. This is a concrete injury-in-fact for which monetary damages or
equitable relief would provide redress. It is true that the AC does not allege that the Plans have
already attempted to switch to a third party recordkeeper or that defendant has actually withheld
the recordkeeping offset from being used as payment for these services. However, plaintiffs’
theory is not only that they may suffer injury in the future, but that because TIAA has a colorable
argument that the RSAs do not require it to share the recordkeeping offset with a potential future
third party recordkeeper, the fees TIAA is charging the Plans right now are excessive in violation

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of ERISA. The Court finds that it has subject matter jurisdiction over the action and that
plaintiffs have standing to sue on behalf of the Plans.
II.

The ERISA Statute of Repose does not warrant Dismissal.
ERISA’s statute of repose bars actions commenced:
[S]ix years after (A) the date of the last action which constituted a
part of the breach or violation, or (B) in the case of an omission,
the latest date on which the fiduciary could have cured the breach
or violation . . . .

Section 413(1) of ERISA, 29 U.S.C. § 1113(1).
Defendant argues that because the relevant contracts (the RSAs and plaintiffs’
annuities) have been in place for more than ten years, whether the injury stems from the act of
making the agreements or the omission of failing to disclose defendant’s policy of not sharing
the recordkeeping offset with third party service providers, the relevant date is when the
contracts were made, which is outside the statute of repose.
The Court disagrees, as it is bound to take the facts alleged in the complaint as
true and draw all inferences in plaintiffs’ favor. The AC alleges that defendant’s policy causes
the Plans to pay more for administrative services than they otherwise would and that defendant
retains excessive compensation from the Plans’ assets. (AC ¶¶ 46, 47.) The Plans, and thus the
plaintiffs, suffer this alleged injury every time defendant collects fees. While the AC does not
specify the frequency with which fees are collected, it is reasonable to infer that defendant has
been paid fees for its services within the last six years.
III.

Defendant is not a Fiduciary.
Plaintiffs allege that defendant breached its fiduciary duty to the Plans under

section 404(a), 29 U.S.C. § 1104(a) and engaged in prohibited transactions in violation of
sections 406(a)(1) and 406(b), 29 U.S.C. § 1106(a)(1) & 1106(b). To breach a fiduciary duty
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under section 404(a) one must be a fiduciary in the first place. Likewise, transactions prohibited
by sections 406(a)(1) and (b) are only prohibited with respect to fiduciaries. The Court’s finding
that TIAA is not a fiduciary of the plans with respect to the recordkeeping services it provides
thus precludes liability under those sections of ERISA.
Under ERISA:
[A] person is a fiduciary with respect to a plan to the extent (i) he
exercises any discretionary authority or discretionary control
respecting management of such plan or exercises any authority or
control respecting management or disposition of its assets, (ii) he
renders investment advice for a fee or other compensation, direct
or indirect, with respect to any moneys or other property of such
plan, or has any authority or responsibility to do so, or (iii) he has
any discretionary authority or discretionary responsibility in the
administration of such plan.
29 U.S.C.S. § 1002(21)(A). A plan service provider “may be an ERISA fiduciary with respect to
certain matters but not others,” such that “fiduciary status exists only to the extent” that the plan
service provider “has or exercises the described authority or responsibility over a plan.” Coulter
v. Morgan Stanley & Co., 753 F.3d 361, 366 (2d Cir. 2014) (internal quotation marks omitted).
Thus, “[i]n every case charging breach of ERISA fiduciary duty . . . the threshold question is . . .
whether that person was acting as a fiduciary (that is, was performing a fiduciary function) when
taking the action subject to complaint.” Id. (quoting Pegram v. Herdrich, 530 U.S. 211, 226
(2000)) (alterations in original).
Plaintiffs contend that TIAA was acting as a fiduciary of the Plans, arguing that:
Defendant became a fiduciary when it exercised discretionary
control over the fee to be used as a recordkeeping offset . . . . By
exercising discretion to take these Plan assets subject to its
undisclosed policy that it would not share the recordkeeping offset,
Defendant exercised its discretion to adopt an undisclosed policy
that would enable it to further exercise its discretion to take Plan
assets.

