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Sweda v. University of Pennsylvania

United States District Court, E.D. Pennsylvania

September 21, 2017

JENNIFER SWEDA et al., Plaintiffs,



         A group of University of Pennsylvania Matching Plan participants and beneficiaries bring this ERISA action against the University of Pennsylvania and Jack Heuer, Penn's Vice President of Human Resources. The Plan participants allege that Defendants enabled third-party service providers-here, TIAA-CREF and Vanguard-to collect excessive fees, increased costs by including duplicative investments in the Plan, and retained underperforming funds in the Plan. Plaintiffs claim this violated two provisions of the Employee Retirement Income Security Act, 29 U.S.C. § 1001 et seq (“ERISA”). First, they claim a breach of fiduciary duties, in violation of 29 U.S.C. § 1104(a)(1) (Counts I, III, V and VII[1]). Second, they claim the contracts with TIAA-CREF and Vanguard were prohibited transactions, in violation of 29 U.S.C. § 1106(a)(1) (Counts II, IV and VI).

         The Penn parties urge dismissal of the complaint, arguing that the Third Circuit Court of Appeals' decision in Renfro v. Unisys Corp., 671 F.3d 314 (3d Cir. 2011), controls and demands dismissal of the breach of fiduciary duties claims (Counts I, III, and V), and that the prohibited transaction claims (Counts II, IV, and VI) are duplicative of the breach claims. For the following reasons, the Court grants the motion as to all counts.

         BACKGROUND [2]

         The Plan participants bring this action, individually and as representatives of a purported class, as beneficiaries in the University of Pennsylvania Matching Plan (“Plan”), against the University of Pennsylvania and its Vice President of Human Resources, for breach of fiduciary duties under 29 U.S.C. § 1132(a)(2). They allege three main failures of the defendants. First, they claim that the defendants breached their fiduciary duty by “locking in” Plan investment options into two investment companies. Amended Complaint, ¶¶ 184-95 (hereinafter “Am. Compl.”). Second, they claim that the administrative services and fees were unreasonably high due to the defendants' failure to seek competitive bids to decrease administrative costs. Am. Compl. ¶¶ 196-209. Third, they argue that the fiduciaries charged unnecessary fees while the portfolio underperformed. Am. Compl. ¶¶ 210-28. Plaintiffs seek to certify a class encompassing all participants and beneficiaries of the Plan from August 10, 2010, through the date of judgment, excluding the defendants. Am. Compl. ¶ 237.

         I. Defendants' § 403(b) Program

         Defendants' § 403(b) Plan is a defined contribution, individual account, employee pension benefit plan as defined under 29 U.S.C. §§ 1002(2)(A) and (34) that provides for retirement income benefits for certain employees of the University of Pennsylvania. Am. Compl. ¶ 9. It is funded through deferrals of employee compensation, employer contributions, and investment performance, net of fees and expenses. Am. Compl. ¶ 11. At the end of 2014, the Plan had $3.8 billion in net assets and 21, 412 participants, making it among the largest 0.02% of defined contribution plans in the United States based on total assets. Am. Compl. ¶ 12.

         There are generally two main costs associated with investment accounts: plan administration and investment options management. Am. Compl. ¶ 35. Plan administration includes the use of recordkeepers, entities that track the amount of each participant's investments in various options in the plan. Recordkeepers usually provide participants with quarterly account statements, a website, call center, and investment education materials. Am. Compl. ¶¶ 40-41. A recordkeeper's fee is often partially covered by “revenue sharing” agreements. In revenue sharing arrangements, a mutual fund itself (rather than the participant) pays a portion of these expenses. The Plan at issue here operates on a revenue sharing model. Am. Compl. ¶ 119. The second main cost associated with investment accounts is investment options management. Investment options differ by offering different share classes. “Retail share” classes are geared toward small investments, whereas “institutional share” classes are aimed at large investments. Investment companies hope to persuade large plans to invest in these institutional funds by charging lower fees. Am. Compl. ¶ 45. The same way big box chains like Costco arguably can offer savings over the local convenience store by selling in bulk, institutional shares offer fee savings for bulk investments.

         ERISA requires each plan to have one or more named fiduciaries that have the authority to operate and administer the plan. 29 U.S.C. § 1102(a)(1). The Plan at issue here is managed by an investment committee, designated by the Trustees of the University of Pennsylvania as a named fiduciary, responsible for the “selection, monitoring, and removal of Plan investment options and providers.” Am. Compl. ¶ 21. Jack Heuer as the Vice President of Human Resources is also a named fiduciary under the plan and designated as the Plan Administrator responsible for “Plan-related matters” including “establishing rules and procedures for the Plan's operation.” Am. Compl. ¶ 23.

         Employees (the beneficiaries, or participants, of the plan) may opt into the Plan, but as in all § 403(b) plans, they are limited in where they can invest. The Plan managers determine the range of options available to the beneficiaries, who then choose where their money is placed. The University of Pennsylvania, as manager of one of the largest funds in the country, has a diverse array of beneficiaries to serve, from grounds and cleaning crews to renowned Wharton School and Law professors, physicists, anthropologists, hockey coaches and endless others.[3]These individuals have different goals, risk tolerances, investment acumen and income.

