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Tracey v. Massachusetts Institute of Technology

United States District Court, D. Massachusetts

September 4, 2019



          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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