Carfora v. Teachers Ins. Annuity Ass'n of Am.
| Decision Date | 27 September 2022 |
| Docket Number | 21 Civ. 8384 (KPF) |
| Parties | JOHN CARFORA, SANDRA PUTNAM, and JUAN GONZALES, individually and as representatives of a class of similarly situated individuals, Plaintiffs, v. TEACHERS INSURANCE ANNUITY ASSOCIATION OF AMERICA and TIAA-CREF INDIVIDUAL & INSTITUTIONAL SERVICES, LLC, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Plaintiffs John Carfora, Sandra Putnam, and Juan Gonzales bring this action against Defendants Teachers Insurance Annuity Association of America and TIAA-CREF Individual & Institutional Services, LLC (collectively “Defendants” or “TIAA”), asserting a variety of claims under the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C §§ 1001-1191d. Now before the Court is Defendants' motion to dismiss the Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), which motion is predicated in large measure on the Court finding that Defendants were not ERISA fiduciaries during the relevant timeframe. For the reasons set forth in the remainder of this Opinion, the Court so finds, and grants Defendants' motion to dismiss.
BACKGROUND[1]
Like many Americans, Plaintiffs John Carfora, Sandra Putnam, and Juan Gonzales are participants in employer-sponsored defined contribution retirement plans. Such tax-advantaged plans are integral to funding participants' future retirements. TIAA provided Plaintiffs' employer-sponsored plans and thousands of others with various administrative and investment-related services. At the same time, however, TIAA also sought to grow its individual advisory business in its capacity as a broker-dealer and investment advisor. In furtherance of this goal, TIAA encouraged Plaintiffs and others similarly situated to take distributions from their defined contribution plans and roll that money over into TIAA's “Portfolio Advisor,” a managed account service. Once Plaintiffs and other participants moved assets from their employer-sponsored plans into Portfolio Advisor, TIAA was able to earn higher fees on those assets. Whether such transfers were in the best interests of the plan participants or of TIAA is at the heart of this lawsuit.
Plaintiffs are current or former researchers and university professors who are participants in ERISA-governed defined contribution retirement plans. (Compl. ¶¶ 12-14). Unlike a defined benefit plan, which provides employees with a guaranteed monthly payment and places the risk of loss on the employer to ensure its plan has sufficient assets to pay out, defined contribution plans shift the risk of loss to employees. (Id. at ¶ 18). As evidence of this shift, these plans are individual-oriented and market-based: participants contribute individual pre-tax earnings into their own accounts, and “direct the contributions into one or more options on the plan's investment menu, which is assembled by the plan's fiduciaries.” (Id. at ¶ 19).
Because an employer-sponsored defined contribution plan combines the assets of myriad participants, it exercises more leverage than an individual retail investor and, accordingly, can obtain lower investment fees. (Compl. ¶ 21). This is important because, as the Department of Labor (“DOL”) has documented, “a 1% difference in fees reduces the average worker's [defined contribution plan] account balance by 28% after 35 years.” (Id. at ¶ 20). In other words, even marginal differences in the fees charged to plans can have significant effects down the line for retirees.
TIAA was founded in 1918 and “historically has heavily marketed to the higher education market.” (Compl. ¶ 22). For years, TIAA has provided recordkeeping functions for over 15,000 institutional clients, which clients' plans count over 5 million participants. (Id.). Alongside its recordkeeping services, TIAA also provides “TIAA-affiliated investment options in which participants can invest, including fixed and variable annuities and mutual funds.” (Id.). Additionally, TIAA operates an individual advisory business. (Id. at ¶ 27).
Beginning in 2011, TIAA became aware of the fact that its institutional retirement plan business faced two potentially existential threats. (Compl. ¶ 26). First, the business was suffering declining market share due to “aggressive competition from industry giants such as Vanguard and Fidelity.” (Id.). In just one year, for example, TIAA lost $6.4 billion in client assets to competitors. (Id.). Second, TIAA's institutional business appeared to be losing favor with the baby-boomer generation, which continued to move its retirement assets to other providers. (Id.). TIAA projected that it would have negative asset flows by 2018 if it did not take action. (Id.).