         To make it easier for potential investors, plan managers divided the investment options (which ranged between 76 and 118 options) into four tiers. Motion to Dismiss (hereinafter “Mot.”) Ex. 6.[4] Tier 1 is for the “do it for me” investor; tier 2 is geared toward the “help me do it” investor; tier 3 is designed for the “mix my own” investor; and tier 4 is built for the “self-directed” investor. Mot. Ex. 6. In each of these plans, options are presented to the beneficiaries from TIAA-CREF and Vanguard, the two companies used in the Plan. The options range from one option from each company in the “do it for me” category to complete customization of available options in tier 4. Mot. Ex. 6. Beneficiaries are informed that each mutual fund's prospectus is available online. Mot. Ex. 3. They are given detailed statistics on each of the investment options, including 1, 5 and 10 year returns, as well as total operating expenses. Mot. Ex. 3.

         Since 2010, the Plan has offered as many as 118 investment options, and as of December 31, 2014, the Plan offered 78 options. Am. Compl. ¶ 77. Vanguard Group, Inc. manages 48 mutual fund options (totaling $1.3 billion) and TIAA-CREF manages the other 30 options including mutual funds and fixed and variable annuities (totaling $2.5 billion). Am. Compl. ¶¶ 77, 79. The Plan includes multiple recordkeepers; Vanguard and TIAA-CREF each serve as the recordkeeper for their respective offerings. Am. Compl. ¶ 78.

         II. Plaintiffs' Claims

         The Amended Complaint includes seven claims: Breach of fiduciary duties for locking the Plan into the CREF stock account and TIAA recordkeeping, in violation of 29 U.S.C. § 1104 (a)(1) (Count I); breach of fiduciary duties for unreasonable administrative fees, in violation of 29 U.S.C. § 1104 (a)(1) (Count III); breach of fiduciary duties for unreasonable fees in violation of 29 U.S.C. § 1104(a)(1) (Count V); and failure to monitor fiduciaries (Count VII). The plaintiffs allege that these actions also violate the “prohibited transactions” clause of ERISA, 29 U.S.C. § 1106(a)(1) (Counts II, IV & VI).


         I. Standard of Review

         A Rule 12(b)(6) motion to dismiss tests the sufficiency of a complaint. Although Rule 8 of the Federal Rules of Civil Procedure requires only “a short and plain statement of the claim showing that the pleader is entitled to relief, ” Fed.R.Civ.P. 8(a)(2), “to ‘give the defendant fair notice of what the . . . claim is and the grounds upon which it rests, '” the plaintiff must provide “more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citation omitted) (alteration in original).

         To survive a motion to dismiss, the plaintiff must plead “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Specifically, “[f]actual allegations must be enough to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555. The question is not whether the claimant “will ultimately prevail . . . but whether his complaint [is] sufficient to cross the federal court's threshold.” Skinner v. Switzer, 562 U.S. 521, 530 (2011) (citation and internal quotation marks omitted). Thus, assessment of the sufficiency of a complaint is “a context-dependent exercise” because “[s]ome claims require more factual explication than others to state a plausible claim for relief.” W. Penn Allegheny Health Sys., Inc. v. UPMC, 627 F.3d 85, 98 (3d Cir. 2010).

         In evaluating the sufficiency of a complaint, the Court adheres to certain well-recognized parameters. For one, the Court “must consider only those facts alleged in the complaint and accept all of the allegations as true.” ALA, Inc. v. CCAIR, Inc., 29 F.3d 855, 859 (3d Cir. 1994); see also Twombly, 550 U.S. at 555 (stating that courts must “assum[e] that all the allegations in the complaint are true (even if doubtful in fact)”); Mayer v. Belichick, 605 F.3d 223, 230 (3d Cir. 2010) (“[A] court must consider only the complaint, exhibits attached to the complaint, matters of public record, as well as undisputedly authentic documents if the complainant's claims are based upon these documents”). Also, the Court must accept as true all reasonable inferences emanating from the allegations, and view those facts and inferences in the light most favorable to the nonmoving party. See Rocks v. City of Philadelphia, 868 F.2d 644, 645 (3d Cir. 1989); see also Revell v. Port Auth., 598 F.3d 128, 134 (3d Cir. 2010).

         That admonition does not demand that the Court ignore or discount reality. The Court “need not accept as true unsupported conclusions and unwarranted inferences, ” Doug Grant, Inc. v. Greate Bay Casino Corp., 232 F.3d 173, 183-84 (3d Cir. 2000) (citations and internal quotation marks omitted), and “the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Ashcroft, 556 U.S. at 678; see also Morse v. Lower Merion Sch. Dist., 132 F.3d 902, 906 (3d Cir. 1997) (explaining that a court need not accept a plaintiff's “bald assertions” or “legal conclusions” (citations omitted)). If a claim “is vulnerable to 12(b)(6) dismissal, a district court must permit a curative amendment, unless an amendment would be inequitable or futile.” Phillips v. County of Allegheny, 515 F.3d 224, 236 (3d Cir. 2008).[5]

         II. Fiduciary Duty Under ERISA

         Both sides agree that the defendants are fiduciaries to the plaintiffs under the Plan. ERISA imposes the “prudent man standard of care.” 29 U.S.C. § 1104(a). This requires the fiduciary to

(1) . . . discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and-
(A) for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan;
(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.

29 U.S.C. § 1104(a).

         “The fiduciary standard is ‘flexible, such that the adequacy of a fiduciary's independent investigation and ultimate investment selection is evaluated in light of the character and aims of the particular type of plan he serves.'” Renfro, 671 F.3d at 322 (quoting In re Unisys Sav. Plan Litig. (Unisys I), 74 F.3d 420, 434 (3d Cir. 1996)). An ERISA fiduciary acts prudently when it gives “appropriate consideration to those facts and circumstances that, given the scope of such fiduciary's investment duties, the fiduciary knows or should know are relevant to the . . . investment course of action involved . . . .” Renfro, 671 F.3d at 322 (quoting 29 C.F.R. ยง ...

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