Wilcox v. Georgetown University

          MEMORANDUM OPINION

          ROSEMARY M. COLLYER, UNITED STATES DISTRICT JUDGE.

         If a cat were a dog, it could bark. If a retirement plan were not based on long-term investments in annuities, its assets would be more immediately accessed by plan participants. These two truisms can be summarized: cats don't bark and annuities don't pay out immediately.

         Darrell Wilcox and Michael McGuire work for Georgetown University. Each man has an individual investment account in each of the two retirement plans offered by the University. They allege that Georgetown imprudently selected and retained certain investment options that caused excessively high administrative fees and that it failed to manage the plans' investments prudently, in violation of the University's fiduciary duties to the plans' participants. This type of lawsuit seems to have taken higher education by storm, with suits brought all over the country. Georgetown moves to dismiss, arguing that Plaintiffs have no standing to make some of their claims and that others fail to state a claim on which relief can be granted. The motion to dismiss will be granted as to all claims.

         I. FACTS

         Georgetown University in Washington, D.C. provides two retirement plans for its faculty and staff members: the Georgetown University Defined Contribution Retirement Plan (Defined Contribution Plan) and the Georgetown University Voluntary Contribution Retirement Plan (Voluntary Plan) (collectively “the Plans”). The Plans are defined contribution, individual account employee pension plans governed by the Employee Retirement Income Security Act (ERISA) 29 U.S.C. § 1001 et seq. “[A] ‘defined contribution plan' or ‘individual account plan' promises the participant the value of an individual account at retirement, which is largely a function of the amounts contributed to that account and the investment performance of those contributions.” LaRue v. DeWolff, Boberg & Assoc., Inc., 552 U.S. 248, 250 n.1 (2008) (citation omitted). By contrast, “a ‘defined benefit plan,' generally promises the participant a fixed level of retirement income, which is typically based on the employee's years of service and compensation.” Id. (citation omitted).

         Georgetown contributes an amount up to ten percent (10%) of an employee's annual salary into the Defined Contribution Plan and employees can contribute, as they choose, up to three percent (3%) more to the Voluntary Plan. Each participant has his own account in each Plan and decides personally how to invest its funds across a wide array of investment options, according to individual choice. Georgetown is the designated Plan Administrator for both Plans. See 29 U.S.C. §§ 1002(2)(A), 1002(34). It manages the Plans and their assets, including selecting, monitoring, and removing investment options.

         The Plans are organized under Section 403(b) of the Internal Revenue Code, 26 U.S.C. § 1 et seq. Titled “Taxation of employee annuities, ” § 403 provides a set of rules for certain plans sponsored by non-profit employers; it allows employer contributions and part of an employee's salary to be set aside in an individual account and then to increase in value (one hopes) without immediate taxation to the employee. Id. § 403. This provision predates ERISA and speaks directly to the heritage of the collegiate retirement system.

         In 1905, Andrew Carnegie endowed a $10 million gift to fund pensions at thirty universities.^[1] In 1906, Congress chartered the Carnegie Foundation for the Advancement of Teaching to provide a system of retirement pensions for university professors. Act to Incorporate the Carnegie Foundation for the Advancement of Teaching, ch. 636, 34 Stat. 59 (Mar. 10, 1906). When, by 1918, it became clear that Mr. Carnegie's gift would be insufficient to meet the need, the Carnegie Foundation founded the Teachers Insurance and Annuity Association, now known as TIAA. TIAA developed annuity contracts with “fundamental provisions specially designed for college retirement plans.” Greenough at 14, 17. An annuity is essentially a long-term insurance contract that guarantees regular payments at retirement and for the life of the holder.^[2] This collegiate retirement system of annuities predated the enactment of Internal Revenue Code § 403(b), which was adopted in 1958 to provide favorable tax treatment for “tax-sheltered annuities, ” such as those offered by the Plans. Technical Amendments Act of 1958, Pub. L. No. 85-866, § 1022(e), 88 Stat. 829, 1972 (1974) (codified as amended at 26 U.S.C. § 403(b)).

