Brookins v. Northeastern University

United States District Court

District of Massachusetts

)

Oscar Brookins, individually and as )

the representative of a class of )

similarly situated persons, )

)

Plaintiff, ) Civil Action No.

) 22-11053-NMG

v. )

)

Northeastern University et al., )

)

Defendants. )

MEMORANDUM & ORDER

GORTON, J.

The late, renowned attorney-investor Charlie Munger once

quipped that “the big money is not in the buying and selling,

but in the waiting.”

This action arises out of allegations that plaintiff, Oscar

Brookins (“Brookins” or “plaintiff”), while waiting for “big

money” to compound in his retirement account, has been short-

changed by defendants, Northeastern University (“Northeastern”)

and Northeastern University 403(b)-Investment Committee (“the

Committee” and collectively, “defendants”), in their management

of the Northeastern University Retirement Plan (“the Plan”).

Plaintiff is a current or former employee of Northeastern and a

Plan participant. He brings the suit on behalf of himself and a

putative class of similarly situated Plan participants.

Pending before the Court is defendants’ motion to dismiss

(Docket No. 54). For the reasons that follow, the motion will

be allowed, in part, and denied, in part.

I. Background

The suit concerns purported lapses in the management and

oversight of the Plan, which is administered by the Committee

and is sponsored by Northeastern. It is a “defined contribution

plan,” meaning that a participant’s account is comprised of his

or her contributions and matching contributions of Northeastern.

Upon enrolling, a participant has the choice of a custodian,

namely, Fidelity Management Trust Company (“Fidelity”) or

Teachers Insurance and Annuity Association (“TIAA”). The Plan

includes over 60 investment options, including as relevant here,

13 Fidelity Freedom Target Date Funds (“Fidelity Freedom

Funds”), 11 TIAA Lifecycle Target Date Funds (“TIAA Lifecycle

Funds”), the TIAA Real Estate Account and the College Retirement

Equities Fund Stock Account (“CREF Stock Account”).

Plaintiff contends that Plan administrators violated their

duty of prudence and Northeastern failed to monitor plan

fiduciaries, in violation of Sections 409 and 502 of the

Employee Retirement Income Security Act of 1974, 29 U.S.C.

§§ 1109, 1132 (“ERISA”). Those purported breaches allegedly

caused the retirement accounts of plaintiff and other similarly

situated Plan participants to incur excessive fees and

underperform. Two particular fees warrant further examination:

recordkeeping fees and investment management fees.

Plaintiff alleges that Plan participants have been forced

to pay excessive recordkeeping fees. In exchange for a fee,

TIAA and Fidelity provide a “suite” of administrative services

to Plan participants which include tracking participant account

balances and delivering communications to accountholders.

Purportedly, the market for providing such “recordkeeping”

services is highly competitive. There are two payment models

for recordkeeping fees: 1) payment by the plan sponsor (e.g.,

Northeastern) and, as is the case here, 2) payment from Plan

assets. The latter model is referred to as “revenue sharing.”

Plaintiff also contends that defendants have caused plan

participants to incur excessive investment management fees which

are expenses associated with holding a particular investment.

They are expressed in terms of an “expense ratio” which reflects

the fee amount as a percent of assets invested in the fund

(e.g., a fund with an expense ratio of 0.1% denotes that an

investor will pay $1 for every $1,000 invested in that fund).

In his claims concerning investment management fees, plaintiff

focuses on the TIAA Real Estate Account and the Fidelity Freedom

Funds.

All together, plaintiff’s theories of imprudence fall into

four categories: 1) excessive recordkeeping fees, 2) excessive

investment management fees, 3) investment underperformance and

4) a challenge to TIAA’s custodianship based upon a subsidiary’s

marketing practices. Each will be addressed in turn.

II. Motion to Dismiss

A. Legal Standard

To survive a motion to dismiss under Fed. R. Civ. P.

12(b)(6), the subject pleading must contain sufficient factual

matter to state a claim for relief that is actionable as a

matter of law and “plausible on its face.” Ashcroft v. Iqbal,

556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly,

550 U.S. 544, 570 (2007)). A claim is facially plausible if,

after accepting as true all non-conclusory factual allegations,

the court can draw the reasonable inference that the defendant

is liable for the misconduct alleged. Ocasio-Hernandez v.

Fortuno-Burset, 640 F.3d 1, 12 (1st Cir. 2011).

