New Ground(s) Emerge in NYU Excessive Fee Suit
An amended claim in an excessive fee litigation treads some new ground – including naming the plan’s investment advisor as a defendant.
New York University was one of the first of the university 403(b) excessive suits filed in August 2016, and representing the plaintiffs then (and now) was the law firm of Schlichter, Bogard & Denton.
A year ago the NYU fiduciaries were able to persuade the court to reject some allegations, notably that there were too many investment options in the plan. But claims regarding excessive recordkeeping fees and failure to prudently monitor plan investment options by continuing to offer funds with high fees and poor performance remained. Then in November came a new filing, expanded to include the university’s hospital system, school of medicine, the retirement plan committee and 21 named individuals.
Enter the new, amended complaint – 143 pages long – in the U.S. District Court for the Southern District of New York, with new ground(s) that includes naming as a defendant Cammack LaRhette, which, according to the plaintiffs, has served as the plans’ investment advisor since 2009. “As a result of Cammack’s imprudent investment advice failing to recommend the removal of the imprudent TIAA Real Estate and CREF Stock Accounts despite their high fees and histories of abysmal performance, the Plans suffered tremendous losses,” according to the suit.
The plaintiffs go on to note that since jumbo plans (such as NYU’s) “can obtain much lower fees for investment management, benchmarking fees in NYU’s Plans to small plans or retail fees is wholly inappropriate,” and that the “use of Morningstar weighted averages is an inappropriate benchmark for evaluating fees charged by the investment options offered in the Plans because these averages include mostly retail share classes of funds that carry far higher fees than those appropriate for inclusion in massive jumbo plans, like the NYU Plans.” They go on to note that using “the Morningstar blended average to evaluate the appropriateness of the fees in the Plans would produce distorted results that give the incorrect appearance that high-fee funds in the Plans had reasonable fees compared to industry averages that fail to account for the massive size and bargaining power of the Plans.”
Indeed, the plaintiffs note that Margaret Meagher, longtime Co-Chair of the Retirement Plan Committee, “conceded that Morningstar contains mostly retail funds in its averages,” and that Cammack’s Vice President, Jan Rezler, “has admitted that the use of Morningstar averages as a fee benchmark is inappropriate for large plans such as NYU’s.” However, “when Cammack actually became the Plans’ investment consultant,” the suit claims that “…Rezler has conceded under oath that Cammack used those Morningstar fee averages to evaluate each of the Plans’ funds,” and that “this use of an improper benchmark masked the excessive fees in the Plans’ funds and reveals a flawed benchmarking process.”
While the excessive fee suits have tended to treat the defendant fiduciaries as a block, this one took pains to outline actions and comments attributed to Meagher, who the suit says “conceded that the Retirement Plan Committee, and all of its members, accepted Cammack’s use of this admittedly flawed benchmark for years (continuing through the present) and never once questioned why Cammack used this inappropriate benchmark. Indeed, she admitted that not a single Committee member ever questioned the use of these Morningstar averages, took issue with their use, or even brought it up at a Committee meeting.”
Bearing in mind that this is only one side of the story, despite what plaintiffs described as “their long histories of dramatic underperformance and exorbitant fees detailed below, Cammack never recommended removing the CREF Stock or TIAA Real Estate Accounts.” They went on to state that Meagher “..admitted that the Committee never considered removing the CREF Stock Account and never even asked Cammack whether they considered the prudence of the CREF Stock Account since TIAA required its inclusion in the Plans.” Moreover, they note that “Meagher admitted that the NYU Plans had it for a long time so TIAA’s continuing to require it was never an issue for the NYU Defendants.”
The plaintiffs also noted that Meagher “admitted that she had never heard of the terms ‘float’ or ‘securities lending’ from anyone and did not even know what the terms mean despite the DOL’s requirement that plan fiduciaries must take into account a service provider’s float income as part of the service provider’s compensation for services to the plan. DOL Field Assistance Bulletin 2002-03,” and that “Cammack has never discussed with the Retirement Plan Committee terms such as float and securities lending and Cammack failed to take these forms of compensation into account when evaluating the reasonableness of the Plans’ recordkeeping fees.” Moreover, that “in failing to take this into account, Cammack provided flawed investment advice which the Retirement Plan Committee accepted without question.”