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(Pl.’s Mem. in Opp., June 6, 2016, Dkt. No. 51 at 15.) As a practical matter, plaintiffs argue, this
“undisclosed policy” prevents the Plans from switching to another recordkeeper, which might
charge less for its services. (Id. at 5.) The Plans are thus ‘locked in’ for the full term of the
mutual fund or annuity contracts that the RSAs cover. (Id.) Consequently, TIAA has used its
“discretion to in effect turn a 90-day RSA into a 10-year RSA, thereby using its discretion to
lock up the Plans and receive additional recordkeeping compensation as a result thereof.” (Id. at
15.)
This argument is not meritorious. Calling TIAA’s alleged “undisclosed policy” of
refusing to share the recordkeeping offset an exercise of discretion does not make it so. Neither
do the allegations that this policy causes the Plans to be “locked in” to the RSA for the full
length of the annuity or mutual fund contract, taken as true, establish an exercise of discretion on
the part of TIAA or establish that TIAA is a fiduciary of the Plans. The fact that the fees used to
pay for the recordkeeping services are collected from Plan assets does not give the collector of
those fees authority over Plan assets.
It is axiomatic that an exercise of discretion must consist of either an act or an
omission. Plaintiffs point to only two acts or omissions relevant to the determination of TIAA’s
fiduciary status vis-a-vis its role as service provider to the Plans: the original agreement
embodied in the RSAs, including any disclosures made by TIAA or the lack thereof, and the
periodic collection of fees, some of which are designated/allocated as the recordkeeping offset.
Neither involves a discretionary act or omission by TIAA.
The original agreement between TIAA and each Plan regarding TIAA’s
compensation, embodied in the RSA, was not a discretionary act giving rise to fiduciary
obligations on behalf of TIAA.

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When a person who has no relationship to an ERISA plan is
negotiating a contract with that plan, he has no authority over or
responsibility to the plan and presumably is unable to exercise any
control over the trustees’ decision whether or not, and on what
terms, to enter into an agreement with him. Such a person is not an
ERISA fiduciary with respect to the terms of the agreement for his
compensation.
F.H. Krear & Co. v. Nineteen Named Trs., 810 F.2d 1250, 1259 (2d Cir. 1987). Plaintiffs have
pled no facts that suggest the agreements were not the product of arm’s length negotiations or
that TIAA had any prior relationship with the Plans, and thus TIAA’s act of agreeing with each
Plan to receive compensation for its services through the RSA was not a discretionary act that
gave rise to a fiduciary duty.
Plaintiffs argue that TIAA’s periodic collection of fees, by virtue of TIAA’s
“undisclosed policy” of not sharing the record keeping offset with potential future third party
service providers, is an act of discretion. This argument is unavailing. A service provider’s
periodic collection of fees is not a discretionary act giving rise to a fiduciary duty. See United
States v. Glick, 142 F.3d 520, 528 (2d Cir. 1998) (“[T]he mere deduction of an agent’s
commission from [plan] assets does not, in itself, create a fiduciary relationship between the
agent and the [plan].”). The fact that the service provider could, of course, refrain from
collecting the fees he is due does not change this. The analysis is not altered by the existence of
an underlying policy to refrain from using the fees in a way that benefits the plans it services in
ways not contemplated by the relevant agreements. See Harris Tr. & Sav. Bank v. John Hancock
Mut. Life Ins. Co., 302 F.3d 18, 28 (2d Cir. 2002) (“We do not believe that ‘discretionary
authority’ can be read to include any concession a plan administrator could gratuitously make to
a plan’s trustee.”). “If a specific term (not a grant of power to change terms) is bargained for at
arm’s length, adherence to that term is not a breach of fiduciary duty. No discretion is exercised

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when an [administrator] merely adheres to a specific contract term.” Id. at 29 (quoting Ed
Miniat, Inc. v. Globe Life Ins. Group, Inc., 805 F.2d 732, 737 (7th Cir. 1987)).
As discussed above, plaintiffs have pled no facts suggesting that the negotiation
of the RSAs was not at arm’s length. Nowhere do plaintiffs allege that a potential future refusal
by TIAA to share the record keeping offset, allocated as part of the investment fee, with a third
party plan servicer, would breach the RSAs. Rather, plaintiffs argue, such a potential future
practice amounts to an “undisclosed policy” that violates TIAA’s fiduciary duties. But plaintiff
cites no case law supporting the argument that such a policy would, in and of itself, amount to an
exercise of discretion or make TIAA a fiduciary. Ultimately, plaintiffs are arguing that the Plans
made a bad deal and that TIAA’s “undisclosed policy,” which plaintiffs admit is consistent with
the RSAs, is nonetheless inconsistent with TIAA’s fiduciary duties to the Plans, without any
underlying support as to why TIAA is a fiduciary in the first place. The Court cannot conclude
based on the facts pled in the complaint that TIAA was a fiduciary of the Plans with respect to its
role as reckordkeeper. Counts I-III, which are predicated on TIAA being a fiduciary in such
role, are thus dismissed.
IV.

Plaintiffs are not entitled to Equitable Relief.
Plaintiffs also bring claims for equitable relief under section 502(a)(3), 29 U.S.C.

