On August 5, three Named Plaintiffs sued TIAA and Morningstar in the S.D.N.Y., claiming Defendants engaged in a “scheme to enhance corporate profits” by counseling participants to invest in two of TIAA’s most lucrative investment vehicles. Plaintiffs target ERISA and non-ERISA plans.  The Complaint alleges TIAA and Morningstar developed an investment advisory tool – the Retirement Advisor Field View (RAFV) – deliberately inducing participants to transfer account balances into TIAA’s Traditional Annuity and/or Real Estate Account, TIAA’s two most profitable investment products.

Notably, no plan nor plan sponsor is named as a fiduciary nor a Defendant.  TIAA and Morningstar are the sole Defendants.  The case is brought as a broad class action.  The class definition includes all participants and beneficiaries of all ERISA-covered defined contribution plans and plans not subject to ERISA, who initiated or increased their allocation of assets in the TIAA annuity or real estate funds based on advice received through the RAFV tool.  The claims include breach of fiduciary duty and loyalty under ERISA and New York state law (as to non-ERISA plans sponsored by public universities) and claims under ERISA’s prohibited transaction rules.  Additionally, Plaintiffs seek trial by jury or an advisory jury.

The Complaint weaves together contentions of an unlawful TIAA “scheme” developed to recover losses from its core retirement services business.  Plaintiffs’ theory is that because TIAA was losing market share, it developed this new business model – RAFV – that induced participants to move their investments to the TIAA Traditional Annuity and TIAA Real Estate Account.  According to Plaintiffs, RAFV was designed to show participants they were failing to meet their retirement income goals based upon their current allocations.  Representatives provided new investment recommendations, and those TIAA and Morningstar recommendations channeled participant funds into TIAA’s annuity and real estate accounts, even though Morningstar purported to be an “independent financial expert.”  According to the Complaint, these two investment funds were TIAA’s most profitable investment products, in large part due to continued revenue flows from this “scheme.”  In this sense, these allegations borrow heavily from prior proprietary fee cases. 

Defenses

The chief defense to the case is whether TIAA and Morningstar’s conduct is fiduciary conduct.  The alleged advice is provided to participants as they exit the plan, either because they are retiring, or because they are moving their assets into an investment vehicle that is no longer an ERISA plan.  The Department of Labor’s fiduciary rules may or may not govern such situations in the future, but those rules, to the extent that they were in effect, have been enjoined nationally.

The Complaint is interesting also because it ignores the touchstone between TIAA and Morningstar’s alleged conduct and the activity/presence of a plan sponsor or a more traditional plan fiduciary.  Typically, this type of claim would be centered on a plan fiduciary and the allegations cast as a fiduciary failing to recognize how the service provider takes advantage of plan participants.  Instead, this Complaint bypasses a specific plan or plan fiduciary and takes direct aim at the service provider.  Will that strategy succeed before regulatory rules govern such service provider conduct?

Takeaways

Financial services entities weathered the proprietary fee litigation cases when many such entities were sued for offering their proprietary investment products to their employees in their own 401(k) Plans.  This case has elements of proprietary fee litigation in that it attacks TIAA for marketing proprietary products to participants to “feather its own nest.”  Given the past 401(k) Plan litigation history and the analogous prior proprietary fee cases, if this case survives a motion to dismiss as to fiduciary status, we may see more of these cases filed in the future against other financial services entities.