         When adopting ERISA in 1974, Congress amended the Code so that § 403 plans could offer mutual funds in addition to annuities. See ERISA, Pub. L. No. 93-406, § 1022(e), 88 Stat. 829, 1072 (1974) (codified as amended at 26 U.S.C. § 403(b)(7)). At that time, “the defined benefit plan was the norm of American pension practice.” LaRue, 552 U.S. at 255 (alteration and internal quotation marks omitted). Under a defined benefit plan, an eligible employee who has worked sufficient years receives a promised monthly pension benefit for life. Because of the huge legacy costs of funding such plans for growing numbers of retirees, many employers have changed to “defined contribution” plans through which an employer's contribution is specified and capped, no matter how long a retired employee might live.^[3] In response to this change, Congress adopted legislation by which employees can invest in various other tax-deferred plans, such as individual § 401(k) plans. Revenue Act of 1978, Pub. L. No. 95-600, § 135(a), 92 Stat. 2763, 2785 (codified as amended at I.R.C. § 401(k) (2006)). “[D]efined benefit plans are now largely limited to the public sector, very large employers, and multi-employer plans of large national unions such as the Teamsters.” David Pratt, To (b) or Not to (b): Is That the Question? Twenty-first Century Schizoid Plans Under Section 403(b) of the Internal Revenue Code, 73 Alb. L. Rev. 139, 144 (2009).

         Defendants Christopher Augustini and Geoff Chatas have served as Georgetown's Senior Vice President and Chief Administrative Officer, and as fiduciaries to the Plans, until May 2017 and from February 30, 2018 through to the present, respectively. They, and Georgetown, are sued for alleged breaches of their fiduciary duties to the Plans' participants.

         Plaintiffs Darrell Wilcox and Michael McGuire are participants in both Plans. They filed this lawsuit on February 23, 2018 and challenge the expenses of the Plans, which they say are detrimental to the interests of the Participants, wasteful, and breach the fiduciary duties of the Plans' fiduciaries. See Compl. [Dkt. 1]. Specifically, Plaintiffs attack the expense of separate recordkeeping services that maintain the Plans; the expense of some of the investment options that are available; the number of investment options that are offered; and the inclusion in the Plans of certain investment options.

         The University and Messrs. Augustini and Chatas (collectively, Georgetown) deny that they violated any duty to the Plans' Participants and move to dismiss the Complaint.

         A. Description of the Plans

         Each of the Georgetown Plans provides individual accounts for all Participants. Georgetown contributes an amount equal to 5% of each Participant's salary into his account in the Defined Contribution Plan. Participants may, but are not required to, voluntarily contribute an additional three percent (3%) of their salaries to the Defined Contribution Plan; if a Participant does so, Georgetown matches these contributions at a little more than one-and-one-half for each dollar contributed, i.e., 1.67-to-1. As a result, a Participant who voluntarily contributes the entire allowed-amount of 3% of his salary into the Defined Contribution Plan receives a 5% match of funds from the University.

         In each Plan, the Participant directs how his funds are invested from a broad set of choices that includes fixed and variable annuities offered by TIAA and mutual funds offered by TIAA, Vanguard, and Fidelity.^[4] The three investment platforms charge certain fees to Plan Participants, which are fully disclosed but which Plaintiffs assert are more expensive than need be.

         1. Fidelity Investment Options

         Plaintiffs do not complain about investment options offered by Fidelity and they will not be further discussed.

         2. Vanguard Investment Options

         Plaintiffs complain that Georgetown “used more expensive funds . . . than investments that were available to the Plans.” Compl. ¶ 131. Specifically, they challenge the particular share classes of Vanguard funds that were available to Participants. Neither Plaintiff, however, invested in the Vanguard funds or alleges that he intended or intends to do so.