The suit also noted that “prudent fiduciaries conduct an RFP every three years in order to ensure their plans’ recordkeeping fees are reasonable,” but that “the NYU Defendants waited approximately seven years, or not until late 2016, to conduct another RFP after the one conducted in 2009,” and that that one “…was executed only after the filing of a related lawsuit in this District against NYU by these same Plaintiffs challenging the fiduciaries’ management of the Plans.”
And then there were the allegations that that 2009 RFP “was deeply flawed and irreparably tainted because of the conflicted conduct involving the Retirement Plan Committee’s Co-Chair, Margaret Meagher, and certain representatives of TIAA.” Citing statements under oath by Meagher, the plaintiffs note that “Ms. Meagher regularly met with TIAA representatives for dinners that were paid for exclusively by TIAA,” that what it called “liaisons and private communications” between Meagher and TIAA representatives were carried out while the RFP for recordkeeping services was being conducted in 2009, and that while she “originally testified that she would not have discussed ‘Committee business’ at these individual dinners with TIAA representatives,” she later “acknowledged that there was an active dialogue between Ms. Meagher and Peter Hueber, TIAA’s director of Institutional Relationships, who was one of two point people overseeing TIAA’s response to NYU’s RFP,” that “she provided intelligence to TIAA on individual members of the Retirement Plan Committee and their potential vote on TIAA getting the recordkeeping business; faced questions from TIAA about the outlook for TIAA; and stated that she did not want to ‘lose ground’ with TIAA.”
“Tainted by the bias of the Committee’s own Co-Chair, it is evident that the 2009 RFP could not have been conducted in a rigorous and independent manner as it should have been,” according to the suit.
And, as if that weren’t enough, the suit takes a couple of pages of bullets to outline what it termed “Ms. Meagher’s remarkable unawareness of basic facts relating to the Plans.”
Another unique allegation in this litigation – charges that TIAA “used its position as recordkeeper in the NYU Plans to obtain access to participants, learning their ages, length of employment, time until retirement age, the size of their accounts, and choices of investments, and used that information for its benefit to market and sell lucrative investment products, insurance, 529 plans, IRAs, and wealth management products to participants as they neared retirement and before retirement,” and that the plan fiduciaries “allowed TIAA to market and sell its services and investment products outside the Plans, benefitting TIAA enormously.”
There were, of course, many familiar allegations: that “jumbo” plans have “tremendous economies of scale for purposes of recordkeeping and administrative fees” that were not leveraged here, that asset-based fees “have nothing to do with” recordkeeping services, and that “a flat price based on the number of participants in the plan ensures that the amount of compensation is tied to the actual services provided,” challenges the use of multiple recordkeepers (in this case TIAA-CREF and Vanguard), touts the advantages of open architecture (in offering options beyond proprietary provider funds), while noting that “…among the thousands of mutual funds in the market, not a single fund other than the proprietary funds of the recordkeepers (27 TIAA-CREF and 74 Vanguard) was allowed in the Plans,” and that by “by using TIAA-CREF, fiduciaries locked their plans into an arrangement in which certain investments could not be removed from the plan—even if the funds were not prudent investments, in violation of prudent accepted fiduciary practices.”
The plaintiffs alleged that the “use of multiple recordkeepers and proprietary funds required by the recordkeepers to be included in the Plans” illustrated their failure to conduct “comprehensive plan reviews,” and that “had Defendants conducted such a review of the Plans, Defendants would not have allowed the Plans to continue to pay excessive administrative fees; would not have maintained an inefficient multi-recordkeeper structure; would not have continued to include an excessive number of investment options in the Plans, including duplicative funds in numerous investment styles and higher-cost retail share classes for which an identical lower-cost version of the same fund was available; and would not have retained investment options in the Plans despite a sustained track record of underperformance.”
Plaintiffs also alleged that “a reasonable annual recordkeeping fee for the Plans would be no more than $840,000 in the aggregate for both Plans combined (a rate of no more than approximately $35 for each participant in the Plans per year) using a recordkeeper who does not sell investment products and does not benefit as TIAA did from its position as a recordkeeper in selling lucrative retirement products outside of the Plans to the Plans’ participants.”
As noted above, the complaint is only one side of the story, and here makes a number of charges and allegations that may well be disputed or rejected at trial. However, this case does make a number of extraordinarily detailed claims about what defendants have not only done, but said on the record. It will be interesting to see how this case – particularly in view of the expanding and evolving claims – develops.