§ 1132(a)(3) to recover excess amounts paid to TIAA by the Plans, the Plan investment options,
and any other source due to TIAA’s control of Plan assets. Plaintiffs allege that through its
‘undisclosed policy’ of refusing to share the revenue offset with a potential future third party
plan servicer, TIAA failed to disclose a source of compensation and has retained monies that
exceed the value of the services provided. (AC ¶¶ 105-07). These monies, plaintiffs argue,
constitute excess fees beyond reasonable compensation for TIAA’s services. (AC ¶ 109.)

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Plaintiffs allege that TIAA failed to satisfy its disclosure obligations under 29 C.F.R. §
2550.408b-2(c) and instructed employees not to disclose information required to be disclosed by
the Department of Labor’s Fee Disclosure Rule. (AC ¶ 110.) Plaintiffs further allege that:
Defendant failed to provide an estimate of its indirect
compensation for recordkeeping and administration, failed to
provide an explanation of the methodology and assumptions used
to prepare the estimate and a detailed explanation of the
recordkeeping services that will be provided to the covered plan,
and failed to take into account, as applicable, the rates that it, an
affiliate, or a subcontractor would charge to, or be paid by, third
parties, or the prevailing market rates charged, for similar
recordkeeping services for a similar plan with a similar number of
covered participants and beneficiaries.
(Id.)
Plaintiffs essentially argue that either (a) the Plans made a bad deal, or (b) that
TIAA is treating the Plans unfairly, contrary to conventions within the industry, but not contrary
to the contract, and, because TIAA is not a fiduciary of the plans, not contrary to law. If the
former is the case, then plaintiffs’ appropriate remedy is against the Plans themselves for making
a bad deal against the interests of its members. In the latter circumstance, equitable relief is not
available according to the Supreme Court’s and the Second Circuit’s interpretation of section
502(a)(3).
Plaintiffs argue that monetary damages may be awarded as equitable relief under
section 502(a)(3) as a “surcharge” against defendant, citing CIGNA Corp. v. Amara, 563 U.S.
421 (2011). (Pls.’ Mem. in Opp., June 6, 2016 at 22-23.) However, CIGNA Corp. involved a
claim by an ERISA plan member against a fiduciary, which defendant is not. See 563 U.S. at
439 (“[T]he fact that the defendant in this case . . . is analogous to a trustee makes a critical
difference.”). The Supreme Court in Mertens v. Hewitt Assocs., 508 U.S. 248, 251-53, 263
(1993) found that compensatory damages against a non-fiduciary were not available under
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section 502(a)(3). Because defendant is not a fiduciary of the Plans with respect to the
recordkeeping services it provides, the Plans may not recover compensatory damages under a
surcharge theory.
Plaintiffs are further barred from recovering what would essentially be
compensatory damages as restitution under section 502(a)(3) because “for restitution to lie in
equity, the action generally must seek not to impose personal liability on the defendant, but to
restore to the plaintiff particular funds or property in the defendant’s possession,” such as
through the mechanism of a constructive trust or an equitable lien on that property. Great-West
Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 214 (2002) (restitution not appropriate under
section 502(a)(3) where petitioners sought payment under a contract rather than particular funds
belonging to petitioners held by respondent). Plaintiffs have identified no particular funds or
specific property against which they would be entitled to equitable relief. They essentially seek
compensatory damages as equitable relief, which is not appropriate under section 502(a)(3).
Neither can plaintiffs recover on a disgorgement theory of equitable relief against a nonfiduciary as contemplated in Buffalo Labor Sec. Fund v. J.P. Jeaneret Assocs. (In re Beacon
Assocs. Litig.), 818 F. Supp. 2d 697, 707-08 (S.D.N.Y. 2011), as the theory of liability in that
case was premised on defendant’s actual or constructive knowledge of the unlawfulness of the
transactions defendant engaged in, and plaintiffs have failed to plead sufficient facts in the
complaint to establish that defendant’s alleged actions were unlawful.
Plaintiffs are not entitled to recovery under section 502(a)(3) as their claims for
relief are legal rather than equitable in nature and thus not appropriately brought under section
502(a)(3).

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CONCLUSION
Plaintiffs have not pled facts sufficient to establish that defendant was a fiduciary
of the Plans with respect to its role as service provider, a condition precedent for all of plaintiffs’
claims for legal relief. Equitable relief is not appropriate in this case. Defendant’s motion to
dismiss is thus GRANTED. The Clerk of the Court is directed to enter judgment for defendant
TIAA.
SO ORDERED.

Dated: New York, New York
March 7, 2017

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