When rendering that determination, a court may consider

certain categories of documents extrinsic to the complaint

“without converting a motion to dismiss into a motion for

summary judgment.” Freeman v. Town of Hudson, 714 F.3d 29, 36

(1st Cir. 2013) (citing Watterson v. Page, 987 F.2d 1, 3 (1st

Cir. 1993)). For instance, a court may consider documents of

undisputed authenticity, official public records, documents

central to a plaintiff’s claim and documents that were

sufficiently referred to in the complaint. Watterson, 987 F.2d

at 3.

A court may not disregard properly pled factual allegations

in the complaint even if actual proof of those facts is

improbable. Ocasio-Hernandez, 640 F.3d at 12. Rather, the

court’s inquiry must focus on the reasonableness of the

inference of liability that the plaintiff is asking the court to

draw. Id. at 13.

B. Analysis

1. Breach of Duty of Prudence

Plaintiff asserts that defendants have breached the

fiduciary duty of prudence by, inter alia, subjecting plaintiff

and other Plan participants to excessive recordkeeping and

investment management fees and by failing to eliminate

underperforming investment options.

ERISA sets forth a duty of prudence which requires

fiduciaries such as defendants to act:

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)(1)(B). The test of prudence looks to

conduct and not investment performance. See Ellis v. Fidelity

Mgmt. Trust Co., 883 F.3d 1, 10 (1st Cir. 2018). Accordingly,

the duty requires fiduciaries to investigate and monitor the

merits of investments properly and to divest of any that are

imprudent. See Turner v. Schneider Elec. Holdings, Inc., 530 F.

Supp. 3d 127, 133 (D. Mass. 2021).

a. Recordkeeping Fees

i. Failure to Conduct RFP Process

Plaintiff contends that defendants failed to conduct a

competitive bidding process for recordkeeping services and thus,

breached the duty of prudence. Relying on two out-of-circuit

decisions, defendants rejoin that they were not required to

conduct a competitive request for proposal (“RFP”) process and

that failure to conduct such a process is insufficient to state

a claim for imprudence. See Albert v. OshKosh Corp., 47 F.4th

570, 574 (7th Cir. 2022); Matney v. Barrick Gold of N. Am., 80

F.4th 1136 (10th Cir. 2023).

This session as well as two other sessions of this Court

have taken a different approach, holding that failure to conduct

a competitive bidding process for a substantial period could

plausibly constitute imprudence. See Turner, 530 F. Supp. 3d at

137; Brown v. MITRE Corp., 2023 WL 2383772, at *4 (D. Mass. Mar.

6, 2023); Sellers v. Trustees of College, 647 F. Supp. 3d 14,

26-27 (D. Mass. 2022). The Court perceives no reason to depart

from its prior approach. Competitive bidding ensures that fees

are kept as low as the market will permit, enabling plan

participants to earn better returns. It is certainly plausible

that failure to conduct such a process could constitute

imprudence.

Defendants insist that, in any event, they have conducted a

competitive bidding process. They point to the 2021 Faculty

Senate Report (“the Report”) which states, in passing, that the

Report drafter “understand[s]” that a competitive bidding

process took place. That reference is, however, insufficient to

preclude a finding that defendants failed to conduct an RFP

process. The drafters simply surmised that the Committee

conducted an RFP process but did not confirm that it had or that

any such process was substantively adequate. Accordingly, at

this stage, the purported failure to conduct an appropriate RFP

process remains a viable theory of breach.

ii. Revenue Sharing Model

Plaintiff also asserts that the Plan’s use of a revenue

sharing recordkeeping fee model forced Plan participants to pay

excessive recordkeeping fees in breach of the duty of prudence.

Defendants rely on two contentions in rebuttal:

1) plaintiff speculates as to whether recordkeeping fees were

excessive based on the decision to use a revenue sharing model

and 2) plaintiff fails to allege that the fees were excessive in

proportion to the amount and quality of services provided.

It is true that plaintiff does not include a detailed

analysis of how recordkeeping fees purportedly exceed the norm.

He does contend, however, that information related to specific

costs is unascertainable because fee information under the

revenue sharing model is undisclosed in the disclosure form

(“Form 5500”).

The Court agrees that plaintiff has stated a plausible

claim for excessive recordkeeping fees. It is well-established

that

if plaintiffs cannot state a claim without pleading

facts which tend systemically to be in the sole

possession of defendants, the remedial scheme of the

statute will fail, and the crucial rights secured by

ERISA will suffer.

Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 598 (8th Cir.

2009); see also Tracey v. Massachusetts Inst. of Tech., 2017 WL

4453541, *11 (D. Mass. Aug. 31, 2017).

The Court accepts as true plaintiff’s assertion that the

recordkeeping fees determined by a revenue-sharing model are not

publicly disclosed and remain within defendants’ possession.

