Cunningham v. Cornell Univ.

86 F.4th 961

Casey CUNNINGHAM, Charles E. Lance, Stanley T. Marcus, Lydia Pettis,and Joy Veronneau, individually and as representatives of a class of participantsand beneficiaries on behalf of the Cornell University Retirement Planfor the Employees of the Endowed Colleges at Ithaca and the Cornell UniversityTax Deferred Annuity Plan, Plaintiffs-Appellants-Cross-Appellees, v. CORNELL UNIVERSITY, The Retirement Plan Oversight Committee,Mary G. Opperman, and CapFinancial Partners,LLC d/b/a CAPTRUST Financial Advisors, Defendants-Appellees-Cross-Appellants.^*

No. 21-88-cv

No. 21-96-cv

No. 21-114-cv

August Term 2022

United States Court of Appeals, Second Circuit

Argued: October 19, 2022

Decided: November 14, 2023

Appeal from the United States District Court for the Southern District of New York (Castel, J.)

For Plaintiffs-Appellants-Cross-Appellees: Sean E. Soyars (Jerome J. Schlichter, Heather Lea, and Joel D. Rohlf, on the brief), Schlichter Bogard & Denton LLP, St. Louis, MO.

For Defendants-Appellees-Cross-Appellants: Michael A. Scodro (Nancy G. Ross, Samuel P. Myler, and Jed W. Glickstein, on the brief), Mayer Brown LLP, Chicago, IL; Michelle N. Webster, on the brief, Mayer Brown LLP, Washington, DC, for Cornell University, The Retirement Plan Oversight Committee, and Mary G. Opperman. Caroline A. Wong (Eric S. Mattson, Joseph R. Dosch, and Meredith R. Aska McBride, on the brief), Sidley Austin LLP, Chicago, IL, for CapFinancial Partners, LLC. Jaime A. Santos and William M. Jay, Goodwin Procter LLP, Washington, DC; James O. Fleckner and Alison V. Douglass, Goodwin Procter LLP, Boston, MA; Stephanie A. Maloney, U.S. Chamber Litigation Center, Washington, DC, for Chamber of Commerce of the United States of America and American Benefits Council, amici curiae in support of Defendants-Appellees-Cross-Appellants.

Before: Livingston, Chief Judge, and Kearse and Park, Circuit Judges.

Debra Ann Livingston, Chief Judge:

This case is one of a number of similar actions filed in federal courts across the country alleging that university pension plans, known as "403(b) plans," have been improperly managed in violation of the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended, 29 U.S.C. § 1001 et seq. Plaintiffs-Appellants-Cross-Appellees Casey Cunningham, Charles E. Lance, Stanley T. Marcus, Lydia Pettis, and Joy Veronneau ("Plaintiffs") are participants in and beneficiaries of the Cornell University Retirement Plan for Employees of the Endowed Colleges at Ithaca ("Retirement Plan") or the Cornell University Tax Deferred Annuity Plan ("TDA Plan") (together, the "Plans").

Plaintiffs, individually and as representatives of a class of beneficiaries to the Plans, brought this action in the Southern District of New York (Castel, J.) against Cornell University ("Cornell") and its appointed fiduciaries (together, "Defendants"), alleging that they, among other things, failed to employ adequate processes for monitoring the Plans in violation of 29 U.S.C. § 1104, resulting in the retention of underperforming investment options and the payment of excessive fees, and engaged in transactions prohibited under 29 U.S.C. § 1106. Following motion practice, the district court dismissed or granted summary judgment to Defendants on all but one of Plaintiffs' claims. After a settlement was reached on the remaining claim, the district court entered judgment on December 22, 2020.

Plaintiffs challenge the district court's award of summary judgment on two counts alleging that Defendants breached their duty of prudence. In addition, Plaintiffs argue that the district court erred in dismissing one of their prohibited transactions claims for failure to state a claim and in parsing one of their claims for a breach of the duty of prudence at the motion-to-dismiss stage. Should the case be remanded to the district court, Plaintiffs also argue that the end date of the class period should be vacated. Defendants conditionally cross-appeal, in the event that the judgment is not affirmed, from the district court's denial of their motion to strike the jury demand.

We conclude that the district court correctly dismissed Plaintiffs' prohibited transactions claim and certain duty-of-prudence allegations for failure to state a claim and did not err in granting partial summary judgment to Defendants on the remaining duty-of-prudence claims. In so doing, we hold as a matter of first impression that to state a claim for a prohibited transaction pursuant 29 U.S.C. § 1106(a)(1)(C), it is not enough to allege that a fiduciary caused the plan to compensate a service provider for its services; rather, the complaint must plausibly allege that the services were unnecessary or involved unreasonable compensation, see id. § 1108(b)(2)(A), thus supporting an inference of disloyalty. Because we affirm the district court's judgment, we do not reach the issues related to the end date of the class period, and we dismiss Defendants' conditional cross-appeals as moot.

