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Traceyv. MIT

United States District Court, D. Massachusetts

October 19, 2018

Tracey, et al., Plaintiffs,
v.
MIT, et al., Defendants.

          MEMORANDUM & ORDER

          NATHANIEL M. GORTON UNITED STATES DISTRICT JUDGE.

         This case involves an alleged breach of fiduciary duty by Massachusetts Institute of Technology (“MIT” or “defendants”) with respect to the supervision of its employee-sponsored defined contribution plan under the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1109. Plaintiffs seek to certify a class of all MIT employees who participated in the subject retirement plan, excluding defendants, from August 9, 2010, to the date of judgment. The named plaintiffs are four current or former employees of MIT who did just that.

         The underlying claims are for alleged excessive recordkeeping fees and imprudent investment lineups. Defendants do not oppose plaintiffs' request for class treatment regarding plaintiffs' claim for excessive recordkeeping fees but they do oppose class certification for the separate claims that the investment lineup of the retirement plan should be altered in various ways. The legal analysis that follows addresses only the latter dispute regarding the Plan's investments.

         I. Background

         A. Factual Background

         Massachusetts Institute of Technology (“MIT”) is a nonprofit educational and research institution that offers its employees an employer-sponsored defined contribution plan (“the Plan”). The Plan is funded through employee contributions and matching contributions from MIT. Under ERISA, the Plan's assets are held in a single trust for the exclusive benefit of the Plan's participants. 29 U.S.C. § 1103(a). MIT serves as the Plan's administrator and named fiduciary with the ultimate responsibility for the management and operation of the Plan. MIT has delegated its investment-related duties to the MIT Supplemental 401(k) Plan Oversight Committee. That committee determines the available investment options in which participants may invest their accounts.

         In 1999, MIT contracted with Fidelity Investments Operations Company to serve as the Plan's recordkeeper and Fidelity Management Trust Company to serve as the Plan's Trustee. Until 2015, plaintiffs allege that the Plan consisted of over 300 investment options primarily advised by Fidelity Management & Research Company. Plaintiffs further allege that defendants agreed to include almost every Fidelity mutual fund in the Plan without vetting the funds (approximately 180 options).

         1. Excessive Administrative Fees

         Fidelity is compensated for its administrative services as the Plan's recordkeeper through a revenue-sharing model by which the recordkeeper receives a percentage of the value of the mutual fund asset. Mutual funds sometimes offer investors different share classes (categories of different kinds of securities, such as common stock or mutual fund units). Retail share classes are marketed to individuals with relatively small amounts to invest. Institutional share classes are offered to larger investors, such as municipal or educational retirement plans. The different share classes are managed in the same way. Plaintiffs allege that retail share classes charge higher fees and that defendants deliberately selected more expensive options (retail share classes) rather than cheaper investment options (institutional share classes), thereby permitting Fidelity, as its recordkeeper, to receive excessive administrative fees. Moreover, from 2009 to 2014, the Plan's assets nearly doubled in value from $2 billion to $3.8 billion and the fees paid to Fidelity increased accordingly.

         Plaintiffs allege that Fidelity's recordkeeping compensation was up to five times greater than the market rate for such services, leading to a calculated loss of $12 million to the Plan.

         2. Lineup of funds in the Plan

         Prior to 2015, MIT's Plan was composed of four tiers of investment options including a “Brokerage Window” (Tier 4). Through that tier, participants could invest in the broader mutual fund market via a brokerage account. In 2015, MIT restructured the Plan, reducing the number of options in the lineup from 340 to 37 and eliminating all but one Fidelity fund (hereafter referred to as “the consolidation”). The amounts invested in funds that no longer existed post-consolidation were reallocated to a specified option in the new lineup unless participants elected to keep their investments through the Plan's Brokerage Window for a brokerage fee.

         3. Claims alleged by Plaintiffs

         Based on the above facts, plaintiffs make the following claims: 1) defendants breached their fiduciary duty by retaining imprudent and excessive cost investment options that enriched Fidelity at the Plan's expense (Count I); 2) defendants breached their fiduciary duty by allowing Fidelity to collect excessive recordkeeping and administrative fees (Count II); 3) defendants caused the Plan to engage in prohibited transactions in violation of 29 U.S.C. § 1106(a) (Count III) and 4) defendants failed to monitor adequately those to whom it delegated fiduciary responsibilities (Count IV).

         The named plaintiffs include four current and former MIT employees and participants in the Plan. They seek to represent the following class:

All participants and beneficiaries of the MIT Supplemental 401(k) Plan from August 9, 2010, through the date of judgment, excluding the defendants.

         Pending before this Court is plaintiffs' motion to certify the proposed class.

         B. Procedural History

         On August 31, 2017, Magistrate Judge Bowler issued a Report and Recommendation (“R&R”) that recommended

1) allowing the motion to dismiss the duty of loyalty claim but denying the motion to dismiss the duty of prudence claim under Count I;
2) allowing the motion to dismiss the duty of loyalty claim but denying the motion to dismiss the duty of prudence claim under Count II;
3) denying the motion to dismiss the claim for prohibited transactions involving “assets of the plan”, allowing the motion to dismiss the claims arising from mutual funds and denying the motion to dismiss the claims as to non-mutual fund options under Count III; and
4) denying the motion to dismiss for failure to monitor under Count IV.

         This Court entered a Memorandum and Order in October, 2017, that accepted the Magistrate Judge's R&R with the exception that it dismissed plaintiffs' prohibited transaction and monitoring claims under Counts III and IV. With leave of the Court, plaintiffs filed a Second Amended Complaint (“SAC”), adding additional defendants and eliminating certain disloyalty allegations but otherwise reiterating all of the counts and theories of liability and damages that were included in the First Amended Complaint. Plaintiffs subsequently moved to certify the class.

         II. Legal Standard

         Under Fed.R.Civ.P. 23, a court may certify a class only if it finds that the proposed class satisfies all the requirements of Rule 23(a) and that class-wide adjudication is appropriate for one of the reasons set forth in Rule 23(b). See ...


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