Dog Days Of Summer Pave The Way For Continuing Rise In ERISA Litigation: Summer 2021 ERISA Litigation Update

Published date01 September 2021
Subject MatterCorporate/Commercial Law, Employment and HR, M&A/Private Equity, Corporate and Company Law, Directors and Officers, Retirement, Superannuation & Pensions, Employee Benefits & Compensation
Law FirmMiller & Chevalier Chartered
AuthorTheresa (Tess) S. Gee, Elizabeth J. Jonas, Dawn E. Murphy-Johnson and Anthony F. Shelley

Three important Employee Retirement Income Security Act of 1974 (ERISA) breach of fiduciary decisions came down this summer. In Sacerdote v. New York University (Sacerdote III), the Second Circuit affirmed the trial result in favor of the fiduciaries but reversed on the district court's earlier dismissal at the pleadings stage of a prudence claim, sending it back for further proceedings.1 The Seventh Circuit's Halperin v. Richards decided whether ERISA preempts state corporate law/breach of fiduciary claims against company officers and directors who also serve in an ERISA fiduciary capacity, as permitted by ERISA's "two-hat" principles.2 Both Sacerdote and Halperin are plaintiff-friendly, and Sacerdote in particular is likely to pave the way for an influx of breach of fiduciary litigation in the future, including class actions. In Jackson v. AT&T Retirement Savings Plan (Jackson II), the Fifth Circuit provided fiduciaries and plan sponsors some comfort by confirming again that a plan sponsor's authority to amend its plan does not implicate fiduciary duties.3

Update on University ' 403(b) Excessive Fee Cases

Sacerdote v. New York University (Sacerdote III)

On August 16, 2021, in a 2-1 decision,4 the Second Circuit issued its highly anticipated decision in Sacerdote III, affirming the district court's judgment in favor of the fiduciaries after a 10-day bench trial, including, notably, that the fiduciaries did not breach their ERISA duties by failing to consolidate recordkeepers more quickly and by retaining two allegedly underperforming investment funds. The case reverts to the district court, however, as the Second Circuit reinstated a claim that the fiduciaries breached their ERISA duty of prudence by offering retail shares, rather than lower-cost institutional shares of mutual funds, which the district court had dismissed at the motion to dismiss stage. Writing for the panel, Circuit Judge John M. Walker, Jr. ruled that this dismissal was in error as Plaintiffs raised a plausible inference of imprudence and the error was not rendered moot by the trial, because the district court's findings addressed different questions. While the Plaintiffs are entitled to litigate the claim on the merits, the Second Circuit did allow that the "[d]iscovery ... may turn out to be minimal [ ] before the claim is dispensed with."5

Sacerdote III represents a significant win for the fiduciaries. Its approach to the standard of review in this type of university fees case regarding the plausibility of breach of fiduciary duty allegations at the motion to dismiss stage breaks with the Seventh Circuit, which affirmed dismissal of similar claims,6 and aligns with the Third and Eighth Circuits, which permitted such claims to proceed.7


Plaintiffs are a class of participants and beneficiaries of one of two defined contribution plans, tax qualified under 26 U.S.C. ' 403(b), sponsored by New York University (NYU).8 Both of these plans offered investment options administered by two different recordkeepers, Teachers Insurance and Annuity Association of America and College Retirement Equities Fund (TIAA-CREF) and the Vanguard Group.9 The Faculty Plan offered 103 investment options and the Medical Plan offered 84 options to plan participants at issue in the litigation.10 The NYU Retirement Plan Committee, comprised of nine members, was both plan fiduciary and plan administrator.11

Plaintiffs brought claims under ERISA ' 502(a)(2), alleging that NYU breached its fiduciary duties of loyalty and prudence and engaged in prohibited transactions. Counts I and II alleged a breach of fiduciary duty based on TIAA-CREF's requirement that it be the recordkeeper for certain funds, resulting in increased fees from multiple plan recordkeepers; Counts III and IV alleged a breach of fiduciary duty based on unreasonable recordkeeping fees, which included failing to monitor excessive recordkeeping costs, employing a revenue-sharing method to pay recordkeepers, and employing multiple recordkeepers for each plan; Counts V and VI alleged a breach of fiduciary duty based on unreasonable investment fees, unnecessary marketing and distribution fees, and mortality and expense risk fees (causing unreasonable performance losses); and Count VII alleged NYU's failure to monitor the investments.12

The district court granted in part and denied in part NYU's motion to dismiss, retaining only Counts III and V in part.13 The part of Count V that was dismissed alleged that Defendants breached their fiduciary duty by offering retail class shares rather than more affordable institutional class shares of the same mutual funds.14 In dismissing this claim, the district court reasoned that "prudent fiduciaries may very well choose to offer retail class shares over institutional class shares ... because retail class shares necessarily offer higher liquidity than institutional investment vehicles."15 The district court also found the fees associated with the retail funds to be lower than what was permitted by the Third, Seventh, and Ninth Circuits.16

The case proceeded to trial on the prudence claims relating to the retention of multiple recordkeepers and the associated costs and the continued offering of two underperforming investment options. Granting NYU's motion to strike the Plaintiff's jury demand, the district court held an eight-day bench trial.17 The district court found that Plaintiffs had failed to prove a breach of fiduciary duty by the use of a revenue-sharing method to pay recordkeepers or the retention of the underperforming funds and that Plaintiffs had failed to prove loss resulting from any of its claims.18

Second Circuit Decision

The Second Circuit found that the district court had erred by dismissing Plaintiffs' claim that NYU breached its ERISA fiduciary duty by offering retail-class shares of mutual...

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