BACKGROUND

I. Factual Background

Plaintiffs represent a class of current and former Cornell employees who participated in Cornell's two retirement plans, the Retirement Plan and the TDA Plan, from August 17, 2010 to August 17, 2016 (the "class period"). As of 2016, the Retirement Plan had over 19,000 participants and nearly $2 billion in net assets and the TDA Plan had over 11,000 participants and $1.34 billion in net assets. Both Plans are defined-contribution savings plans that are tax-deferred under 26 U.S.C. § 403(b), which applies to certain tax-exempt organizations. In a defined-contribution plan (of which the more familiar "401(k)" plans are another type) participants maintain individual investment accounts, the value of which "is determined by the market performance of employee and employer contributions, less expenses." Tibble v. Edison Int'l, 575 U.S. 523, 525, 135 S.Ct. 1823, 191 L.Ed.2d 795 (2015); see 29 U.S.C. § 1002(34).¹ The administrators of defined-contribution plans are responsible for choosing a menu of investment options, and plan participants then choose their investments from that menu.

A. Administration of the Plans

Cornell University is the named administrator for the Plans. Cornell delegated administrative responsibilities to Mary G. Opperman, Cornell University's Vice President for Human Resources, who in turn delegated certain responsibilities to Paul Bursic, Senior Director of Benefits Services and Administration (the "Benefits Department"), and employees under his direction. Opperman chaired the Retirement Plan Oversight Committee ("RPOC," and, together with Opperman and Cornell, the "Cornell Defendants"). The RPOC was established in 2010, in response to Internal Revenue Service regulations, to oversee the Plans. In 2011, the RPOC issued a Request for Proposal for a third-party consultant to assist the RPOC with selecting investment options and recordkeeping. After reviewing bids, the RPOC selected CapFinancial Partners, LLC Financial Advisors ("CAPTRUST") as the Plans' investment advisor and plan administration consultant. As part of its agreement with Cornell, CAPTRUST agreed to serve as a fiduciary under ERISA with regard to the selection of mutual funds available to the Plans.

B. Recordkeeping Fees and Investment Options

In any defined-contribution plan, participants incur certain fees and expenses. Two kinds of fees are at issue in this case: investment management fees and recordkeeping fees. Investment management fees are charged by the investment providers and are associated with the services of buying, selling, and managing investments. Investment fees are typically expressed as an "expense ratio," that is, a percentage of the assets under management. For mutual funds, some providers offer different share classes of the same fund: a "retail" share class available to all investors at one expense ratio and "institutional" share classes with lower expense ratios available only to investors that satisfy certain minimum investment amounts—typically institutional investors.

Recordkeeping fees cover necessary administrative expenses such as tracking account balances and providing regular account statements. Recordkeeping fees are charged either as a flat fee, with each fund participant paying a set amount, or by "revenue sharing," in which the fund pays the recordkeeper a set portion of the fund's expense ratio. Recordkeeping services may be provided by the investment providers themselves or by third parties. Throughout the class period, Cornell retained two investment providers who also both served as the Plans' recordkeepers: Teachers Insurance and Annuity Association of America-College Retirement Equities Fund ("TIAA-CREF" or "TIAA") and Fidelity Investments Inc. ("Fidelity"). Both TIAA and Fidelity received recordkeeping fees through a revenue sharing model.

The Plans offered approximately 300 investment options throughout the class period, including fixed annuities (in which the investment returns a contractually specified minimum interest rate), variable annuities (in which the investment returns a variable interest rate), and mutual funds.

II. Procedural History

Plaintiffs filed their Corrected Amended Complaint (the "Complaint") on February 24, 2017, and named as defendants Cornell, the RPOC, Opperman, and CAPTRUST. The Complaint alleged that Defendants violated their fiduciary duties under ERISA by failing to monitor and control the recordkeeping fees paid to TIAA and Fidelity, by failing to review the fees and performances associated with the Plans' investment options, and by entering into certain prohibited transactions.

A. The Alleged ERISA Violations

ERISA imposes various duties on fiduciaries, two of which are relevant here. The first is the duty of loyalty, which requires that the fiduciary act "solely in the interest of the participants and beneficiaries . . . for the exclusive purpose of . . . providing benefits to participants and their beneficiaries[ ] and . . ....