TIAA Can’t Escape $50M Lawsuit Over Retirement Plan Loans

March 29, 2018, 1:22 PM

A proposed class action accusing TIAA of taking improper cuts from the loan repayments workers make to their retirement plans is moving forward.

The retirement plan service provider may have to turn over the money it kept from these loans—allegedly more than $50 million per year—under a theory of disgorgement, a federal judge ruled March 28. TIAA was credibly accused of wrongly generating profits off retirement plan assets that it obtained through transactions that violated federal benefits law, Judge J. Paul Oetken of the U.S. District Court for the Southern District of New York said.

However, Oetken dismissed all claims accusing TIAA of breaching its fiduciary duties under the Employee Retirement Income Security Act. The retirement investor who sued TIAA said the company was an ERISA fiduciary because it had discretion to set its own compensation by virtue of its ability to manipulate the interest rates of plan loans. Oetken disagreed, saying TIAA wasn’t a fiduciary for these purposes, because there was no evidence that the company ever exercised this discretion.

The ruling is noteworthy for allowing allegations of retirement plan mismanagement to proceed against TIAA despite finding that TIAA didn’t act as an ERISA fiduciary. The fiduciary status of retirement plan providers like TIAA has driven several high-profile lawsuits over retirement plan fees in recent years. The Third, Seventh, Eighth, and Ninth circuits recently rejected attempts to paint retirement plan providers as ERISA fiduciaries.

The lawsuit accuses TIAA of systematically failing to credit the interest on plan loan repayments to the account of the investor who took out the loan, instead keeping some of that interest for itself. TIAA earns more than $50 million in “ill-gotten gains” each year from this practice, the lawsuit claims.

Oetken also refused to dismiss claims that TIAA participated in a prohibited transaction under ERISA by receiving plan assets as loan collateral.

Berger & Montague PC and Schneider Wallace Cottrell Konecky Wotkyns LLC represented the investor. Goodwin Procter LLP represented TIAA.

The case is Haley v. Teachers Ins. & Annuity Assoc. of Am., S.D.N.Y., No. 1:17-cv-00855-JPO, granting in part motion to dismiss 3/28/18.

To contact the reporter on this story: Jacklyn Wille in Washington at jwille@bloomberglaw.com

To contact the editors responsible for this story: Jo-el J. Meyer at jmeyer@bloomberglaw.com; Martha Mueller Neff at mmuellerneff@bloomberglaw.com

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