The parties and the Court agree that use of a revenue-sharing

model is not per se imprudent but other allegations in the

complaint are sufficient for the Court to determine that a claim

for imprudence based on the revenue-sharing recordkeeping fee

model here is plausible.

As discussed supra, plaintiff alleges that Plan

administrators failed to conduct a competitive bidding process.

See also Sellers, 647 F. Supp. 3d at 26. Plaintiff also asserts

that defendants, who administer a defined contribution plan

among the very largest investors, failed to leverage its

bargaining power to bring down costs. Those allegations, in

conjunction with the vagueness of the fees collected under the

revenue sharing model, make plausible the inference that

defendants’

overall decision-making, resulted in...the imposition

of excessive administrative and record keeping fees.

Brown, 2023 WL 2383772, at *4 (citing Matousek v. MidAmerican

Energy Co., 51 F.4th 274, 278 (8th Cir. 2022)). The motion to

dismiss with respect to recordkeeping fees will be denied.

b. Investment Management Fees and

Underperformance

Plaintiff also alleges that investment management fees paid

by defendants were imprudent resulting in the underperformance

of several funds offered by the Plan. The pleadings focus on

the fees and performance of the TIAA Real Estate Account, CREF

Stock Account and Fidelity Freedom Funds.

As an initial matter, defendants contend that claims

related to investment management fees and fund underperformance

must fail because plaintiff has not compared the assets at issue

with a “meaningful benchmark.” Several Circuit Courts of Appeal

have held that at the motion to dismiss stage

a complaint cannot simply make a bare allegation that

costs are too high, or returns are too low...[r]ather,

it must provide a sound basis for comparison—a

meaningful benchmark.

Davis v. Washington Univ. in St. Louis, 960 F.3d 478, 484 (8th

Cir. 2020) (internal quotations and citations omitted); see also

Matney, 80 F.4th at 1148.

The First Circuit Court of Appeals (“First Circuit”),

however, has yet to consider the so-called “meaningful

benchmark” standard and several sessions of this Court have

rejected it. While it may seem intuitive to a professional

investor to evaluate fund performance and fees in the context of

analogous “benchmark” funds, this Court agrees with District

Judge William G. Young of this Court that evaluating the

suitability of benchmarks is “inappropriate at the motion to

dismiss stage.” Sellers, 647 F. Supp. 3d at 30 (internal

quotation and citation omitted) (alteration in original). To

engage in meaningful benchmark analysis, this Court would be

required to consider the merits substantively in a manner that

would conflict with the Court’s obligation to draw all

reasonable inferences in favor of the plaintiff. See Decotiis v.

Whittemore, 635 F.3d 22, 27 (1st Cir. 2011).

i. TIAA Real Estate Fund

The dispute over investment management of the TIAA Real

Estate Fund illustrates the futility of factfinding at the

motion to dismiss stage. Plaintiff asserts that the 0.77%

expense ratio of the TIAA Real Estate Fund far exceeds typical

real estate funds which have expense ratios between 0.59% and

0.64%. He cites a report of the Investment Company Institute

(“ICI Report”) which shows that such asset-weighted average

expense ratios range from 0.59% to 0.64%, depending upon the

number of plan participants in a combination of real estate

funds, commodity funds and individual stocks and bonds.

Defendants contend that the benchmark from the ICI Report

is an improper comparator because it includes an amalgam of real

estate and non-real estate assets but they fail to account for

the real possibility that the expense ratios of real estate-

focused funds largely resemble those of more diversified funds

or funds focused on other asset classes. The Court also credits

the allegation that the structure of the fund inherently leads

to higher fees. Finally, as discussed infra, circumstantial

evidence concerning deficiencies in defendants’ process for

selecting and maintaining the investment does not warrant

dismissal at this stage. While there may be appropriate grounds

to discount the weight accorded to the ICI Report, they are more

suitably argued at summary judgment. See Sellers, 647 F. Supp.

at 28.

ii. Fidelity Freedom Funds

A similar story emerges with respect to the Fidelity

Freedom Funds. Plaintiff alleges that those funds, which are

part of the “K” share class of Fidelity offerings, charge

excessive fees and should have been replaced by funds in the

purportedly lower fee “K6” share class. While not denying that

the K6 share class carries lower fees, defendants contend that

plaintiff failed to allege that the K and K6 share classes are

identical. That assertion can, however, be reasonably inferred

from plaintiff’s allegation that defendants “failed to move the

Plan into less expensive versions of options already in the

Plan” immediately before its discussion of the K and K6 share

classes.

