August 17, 2021

Employees sue their employer alleging it breached its fiduciary duty in its administration of their retirement plans

The complaints [Plaintiffs] in this class action represent New York University and New York University School of Medicine employees who are suing the for their respective employers' alleged breach of its fiduciary duty in its administration of their retirement plans within the meaning of the federal Employment Retirement Income Savings Act of 1974, [ERISA], 88 Stat. 829.*

As described by the Second Circuit of Appeals, "[t]he 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.

In the words of the Circuit Court, "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."** 

The Circuit Court, Circuit Judge Menashi dissenting in part, held:

1. Plaintiffs adequately pled a breach of the fiduciary duty of prudence in Count V’s share-class claim, opining that it could not find "the district court’s dismissal of this claim harmless on the present record" and reinstated that claim for further proceeding;

2. The district court erred in denying Plaintiffs’ motion to amend to name individual Committee members as defendants, and vacated the district court's denial of Plaintiffs' leave to amend; but

3. Rejected the remainder of Plaintiffs’ arguments on appeal, affirming [a] the trial of their claims without a jury, [b] the use of written direct testimony at that trial, [c]  the entry of judgment for NYU on the tried claims, and [d] the denial of their motion for a new trial based upon the alleged disqualification of the Federal District Court judge.

In contrast, in a case decided by the Appellate Division, Meirowitz v Bayport-Bluepoint Union Free School Dist., 57 AD3d 858, a save harmless clause was held to bar employees and retirees from recouping Tax Deferred Plan investment losses from the employer. A teacher had sued the Bayport-Bluepoint Union Free School District after losing her contributions that the District transmitted to Horizon Benefits Administration, Inc., its third-party administrator of its retirement savings plan - a Tax Deferred Annuity Plan. The “retirement savings plan” was made available to Bayport-Bluepoint's employees pursuant to Internal Revenue Code §403(b).***  

Horizon, however, also acted as a vendor of investment products and provided two investment options, Choices Unlimited and Choices Select.

Employees electing to participate in the retirement savings plan were required to enter into a written salary reduction agreement [SRA] with Bayport-Bluepoint. The SRA provided that Bayport-Bluepoint would deduct money from the participant's paycheck and transfer it to Horizon's custodial bank, where the funds would then be distributed by Horizon to the vendor selected by the employee-participant. Significantly, the SRA contains a "Hold Harmless Provision" which provided that "[t]he Employee agrees that the Employer shall have no liability whatsoever for any loss suffered by the Employee with regard to his selection of an insurance company or mutual fund, or the solvency of, operation of, or benefits provided by said insurance company or mutual fund company."

The events leading to this lawsuit involved an investigation by the Attorney General of the State of Ohio that resulted in Horizon's assets being frozen and Horizon was eventually liquidated. Retired and active Bayport-Bluepoint employees who participated in the retirement savings plan and opted to have their salary reductions deposited in Horizon's Choices Unlimited product lost their money when Horizon was liquidated. They sued the District, alleging “breach of contract.” The Appellate Division said that Bayport-Bluepoint established a prima facieentitlement to summary judgment dismissing the lawsuit based upon the clear and unambiguous language of the SRA's Hold Harmless Provision. The Hold Harmless Provision said the court, "was clearly intended to encompass a situation like the one at hand."

The Appellate Division also observed that only retirement savings plan employee-participants selecting the Choices Unlimited investment option offered by Horizon lost money. Employee-participants selecting Horizon's Choices Selectinvestment option or having their money deposited in funds offered by other vendors did not suffer losses as a result of Horizon's liquidation.

* The Trustees of Columbia University in the City of New York is an Intervenor in this action.

** The court noted that "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."

*** See also Education Law Section 114 that provides for reduction of salaries for investment in custodial accounts for employees of the State Department of Education and Education Law Article 8-C, authorizing a Tax Deferred Annuity Plan for employees of the State University, the City University and the community colleges.  

Click here to access the full text of the New York University decision. 


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