Carfora v. Teachers Insurance Annuity Association of America

Background

John Carfora, Sandra Putnam, and Juan Gonzales sued Teachers Insurance Annuity Association of America and TIAA-CREF Individual & Institutional Services, LLC. They brought the case individually and as representatives of a proposed class. The opinion concerns administrative and investment-related services provided to employer-sponsored retirement plans governed by the Employee Retirement Income Security Act of 1974, or ERISA.

Plaintiffs alleged that TIAA marketed its Portfolio Advisor managed-account program to participants in TIAA-administered retirement plans. According to the Second Amended Complaint, Portfolio Advisor often included TIAA-affiliated funds and charged multiple layers of fees, including a variable management fee. Plaintiffs alleged that TIAA used a structured sales process to persuade participants to move money from lower-fee employer-sponsored plans into Portfolio Advisor, and that advisors used misleading comparisons, failed to disclose relevant fees and expenses, and were compensated in part based on sales.

Plaintiffs did not rely on their earlier theory that TIAA itself directly breached fiduciary duties owed to them. Instead, they alleged that the retirement-plan sponsors breached their own ERISA fiduciary duties by failing to identify and address TIAA’s cross-selling campaign, failing to disclose related conflicts, and failing to monitor TIAA’s compensation and cross-selling revenue. Plaintiffs further alleged that TIAA knowingly participated in those breaches.

Motion to dismiss standard

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. At this stage, the court accepts well-pleaded factual allegations as true, draws reasonable inferences for the plaintiffs, and determines whether the allegations plausibly support relief. The court does not decide which side’s evidence is true.

Court’s analysis

The court held that Plaintiffs plausibly alleged two underlying breaches by the plan sponsors. First, Plaintiffs plausibly alleged that the sponsors breached their duty of prudence by failing to identify and address TIAA’s cross-selling activities before participants rolled money out of the plans. The court reasoned that the allegations concerned conduct directed at plan participants while they remained participants, and that ERISA fiduciaries may have duties to monitor service providers and communicate material information affecting participants’ interests.

Second, the court held that Plaintiffs plausibly alleged a failure to monitor TIAA’s activities and compensation. Plaintiffs alleged that TIAA’s cross-selling revenue increased from $2.6 million to $54 million between 2013 and 2018, which the opinion described as a 20-fold increase. The court concluded that the alleged increase, together with the allegation that cross-selling provided little benefit to the plans, supported an inference at the pleading stage that the plan sponsors failed to assess whether TIAA’s total compensation was reasonable.

The court also held that Plaintiffs plausibly alleged TIAA’s knowing participation. Under ERISA Section 502(a)(3), a non-fiduciary may be liable for knowingly participating in a fiduciary’s breach. The court stated that Plaintiffs alleged detailed facts showing that TIAA designed and profited from an institution-wide effort to move participants from their ERISA plans into TIAA offerings. Those allegations were sufficient at the motion-to-dismiss stage to support an inference that TIAA knew the relevant circumstances underlying the alleged breaches. The court noted that the defendants did not challenge the sufficiency of Plaintiffs’ damages allegations.

Disposition

The court denied Defendants’ motion to dismiss. The Clerk was directed to terminate the motion at docket entry 74. Defendants were ordered to answer the Second Amended Complaint by June 21, 2024, and the parties were directed to submit a joint case-management plan by June 28, 2024. The opinion did not determine whether the alleged fiduciary breaches or knowing participation actually occurred.