Case 1:16-cv-11620-NMG Document 79 Filed 10/04/17 Page 1 of 11

United States District Court

District of Massachusetts

)
David Tracey et al., )
)
Plaintiffs, )
)
v. ) Civil Action No.
) 16-11620-NMG
Massachusetts Institute of )
Technology et al., )
)
Defendants. )

MEMORANDUM & ORDER

GORTON, J.

Plaintiffs are five employees of Massachusetts Institute of

Technology (“MIT”) who are participants in the MIT Supplemental

401(k) Plan (“the Plan”). They bring a variety of claims under

the Employee Retirement Income Security Act of 1974 (“ERISA”)

arising out of MIT’s allegedly improper relationship with

Fidelity Investments (“Fidelity”), the recordkeeper and primary

investment provider of the Plan.

Plaintiffs allege breaches of the ERISA duties of loyalty

and prudence arising out of the Plan’s inclusion of retail class

options instead of institutional class options in the funds

provided by Fidelity. In addition, plaintiffs allege that

Fidelity was paid excessive compensation for its recordkeeping

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services and that MIT never engaged in a competitive bidding

process for those services. According to plaintiffs, the Plan

was an illicit kickback scheme whereby Fidelity received

inflated fees at the expense of the Plan’s participants in

exchange for making donations to the MIT endowment.

Defendants filed a motion to dismiss for failure to state a

claim upon which relief can be granted. On August 31, 2017,

Magistrate Judge Marianne B. Bowler entered a Report and

Recommendation (“R&R”) to dismiss, in part, Counts I, II, and IV

of the complaint. Both parties filed timely objections to the

R&R.

I. Legal Standard

When a district court refers a dispositive motion to a

magistrate judge for recommended disposition, it must

determine de novo any part of the magistrate judge’s

disposition that has been properly objected to.

Fed. R. Civ. P. 72(b)(3).

In the present case that includes all four counts alleged by

the plaintiffs.

To survive a motion to dismiss, a complaint must contain

sufficient factual matter, accepted as true, to “state a claim

to relief that is plausible on its face.” Bell Atl. Corp. v.

Twombly, 550 U.S. 544, 570 (2007). In considering the merits of

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a motion to dismiss, the Court must accept all factual

allegations in the complaint as true and draw all reasonable

inferences in the plaintiff's favor. Langadinos v. Am. Airlines,

Inc., 199 F.3d 68, 69 (1st Cir. 2000). Yet “[t]hreadbare

recitals of the elements of a cause of action, supported by mere

conclusory statements,” do not suffice to state a cause of

action. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

Accordingly, a complaint does not state a claim for relief where

the well-pled facts fail to warrant an inference of anything

more than the mere possibility of misconduct. Id. at 679.

II. Analysis

A. Count I – Breach of fiduciary duties under 29 U.S.C.

§1104(a)(1)(A) & (B) arising from unreasonable
investment management fees

Magistrate Judge Bowler recommended dismissal of the duty

of loyalty claim under §1104(a)(1)(B) in Count I but not the

duty of prudence claim under §1104(a)(1)(A) in the same count.

The Court will accept and adopt that recommendation.

Plaintiffs allege that defendants selected and retained

Plan investment options with excessive investment management

fees instead of identical, lower-cost share classes of the same

funds. Defendants respond that they did not breach their duties

because the Plan included a wide array of options with different

levels of expense.

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ERISA establishes a duty of loyalty, requiring that a

fiduciary

discharge his 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.

29 U.S.C. § 1104(a)(1)(A).

ERISA also establishes a duty of prudence, requiring that a

fiduciary act

with the care, skill, prudence, and diligence under the

circumstances then prevailing that a prudent man acting in
a like capacity and familiar with such matters would use in
the conduct of an enterprise of a like character and with
like aims.

29 U.S.C. § 1104(a)(1)(B).

Magistrate Judge Bowler found that the conduct regarding

the excessive management fees did not plausibly state a claim of

violation of the duty of loyalty because plaintiffs’ theory was

speculative. This Court will accept and adopt that conclusion.

Plaintiffs rely on untenable claims such as that Abigail

Johnson, CEO of Fidelity, sits on MIT’s Board of Trustees.