Faced with this stark realization, TIAA sought to expand its individual advisory business, which commanded higher fees - and thus higher revenues - and could potentially attract new assets. (Compl. ¶¶ 27-30). “The centerpiece of TIAA's new strategy was to aggressively market Portfolio Advisor, a managed account program.” (Id. at ¶ 29). As a managed account program, Portfolio Advisor places investors in a model portfolio of securities, and rebalances the assets in the account if they deviate too far from the model. (Id. at ¶¶ 29-30).
Investors are required to pay various fees to TIAA for use of the program. (Id. at ¶ 31). Between 2011 and 2017, as part of its efforts to expand the individual advisory side of the business, TIAA tripled the number of “wealth management advisors” who were responsible for selling Portfolio Advisor services (“Advisors”), from 300 to 900. (Id. at ¶ 32).
TIAA's Advisors utilized a multi-step pitch to attract customers to Portfolio Advisor known as the “Consultative Sales Process.” (Compl. ¶ 33). To begin, Advisors cold-called participants in TIAA-administered employer-sponsored plans “to offer free financial planning services, often describing the service as an included benefit of the plan.” (Id.). In order to prioritize which participants to target, TIAA allegedly utilized information to which it had access through its provision of employer-sponsored retirement plan services. (Id. at ¶¶ 53-54, 88). Participants with the largest retirement plan accounts, colloquially called “WHALES,” were high-priority sales targets. (Id. at ¶ 54).
Next, Advisors conducted a “discovery” meeting with the participant, in order to learn more about the participant's financial circumstances and needs. (Compl. ¶ 34). Unbeknownst to participants, Advisors were trained to uncover “pain points” during this process - essentially, circumstances or uncertainties that participants feared and that could be used later to up-sell them on Portfolio Advisor. (Id. at ¶¶ 34-36). TIAA's training materials encouraged Advisors to “Mak[e] the Client ‘Feel the Pain'” so as to convince the client that he or she needed the high-touch services offered by Portfolio Advisor. (Id. at ¶¶ 35-36). After the discovery meeting, TIAA created a curated financial plan responsive to the information collected. (Id. at ¶ 37). Finally, Advisors scheduled a follow-up meeting with the participant, through which the financial plan was presented, and at which the Advisor ultimately pitched Portfolio Advisor. (Id.).
Beyond merely pitching plan participants to roll over assets from their employer-sponsored plans into Portfolio Advisor, Plaintiffs also allege that TIAA held itself out to participants and the broader public as acting solely on behalf of their interests. (See, e.g., Compl. ¶ 38). On this point, Plaintiffs offer several exemplary representations. For example, a 2012 TIAA brochure stated that TIAA and its Advisors provided “objective advice,” and that the company was “a trusted partner providing ... specific investment recommendations” and “working in your best interest.” (Id.). More explicitly, this same brochure referred to “trusted advice and guidance you'll receive - meeting a fiduciary standard requiring us to ensure that our recommendations are always in your best interest.” (Id. at ¶ 41). TIAA also trained its Advisors to tout the company's “non-profit heritage,” and to describe themselves as “objective, [and] non-commissioned.” (Id. at ¶ 39).
Alongside such representations, TIAA instructed Advisors to employ a “hat-switching” strategy during the Consultative Sales Process that Plaintiffs allege was inherently misleading. (Compl. ¶ 59). Advisors were told to wear a “fiduciary hat when acting as an investment adviser representative and a nonfiduciary hat when acting as a registered broker-dealer representative.” (Id.). This instruction was confusing to Advisors, who “did not understand how one hat fell off and another superseded it while in the middle of advising a participant to remove assets from a retirement plan[.]” (Id. at ¶ 60). And it was similarly confusing to plan participants, who were unable to differentiate the standard of advice they were receiving from Advisors from one moment to the next. (Id. at ¶ 63).
Plaintiffs assert that TIAA's incentive structure for its Advisors was “fraught with conflicts of interest.” (Compl ¶ 45). Instead of being noncommissioned, Advisors received a variety of bonuses based on asset growth and meeting sales goals. (Id.). As one example, an Advisor meeting her assets target would receive a 0.10% commission for all assets rolled over from an employer-sponsored plan to Portfolio Advisor. (Id. at ¶ 47). Advisors could...
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