Defendants’ assertion that plaintiff conceded that higher-

cost share classes are always permitted to generate revenue

sharing is unfounded. The Court finds no such concession in the

complaint and, in fact, plaintiff contends that the revenue

sharing fee model in place is imprudent.

Finally, defendants contend that “plan fiduciaries are not

required to pick passive index funds over actively managed

funds.” While that is a legally sound contention, it does not

follow that maintaining the particular funds at issue, the K

share class funds, was not imprudent as a matter of law.

iii. CREF Stock Account

Plaintiff alleges that defendants breached their duty of

prudence by maintaining the CREF Stock Account despite purported

under-performance and the existence of lower-cost alternatives.

Defendants contend that the Vanguard Diversified Equity Fund,

the Vanguard PRIMECAP Fund and the Van guard Capital Opportunity

Fund are inappropriate benchmark funds, and that plaintiff

employs an artificially short timeframe for comparisons. They

also assert that bare allegations of under-performance in

hindsight are insufficient to state a claim for imprudence,

citing this Court’s opinion in Turner.

The Court accepts as true plaintiff’s contention that the

three Vanguard funds have “similar underlying asset allocations”

as the CREF Stock Account and thus are valid comparators.

Furthermore, the Court finds that performance intervals of one,

three and five years are plausibly appropriate comparison

metrics at the motion to dismiss stage. Defendants cite no

First Circuit caselaw to the contrary.

Defendants are correct, however, that under-performance

alone is not enough to support a claim for imprudence. See

Turner, 530 F. Supp. 3d. at 133. Nonetheless, a claim for

imprudence can survive dismissal if a court can reasonably infer

“based on circumstantial factual allegations” that the process

of selecting or maintaining an investment was flawed. See id.

(quoting Moreno v. Deutsche Bank Ams. Holding Corp., 2016 WL

5957307, at *5-6 (S.D.N.Y. Oct. 13, 2016)).

The complaint contains several such circumstantial

allegations that would render plausible a claim of imprudence.

Plaintiff notes that the CREF Stock Account is the second

largest investment in the Plan constituting almost one-eighth of

the Plan’s total assets. It was also the subject of a recent

ERISA imprudence claim that withstood a motion to dismiss in

Short v. Brown University. See 320 F. Supp. 3d 363 (D.R.I.

2018). That modicum of evidence, combined with the relatively

poor performance of the asset compared to the Vanguard funds

make plausible the inference that fiduciaries were on notice and

failed to re-evaluate the CREF Stock Account.

c. TIAA as a Custodian

Finally, plaintiff alleges it was imprudent, as a general

matter, to maintain TIAA as a Plan custodian in light of the

joint Securities and Exchange Commission-New York Attorney

General investigation (“the SEC-NYAG investigation”) into a TIAA

subsidiary. That investigation concerned alleged deceptive

marketing practices related to “cross-selling” services to

clients in TIAA-administered retirement plans. Defendants

contend that any claims arising out of the cross-selling

investigation should be dismissed because plaintiff does not

allege that he or any other Plan participant was exposed to

cross-selling practices.

Another session of this Court evaluated the import of the

investigation to a similar ERISA suit and held that it

does not give much weight--if any at all--to this

investigation since it is not entirely relevant to the

facts...of this case.

Sellers, 647 F. Supp. 3d at 26. Plaintiff did not allege that

any cross-selling occurred for Plan participants nor does he

plausibly allege a connection between the investigation and TIAA

as a custodian for the Plan. Accordingly, the Court will allow

the motion to dismiss to the extent that plaintiff seeks to hold

defendants liable for maintaining TIAA as a custodian in light

of the investigation.

B. Failure to Monitor Fiduciaries

Finally, plaintiff’s claim for failure to monitor

fiduciaries is derivative of its imprudence claim. See In re

Biogen, Inc. ERISA Litigation, 2021 WL 3116331, at *10 (D. Mass.

Jul. 22, 2021). Thus, to the extent plaintiff has plausibly

alleged a claim for imprudence, he has also plausibly alleged a

claim for failure to monitor fiduciaries.

ORDER

For the foregoing reasons, the motion to dismiss of

defendants, Northeastern University and Northeastern University

403(b) Investment Committee, (Docket No. 54) is, as to both

counts, to the extent that plaintiff seeks to hold defendants

liable for maintaining TIAA as a custodian in light of the

Securities and Exchange Commission-New York Attorney General

investigation, ALLOWED but is otherwise DENIED.

So ordered.

__/s/ Nathaniel M. Gorton__

Nathaniel M. Gorton

United States District Judge

Dated: April 17, 2024