Sacerdote v. N.Y. Univ.

Decision Date16 August 2021
Docket NumberNo. 18-2707-cv,August Term, 2020,18-2707-cv
Parties Dr. Alan SACERDOTE, Dr. Herbert Samuels, Mark Crispin Miller, Marie E. Monaco, Dr. Shulamith Lala Straussner, Dr. James B. Brown, individually and as representatives of a class of participants and beneficiaries on behalf of the NYU School of Medicine Retirement Plan for Members of the Faculty, Professional Research Staff and Administration and the New York University Retirement Plan for Members of the Faculty, Professional Research Staff and Administration, Plaintiffs-Appellants, v. NEW YORK UNIVERSITY, Defendant-Appellee, The Trustees of Columbia University in the City of New York, Intervenor.
CourtU.S. Court of Appeals — Second Circuit

Jerome J. Schlichter (Sean E. Soyars, on the brief), Schlichter Bogard & Denton, LLP, St. Louis, MO, for Plaintiffs-Appellants Sacerdote, et al.

Seth P. Waxman (David M. Lehn, Amy C. Lishinski, on the brief), Wilmer Cutler Pickering Hale and Dorr, LLP, Washington, DC; Alan Schoenfeld, Ryan M. Chabot, on the brief, Wilmer Cutler Pickering Hale and Dorr, LLP, New York, NY; Mark Muedeking, Ian C. Taylor, on the brief, DLA Piper LLP, Washington, DC; Brian Kaplan, on the brief, DLA Piper LLP, New York, NY; for Defendant-Appellee NYU.

Todd M. Schneider, James A. Bloom, on the brief, Schneider Wallace Cottrell Konecky Wotkyns LLP, Emeryville, CA; Todd S. Collins, Eric Lechtzin, on the brief, Berger Montague PC, Philadelphia, PA; for Amici Curiae Law Professors in Support of Plaintiffs-Appellants Sacerdote, et al.

Nancy G. Ross, on the brief, Mayer Brown LLP, Chicago, IL; Brian D. Netter, on the brief, Mayer Brown LLP, Washington, DC; for Amici Curiae American Council on Education and Other Higher Education Associations in Support of Defendant-Appellee NYU.

Before: Newman** , Walker, and Menashi, Circuit Judges.

Judge Menashi dissents in part in a separate opinion.

John M. Walker, JR., Circuit Judge:

The plaintiff-appellant class participates in retirement plans administered by New York University (NYU) and the NYU School of Medicine. Plaintiffs brought this suit against NYU in its capacity as the fiduciary of plaintiffs’ retirement plans, alleging a number of breaches of NYU's fiduciary duties under the Employment Retirement Income Savings Act (ERISA). Following a bench trial in the United States District Court for the Southern District of New York (Katherine B. Forrest, J. ) and post-trial motions (Analisa Torres, J. ), they appeal from the entry of judgment in defendant-appellee NYU's favor and the denial of post-trial motions. On appeal, plaintiffs challenge: (1) the dismissal of their claim that NYU breached its duty of prudence by offering particular share classes of mutual funds in the retirement plans, (2) the denial of leave to amend their complaint to name additional defendants, (3) the striking of their demand for a jury trial, (4) the use of written declarations rather than live examination for direct testimony in the bench trial, (5) some of the district court's findings in NYU's favor after the bench trial, and (6) the denial of their motion for a new trial, which argued that the judge presiding over the trial (Forrest, J. ) should have been disqualified. We find merit in the first two of these challenges, but none in the remainder. Accordingly, we AFFIRM in part, VACATE in part, and REMAND for further proceedings consistent with this opinion.

BACKGROUND

The plaintiffs represent a class of NYU and NYU School of Medicine employees who are suing the University for breach of fiduciary duty in its administration of their retirement plans under ERISA. Plaintiffs participate in either the NYU Retirement Plan for Members of the Faculty, Professional Research Staff, and Administration (the Faculty Plan) or the NYU School of Medicine Retirement Plan for Members of the Faculty, Professional Research Staff, and Administration (the Medical Plan). The Faculty Plan covers most of NYU's faculty, research staff, and administrative staff, while the Medical Plan serves employees of the School of Medicine.

The NYU Retirement Plan Committee (the Committee) is the nine-member fiduciary entity responsible for administering both plans, having been designated as the Plan Administrator by NYU's Board of Trustees. The Committee is made up of senior University and Medical Center administrators, including NYU's Chief Investment Officer, the Senior Vice Presidents of Finance of NYU and the Medical Center, the Medical Center's Controller, the Vice Presidents of Human Resources of NYU and the Medical Center, the Directors of Benefits of NYU and the Medical Center, and NYU's Provost (or its designee).

