In a 2015 class action that struck terror in the hearts of colleges and universities across the country, TIAA-CREF’s own employees – participants of its 401(k) and retirement plans – sued TIAA, its Plan Investment Review Committee, and other alleged fiduciaries for breaches of ERISA’s fiduciary duties of loyalty and prudence by favoring TIAA’s own proprietary investment funds and using TIAA as their recordkeeper.
What? You do that, too?
The allegation was that, instead of acting for the exclusive benefit of the Plans’ participants and beneficiaries, and for the purpose of providing benefits and paying reasonable fees from Plan assets, the fiduciaries acted for the benefit of TIAA by forcing the Plans exclusively into investments managed by TIAA or its affiliate, CREF, which charged excessive fees that benefited TIAA. Similar allegations were made about the use of TIAA as the Plans’ recordkeeper.
Whew! You don’t do that, right?
After two years of litigation, the plaintiffs and TIAA entered into a proposed settlement agreement. The details of that proposal are instructive for colleges and universities who use TIAA and its affiliates for their plan investment, recordkeeping, and other services.
Of course you use them, too! They’ve been around for 99 years (literally), and are the 800-pound gorilla of investments in the academic retirement market.
So, let’s talk about the proposed settlement. The money is not the biggest element – “only“ $5 million, and a big chunk of that will be used to pay the class action lawyer’s fees and costs, and the costs of administering the settlement. The big lesson is the changes to the administration and investment of the Plans, which are estimated to result in over $2 million in savings to the Plans and the participants each year. In the settlement, TIAA does not admit to ERISA breaches. However, it has agreed to change the Plans in following ways:
- Add 10 non-proprietary (outside) investment options, including 5 options with investment management fees below 15 basis points (0.15%);
- Rebate any revenue sharing from the outside investment options to participants;
- Add a “brokerage window” to allow participants to access thousands of other outside investment funds; and
- On a one-time basis, provide “mapping” from a participant’s existing funds to the new line-up unless the participant directs otherwise.
In addition, TIAA agreed to:
- Retain an independent consultant to advice the TIAA Committee on the performance of investment options and their investment costs against peers;
- Retain an independent consultant on a one-time basis to review the Plans’ recordkeeping costs in light of the type and quality of services provided; and
- Review and enhance its investor education program for participants of the Plans.
- TIAA-CREF offers an “open architecture” recordkeeping and custodial structure. This means that other mutual funds, not just TIAA and CREF funds, can (and probably should) be added to your plan’s investment line up.
- I don’t read the settlement as suggesting that the addition of a brokerage window is required to satisfy ERISA fiduciary requirements. Brokerage windows add complexity and cost to a plan, and studies have shown that having too many options can cause confusion.
- Benchmark, benchmark, benchmark. Fiduciaries should engage independent consultants to review the performance of investment options and the costs associated with those options, as well as evaluating the features and costs of recordkeeping and other services.
- The TIAA Plans are huge: over $3.5 billion in aggregate at the time of the last publicly available Forms 5500, which are prior to the recent post-inauguration rally. In addition, some members of their Investment Committee are literally investment professionals. The TIAA Investment Committee, then, is the poster child for a “sophisticated investor” which, under the delayed Department of Labor fiduciary rules, is the kind of investor that does not need to rely on sellers of mutual funds – sellers like TIAA-CREF – for fiduciary advice (and therefore those sellers can be exempt from treatment as a fiduciary). And yet, TIAA agreed to engage independent consultants to monitor the investment funds of the Plans. This may be the standard against which all plan fiduciaries, no matter how sophisticated, will be judged in the future.
(Richards-Donald, et al. v. Teachers Ins. & Annuity Assn. of America, S.D.N.Y, No. 1:15-cv-08040, motion for preliminary approval of class settlement filed 5/10/2019)