![Can a TPA’s Exploitation of a Plan Sponsor’s Breach of ERISA Duty Make the TPA a Fiduciary?](/images/articles/s/ERISA-general-32.jpg)
The new theory of liability is that TIAA knew of the plan sponsors’ failure to exercise oversight of TIAA’s sales tactics, a clear breach of fiduciary duty by the plan sponsors. TIAA allegedly knowingly exploited this failure for its own benefit. Therefore, even though the company was a service provider and arguably not a fiduciary under ERISA, this knowing collaboration in the sponsor’s breach brought it within the ambit of the law.
It’s a creative argument; it’s convoluted, and it’s one to watch for the future. Under Judge Polk Failla’s May 31 Order, defendant TIAA had until June 21 to file an amended motion to dismiss.
The cast of characters
TIAA is a legal reserve life insurance company established under the insurance laws of New York. The company’s clients include thousands of defined contribution plans, which utilize TIAA’s investment options (annuities and mutual funds) and administrative services. The universe of clients is limited to schools and educational institutions, non-profit university- and church-affiliated medical and hospital facilities, as well as non-profit organizations, foundations, and NGOs.
The three named plaintiffs, John Carfora, Sandra Putnam and Juan Gonzales, are university professors and researchers. They have participated in the Dartmouth College 401(a) Defined Contribution Retirement Plan, Loyola Marymount University Defined Contribution Plan, the Pacific Institute for Research and Evaluation 401(a) Defined Contribution Plan, the Pacific Institute for Research and Evaluation 403(b) Tax-Deferred Annuity Plan the Georgetown University Defined Contribution Retirement Plan and Georgetown University Voluntary Contribution Retirement Plan.
TIAA administers and keeps records for all the named employer-sponsored ERISA plans. Most, if not all, investment options offered under the retirement plans and made available to participants were or are proprietary to TIAA.
What are ERISA fiduciary duties and who is a fiduciary?
Many of the actions involved in operating a plan make the person or entity performing them a fiduciary. Using discretion in administering and managing a plan or controlling the plan’s assets makes that person a fiduciary to the extent of that discretion or control. Providing investment advice for a fee also makes someone a fiduciary. Thus, fiduciary status is based on the functions performed for the plan, not just a title. The key concept is the exercise of discretion and control.
If, and only if, an individual or institution is an ERISA fiduciary, that organization is required to discharge its duties with respect to a plan solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the plan. It must also act prudently “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person or institution acting in a like capacity and familiar with such matters would use.
The plan sponsors –Dartmouth College, Georgetown University, Loyola Marymount University and the Pacific Institute for Research and Evaluation – are clearly ERISA fiduciaries. Their apparent failure to monitor TIAA’s actions is also clearly a breach of fiduciary duty to monitor the performance of service providers. None of the schools or research facilities, however, are named as defendants in Carfora.
But what about TIAA? If TIAA did not exercise the required discretion and control over plan assets, then it cannot be accused of a breach of the requirements of ERISA.
Bad behavior and a “two-hat” scheme
TIAA instructed sales advisors to engage in a form of “hat switch[ing],” in which the 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.”
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Under the circumstances, do aggressive and misleading sales techniques amount to participation in a breach of ERISA fiduciary duties? If so, will this theory expand the potential legal liability of third-party service providers? It remains to be seen.