Both the Faculty Plan and Medical Plan (the Plans) are defined contribution plans, as set forth in 29 U.S.C. § 1002(34), and are tax-qualified under 26 U.S.C. § 403(b). Defined contribution plans are retirement plans in which the employee contributes directly to her individual account, and the benefits that will ultimately accrue to the employee are a function of the amount she contributes to investments in the plan and the market performance of those investments, minus the expenses of plan administration.1 Plans that operate under § 403(b) ’s beneficial tax scheme are retirement plans administered by certain qualifying non-profits, including universities, that offer mutual fund and annuity investment options to participants.2

Participants in NYU's Plans had a range of investment options offered by either TIAA-CREF or the Vanguard Group, the two retirement investment firms under contract with NYU. The Faculty Plan offered 103 investment options (25 from TIAA-CREF; 78 from Vanguard) to plan participants during the class period. The Medical Plan offered 84 options (11 from TIAA-CREF; 73 from Vanguard). Both Plans offered investment options that included fixed annuity contracts (meaning the investment returns at a contractually specified minimum interest rate), variable annuities (returns at a variable interest rate), and mutual funds. Participants could also choose from both actively and passively managed index funds, with actively managed funds charging higher fees for that service.

TIAA-CREF and Vanguard are referred to in the industry as the Plans’ "recordkeepers." They provide investment and administrative services, for which they charge investment fees and recordkeeping fees, respectively. For mutual funds, the investment fees are charged as a percentage of each fund's assets (the "expense ratio"). The fees can differ depending on the share class of the fund: a "retail" share (the share class that is marketed to individuals with small amounts to invest) typically has a higher expense ratio than an "institutional" share (the share class that is available to institutional investors, including large retirement plans, with large amounts to invest) of the same fund. These fees are measured in "basis points," with each basis point equaling 0.01% of the fund's assets. The administrative (recordkeeping) fees are charged either (1) as a flat fee, in which case each fund participant pays a set amount, or (2) by revenue sharing. Under the revenue-sharing model, a fund pays the recordkeeper a set portion of the fund's expense ratio.

In 2016, plaintiffs brought this suit under 29 U.S.C. § 1132(a)(2),3 alleging that NYU breached its fiduciary duties of loyalty and prudence and engaged in prohibited transactions, which caused the Plans to incur excessive costs and unreasonable performance losses. The breach allegedly occurred because the defendants: permitted TIAA-CREF to mandate inclusion of specific proprietary accounts, requiring use of TIAA-CREF as the recordkeeper, in the Plans (Counts I and II); incurred unreasonable recordkeeping fees (Counts III and IV); incurred unreasonable investment fees, unnecessary marketing and distribution fees and mortality and expense risk fees, and thus caused unreasonable performance losses (Counts V and VI); and failed to monitor the investments (Count VII).

On August 25, 2017, the district court granted in part and denied in part NYU's motion to dismiss, dismissing Counts I, II, IV, VI, and VII in their entirety and Counts III and V in part.4 The district court's order dismissed all claims alleging that NYU breached its duty of loyalty under § 404(a)(1)(A); that NYU engaged in prohibited transactions under § 406(a)(1)(A), (C), and (D); and that NYU failed to monitor the investments.5 The order also dismissed some of the plaintiffs’ claims alleging a breach of the duty of prudence under § 404(a)(1)(B). First, the court dismissed the imprudence claim under Count I, which alleged that NYU mandated inclusion of specific accounts and required the use of TIAA-CREF as recordkeeper.6 Second, the court dismissed in part the imprudence claims under Count V to the extent they arose from allegations that NYU offered more expensive retail class shares rather than the lower-cost institutional class shares of the same mutual funds (the share-class claim), or incurred unnecessary and unreasonable layers of fees.7

The only claims that survived dismissal were the imprudence claims in Count III and one of the imprudence claims in Count V. Specifically, Count III survived dismissal on the grounds of imprudence regarding incurring excessive recordkeeping costs (the recordkeeping claim); employing a revenue-sharing method to pay recordkeepers (the revenue-sharing claim); and failing to consolidate to a single recordkeeper for each Plan (the recordkeeper-consolidation claim).8 Count V survived on the ground of imprudence in continuing to include the underperforming CREF Stock Account and TIAA Real Estate Account as investment options (the investment-retention claim).9 Thus, those portions of Counts III and V were permitted to proceed to trial.

On September 8, 2017, plaintiffs moved both (1) for reconsideration of the district court's dismissal of the share-class and failure to monitor claims and (2) for leave to...

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