Plaintiffs do not allege that Ms. Johnson was involved with the

Plan, however, and she was not on the Board when Fidelity was

selected as the investment provider.

Defendants contend that MIT’s 2015 investment plan

reconfiguration, which eliminated hundreds of options and

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retained only one Fidelity option out of 37, demonstrates that

the duty of loyalty was not breached. That argument, although

accepted by the magistrate judge, is discounted because

ameliorative measures taken after disloyal actions do not

absolve defendants of their breach. Cf. Tussey v. ABB, Inc.,

850 F.3d 951, 957 (8th Cir. 2017) (concluding that although the

fiduciaries “did not always favor Fidelity as much as they

could, or seize every opportunity to send Fidelity more of the

participants' money” such conduct does not satisfy one’s

fiduciary duties).

Nevertheless, this Court will accept and adopt the

recommendation to dismiss the loyalty claim in Count I as

speculative.

Magistrate Judge Bowler found that the allegations with

respect to the excessive management fees plausibly state a claim

for breach of the duty of prudence. This Court will accept and

that conclusion.

Reading the amended complaint in plaintiffs’ favor, they

plausibly allege that defendants failed to obtain identical

lower-cost investment options. Defendants dispute that those

options were “identical” but, at this stage, plaintiffs’

allegations state a claim. If defendants did, in fact, include

higher fee options when identical lower fee options were

available, they failed to act with the “care, skill and

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prudence” required by ERISA. The Court will accept and adopt

the magistrate judge’s recommendation that the prudence claim in

Count I may proceed.

B. Count II – Breach of fiduciary duties under 29

U.S.C. §1104(a)(1)(A) & (B) arising from
unreasonable administrative fees

Magistrate Judge Bowler recommended dismissal of the duty

of loyalty claim under §1104(a)(1)(B) in Count II but not the

duty of prudence claim under §1104(a)(1)(A) in the same count.

The Court will accept and adopt that recommendation.

Plaintiffs allege that defendants overpaid Fidelity for its

recordkeeping services due to its failure to solicit bids from

other recordkeepers, breaching their fiduciary duties of

prudence and loyalty. Defendants respond that ERISA does not

require fiduciaries to seek competitive bids and that

plaintiffs’ loyalty claim is mere speculation.

Magistrate Judge Bowler treated the duty of loyalty claim

contained in Counts I and II as a single claim, which she

recommended dismissing. The Court agrees with her analysis.

Plaintiffs do not allege any facts that more plausibly

demonstrate a breach of loyalty arising from the administrative

fees than from the investment fees. Their allegations do not

rise above speculation.

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Magistrate Judge Bowler recommended that the duty of

prudence claim arising from the administrative fees be allowed

to proceed and the Court agrees. Defendants’ response that

ERISA does not require a fiduciary to solicit competitive bids

is unpersuasive. As part of the “prudent man standard” one

would expect a fiduciary to obtain bids at some point during the

extensive period of managing the fund, considering that the fees

amount to millions of dollars per year. Furthermore,

defendants’ suggestion that they did not act imprudently because

they could have paid Fidelity even more than they did does not

disprove that they overpaid in the first place.

The plaintiffs have plausibly stated a claim for breach of

the duty of prudence arising from administrative fees.

C. Count III – Prohibited transactions between the plan

and party in interest under 29 U.S.C. §1106(a)
arising from unreasonable administrative and
investment fees

Magistrate Judge Bowler recommended denying defendants’

motion to dismiss plaintiffs’ claim for a prohibited transaction

involving “assets of the plan” under §1106(a)(1)(D). She

recommended dismissing the §1106(a)(1)(C) claim arising from

mutual funds in the Plan but allowing the claim as to non-mutual

fund options to proceed. The Court will reject the former

recommendation but accept and adopt the latter.

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Plaintiffs, building off their duty of loyalty claims in

Counts I and II, allege that Fidelity is a “party in interest”,

which defendants intended to, and did, benefit through

unreasonable investment and administrative fees. Defendants

reiterate that the allegations of breach of loyalty are

speculate and that mutual funds are excluded from the statutory

protections of the “party in interest” provision.