         3. TIAA Investment Options

         TIAA offers a variety of investment options. The Court describes only those options that are challenged by Plaintiffs.

         a. TIAA Traditional Annuity

         The TIAA Traditional Annuity is a fixed annuity. “Under a classic fixed annuity, the purchaser pays a sum certain and, in exchange, the issuer makes periodic payments throughout, but not beyond, the life of the purchaser.” NationsBank of N.C., N.A. v. Variable Annuity Life Ins. Co., 513 U.S. 251, 262 (1995). When a Georgetown Plan Participant elects to invest in the TIAA Traditional Annuity, he enters into a direct contractual relationship with TIAA concerning its terms. Mem. of Law in Supp. of Defs.' Mot. to Dismiss (Defs.' Mem.) [Dkt. 18-1] at 6. The University is not a party to that contract.

         The TIAA Traditional Annuity is available to Participants through either the Defined Contribution Plan or the Voluntary Plan but with important differences. A Participant who invests his money from the Defined Contribution Plan into the TIAA Traditional Annuity will earn greater interest (typically, an additional 0.75% a year) than the same investment from the Voluntary Plan. The difference in earning power is inversely reflected in the difference in the accessibility of the invested monies: a Participant who elects the TIAA Traditional Annuity through the Voluntary Plan may withdraw his funds at any time without penalty but a Participant who elects the TIAA Traditional Annuity through the Defined Contribution Plan may not withdraw his funds until he leaves his employment with Georgetown or, if he wishes to re-direct his investments, in ten annual installments. Upon his departure from employment, such a Participant can leave his funds invested in the TIAA Traditional Annuity for the long term and receive a monthly pension payment whenever he qualifies, or withdraw his funds immediately. If he elects to withdraw his funds immediately from the Defined Contribution plan, he will receive a lump-sum payout but must pay a 2.5% surrender charge.

         Plaintiffs complain about both limiting features of the TIAA Traditional Annuity: first, that it “prohibits participants from re-directing their investment into other investment options during their employment except in ten annual installments, ” and second, that it “prohibits participants from receiving a lump sum distribution after termination of employment unless the participant pays a 2.5% surrender charge, ” both of which “violate ERISA's prohibition on the imposition of a penalty for early termination of a contract.” Pls.' Mem. of Law in Opp'n to Defs.'s Mot. to Dismiss Pls.'s Compl. (Opp'n) [Dkt. 24] at 10 (citing Compl. ¶¶ 99, 103, 108).

         Georgetown contends that Plaintiffs have shown no injury-in-fact related to the TIAA Traditional Annuity because any claim they may present is not ripe. Neither alleges that he has left or plans to leave Georgetown or that he wishes to re-direct his investments.

         b. CREF Stock Account

         The CREF Stock Account is a variable-annuity investment fund. CREF stands for College Retirement Equities Fund, which TIAA established in 1952. Defs.' Mem. at 7 n.13. As it advises investors through its prospectus, the CREF Stock Account seeks to achieve “[a] favorable long-term rate of return through capital appreciation and investment income by investing primarily in a broadly diversified portfolio of common stocks.”^[5] The Stock Account is globally diversified and “seeks to maintain the weightings of its holdings as approximately 65-75% domestic equities and 25-35% foreign equities.” Id. at 27 (citing 2017 CREF Prospectus). As a result, the Stock Account advises investors:

The benchmark for the Stock Account is a composite index composed of two unmanaged indices: the Russell 3000® Index and the MSCI All Country World ex USA Investable Market Index (“MSCI ACWI ex USA IMI”). The weights in the composite index change to reflect the relative sizes of the domestic and foreign segments of the Account and to maintain its consistency with the Account's investment strategies.

Id. at 7 (citing 2017 CREF Prospectus).

         The Georgetown Plans assert that the global investments undertaken by the CREF Stock Account are not fully accounted for by federal regulations that control Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans. 29 C.F.R. § 2230-404a-5(d)(1)(iii); see also 75 Fed. Reg. 64, 910, 64, 916 (Oct. 20, 2010) (disallowing the use of composite benchmarks). Because it is a composite fund but cannot use composite benchmarks in certain disclosures, the CREF Stock Account references only the domestic Russell 3000 benchmark in some materials although its prospectus advises that the influence of foreign investments is reported only by the MSCI All Country World ex USA Investable Market Index and that a true benchmark for the Stock Account is both the Russell 3000 and the MSCI All Country World ex USA ...