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Second Circuit Revives Breach of Fiduciary Duty Claims in Class Action Against New York University Retirement Plans

Sacerdote v. New York Univ., No. 18-2707-CV, __F.4th__, 2021 WL 3610355 (2d Cir. Aug. 16, 2021) involves a class action brought by participants in retirement plans administered by New York University (NYU) and the NYU School of Medicine alleging that NYU breached several of its fiduciary duties under ERISA with respect to the plans. Plaintiffs appealed from the entry of judgment in favor of NYU as well as the district court’s denial of post-trial motions. The Second Circuit affirmed in part, vacated in part, and remanded for further proceedings.

The court vacated the district court’s decision on two of the six issues raised by Plaintiffs. First, the Second Circuit held that the district court erred when it dismissed Plaintiffs’ claim that the Plans’ fiduciary breached its duty of prudence by offering retail-class shares of certain mutual funds rather than lower-cost institutional-class shares of the same fund (i.e., the share-class claim). The court found that Plaintiffs adequately pled the share-class claim for breach of the fiduciary duty of prudence. The complaint sets forth cost differentials of specified basis points for dozens of mutual funds that NYU should have offered institutional shares instead of retail shares. The complaint alleges that this information would have been available to the fiduciaries if they inquired. Because Plaintiffs alleged that a better alternative investment was readily apparent and discoverable with an adequate investigation, this claim should have survived a motion to dismiss.

The district court faulted Plaintiffs for not alleging that “the mixes of options in the Plans were imprudent,” or that the Plans were tainted in their entirety because the retail shares were included. While the Second Circuit agrees generally that the prudence of each investment is not assessed in isolation, the principle that a portfolio should be assessed holistically does not preclude critical assessment of individual funds. Plaintiffs alleged that 63 of the funds included in the 103-fund and 84-fund Plans charged excessive fees. This is enough to withstand dismissal at the pleading stage. The dismissal of the share-class claim was not harmless because the district court’s findings with respect to the revenue-sharing and recordkeeping claims do not foreclose a showing of loss. The district court conflated loss with damages which effectively misallocated the burden of proof on damages.

Second, the court found that the district court erred when it denied Plaintiffs leave to amend to add the Committee members as named defendants because it applied the wrong legal standard. The district court should have considered Plaintiffs’ motion for leave to amend under Rule 15(a)(2) since the scheduling order set a deadline for amending the complaint without leave of court and did not set a date after which all amendments were prohibited which would have triggered Rule 16(b)(4)’s “good cause” standard. Failure to allow the amendment was not harmless as it may have later affected Plaintiffs’ post-trial motions.

The court affirmed the district court’s decisions with respect to the remaining four issues. First, the court found that Plaintiffs, even if entitled to a jury demand (which the court did not address) waived their jury demand by not objecting to the bench trial. Second, the district court’s use of written direct testimony was not an abuse of discretion. Third, the district court did not err in ruling for NYU on the recordkeeper-consolidation claim and the investment-retention claim. Specifically, the court found that NYU did not breach its fiduciary duty of prudence by not consolidating recordkeepers faster than it did given the technical challenges it was facing, and the risk the participants’ account access would be disrupted. The court also found that NYU did not breach its duty of prudence by failing to remove the CREF Stock Account and TIAA Real Estate Account from the Plans where they paid “special attention” to the funds and kept them based on the strength of their performance measured against legitimate benchmarks. Lastly, the court found that Judge Forrest, who presided over the case before joining the Cravath law firm, was not disqualified from presiding over this case given her relationship with Cravath’s chairman who serves on the NYU Board of Trustees.


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*Please note that this blog is a summary of a reported legal decision and does not constitute legal advice. This blog has not been updated to note any subsequent change in status, including whether a decision is reconsidered or vacated. The case above was handled by other law firms, but if you have questions about how the developing law impacts your ERISA benefit claim, the attorneys at Roberts Disability Law, P.C. may be able to advise you so please contact us.

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