Section 1106(a)(1)(D) defines certain prohibited

transactions involving ERISA retirement plan assets. Fiduciaries

may not effect any transaction that constitutes a “transfer to,

or use by or for the benefit of a party in interest, of any

assets of the plan.” A claim under § 1106(a)(1)(D) requires

that plaintiff demonstrate that the fiduciary subjectively

intended to benefit a party in interest. See Jordan v. Mich.

Conference of Teamsters Welfare Fund, 207 F.3d 854, 860-61 (6th

Cir. 2000). The magistrate judge concluded that plaintiffs

plausibly alleged subjective intent because Fidelity and its CEO

contributed millions of dollars to MIT. The Court will reject

that recommendation.

The conclusion reached in the R&R is incompatible with the

recommendation to dismiss the duty of loyalty claims in Counts I

and II. Plaintiffs do not plausibly allege that the “kickback

scheme” was more than a coincidence or innocuous activity. To

the extent that the claims of breach of the duty of loyalty in

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Counts I and II are implausible, so too is the subjective intent

element of the prohibited transaction claim.

Section 1106(a)(1)(C) prohibits a “direct or indirect ...

furnishing of goods, services, or facilities between the plan

and a party in interest.” 29 U.S.C. § 1106(a)(1)(C). See

Brotherston v. Putnam Investments, LLC, 2017 WL 1196648, at *6

(D. Mass. Mar. 30, 2017). Magistrate Judge Bowler correctly

relied on 29 U.S.C. § 1002(21)(B), which exempts mutual funds

from liability under the subject section. Accordingly, she

recommended 1) dismissal of the § 1106(a)(1)(C) claims arising

from the Plan’s investments in Fidelity mutual funds but 2)

denial of defendants’ motion to dismiss claims arising from the

Plan’s non-mutual fund options. The Court will accept and adopt

that recommendation.

On the other hand, the Court will accept, in part, and

reject, in part, the R&R with respect to Count III. The Court

will accept the magistrate judge’s analysis of § 1106(a)(1)(C)

and dismiss claims arising from mutual funds but will deny

defendants’ motion to dismiss claims arising from non-mutual

fund options. The Court will reject the recommendation that the

§ 1106(a)(1)(D) claim be allowed to proceed and instead will

dismiss the entire § 1106(a)(1)(D) claim.

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D. Count IV – Failure to monitor fiduciaries

Magistrate Judge Bowler recommends allowing plaintiffs’

claims for failure to monitor to continue insofar as they derive

from plaintiffs’ other claims. The Court will accept and adopt

that conclusion. Because the Court will dismiss the plaintiffs’

§ 1106(a)(1)(D) claim (in contrast to the R&R), however, the

Court will also dismiss any claim for failure to monitor arising

under § 1106(a)(1)(D).

Magistrate Judge Bowler correctly observes that,

ordinarily, a duty to monitor other fiduciaries is derivative of

plaintiffs’ other claims. See Slaymon v. SLM Corp., 506 F.

App’x. 61, 2012 WL 6684564, at *3 (2d Cir. Dec. 26, 2012)

(unpublished). To the extent that plaintiffs have plausibly

alleged that defendants breached their fiduciary duties

directly, plaintiffs have also plausibly alleged that defendants

have breached their duty to monitor.

The Court will accept and adopt the magistrate judge’s

recommendation that Count IV may proceed insofar as the

underlying claims for breaches have been allowed to proceed.

However, the Court will reject the R&R with respect to the duty-

to-monitor claim under § 1106(a)(1)(D) which will be dismissed.

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ORDER

For the foregoing reasons,

1) plaintiffs’ objections to the Report and

Recommendation (“R&R”) (Docket No. 74) are

OVERRULED;

2) defendants’ objections to the R&R that

a) plaintiffs’ claim in Count III pursuant to

§ 1106(a)(1)(D) should be dismissed and

b) plaintiffs’ duty-to-monitor claim in Count IV

pursuant to § 1106(a)(1)(D) should be

dismissed

are SUSTAINED; and

3) the R&R (Docket No. 70) is otherwise accepted and

adopted.

So ordered.

/s/ Nathaniel M. Gorton______

Nathaniel M. Gorton
United States District Judge

Dated October 4, 2017

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