United States District Court, D. Massachusetts
MEMORANDUM & ORDER
Nathaniel M. Gorton United States District Judge.
This
case involves an alleged breach of fiduciary duty by the
Massachusetts Institute of Technology (“MIT”,
“the University” or “defendants”)
with respect to its supervision of its employer-sponsored
defined contribution plan (“the Plan”) under the
Employee Retirement Income Security Act
(“ERISA”), 29 U.S.C. § 1109. It is brought
as a putative class action by representatives of participants
and beneficiaries of the MIT Supplemental 401(k) Plan
(“plaintiffs”).
The
underlying claims are for a breach of the duty of prudence
(failure to monitor, imprudent investment lineup and
excessive recordkeeping) and prohibited transactions in
violation of ERISA. Plaintiffs claim that 1) defendants
breached their fiduciary duty under 29 U.S.C. §
1104(a)(1)(A) by failing to monitor the Plan and retaining
imprudent and excessive cost investment options that enriched
Fidelity Investments (“Fidelity”) at the
Plan's expense (Count I); 2) defendants breached their
fiduciary duty under 29 U.S.C. § 1104(a)(1)(A) 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) MIT, as the
monitoring fiduciary, failed adequately to monitor the other
defendants to whom it delegated fiduciary responsibilities
(Count IV).
Pending
before this Court is defendants' motion for summary
judgment. For the following reasons, that motion will be
allowed, in part, and denied, in part.
I.
Background
A.
Factual Background
MIT is
a renowned, non-profit educational and research institution
that offers its employees an employer-sponsored defined
contribution 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.
The University has delegated its investment-related duties to
the MIT Supplemental 401(k) Plan Oversight Committee
(“Committee”), which determines the available
investment options in which participants may invest their
accounts.
In
1999, MIT appointed Fidelity Investments to render
recordkeeping and administrative services to the Plan.
Specifically, the University 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.
Prior
to July, 2015, when the Plan was restructured, it consisted
of four tiers of investment options. The tiers were designed
in order to provide MIT employees the flexibility to
determine their desired level of involvement with their
retirement investments. Tier 1 consisted of low-risk, low
expense trusts. Tier 2 gave participants more flexibility by
allowing them to distribute their investments across seven
products with varying risk/return profiles. Most relevant to
the claims at issue, Tier 3, the “MIT Investment
Window” (“Investment Window”) offered a
wide range of investment products and was designed to give
individuals with experience conducting investment research a
large degree of choice. Finally, Tier 4 “Fidelity
BrokerageLink” was a self-directed brokerage account
designed for investors with a higher appetite for risk and
independent management.
In
July, 2015, the Plan underwent a major reorganization
removing hundreds of mutual funds from Tier 3 and eliminating
all but one Fidelity fund. In essence, the Committee
eliminated Tier 3 and expanded Tier 2 to include 37 core
options. According to the Plan administrators, they adjusted
the Plan's offerings in order to comply with regulatory
standards, to lower costs and to strike a balance between
affording Plan participants freedom of choice and ensuring
they could choose efficient, cost effective investment
options.
Plaintiffs
allege that MIT breached the duty of prudence owed under
ERISA by generally failing to monitor the Plan's
offerings. Specifically, plaintiffs contend that MIT failed
to remove under-performing investments and included
investment options with excessive fees instead of
indistinguishable lower cost options. Plaintiffs claim this
failure to evaluate the Plan's offerings led Fidelity to
collect millions of dollars in excessive fees that rightfully
belonged to the retirement accounts.
Plaintiffs
also assert that MIT breached its duty of prudence by
allowing Fidelity to retain 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 Plan's assets. Plaintiffs claim that defendants
overpaid Fidelity for its recordkeeping services due to its
failure to solicit bids from other recordkeepers through a
Request for Proposal (“RFP”) and by otherwise
failing to assess and reduce administrative costs. Plaintiffs
further allege that Fidelity's recordkeeping compensation
was up to five times greater than the market rate for such
services and ultimately cost the Plan millions of dollars in
unnecessary expenses.
Plaintiffs
also assert a statutory violation under 29 U.S.C. §
1106(a) which prohibits certain transactions between a plan
and a “party in interest”. They claim that MIT
breached that provision by causing the Plan to pay fees to
Fidelity for non-mutual fund investments.
Finally,
plaintiffs claim a derivative failure to monitor against MIT.
They argue that MIT as the responsible fiduciary failed to
monitor the other fiduciaries (in this case the other
defendants) and thus faces additional liability.
B.
Procedural Background
On
August 8, 2016, Plaintiffs David Tracey, Daniel Guenther,
Maria Nicolson, Corrianne Fogg and Vahik Minaiyan,
individually and as representatives of a class of
participants and beneficiaries filed this action alleging a
breach of fiduciary duties and prohibited transactions under
ERISA. Defendants filed a motion to dismiss and, in August,
2017, Magistrate Judge Bowler issued a Report and
Recommendation (“R&R”) in which she
recommended:
1) allowance of the motion to dismiss the duty of loyalty
claims but denial of the motion to dismiss the duty of
prudence claims under both Counts I and II;
2) denial of the motion to dismiss the claim for prohibited
transactions involving “assets of the plan” under
§ 1106(a)(1)(D), allowance of the motion to dismiss the
§ 1106(a)(1)(C) claim arising from mutual funds in the
Plan but denial of the motion to dismiss as to non-mutual
fund options under Count III; and
3) denial of the motion to dismiss the claims for failure to
monitor insofar as they are derived from plaintiffs'
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