Plaintiff Melissa Haley brought a class action lawsuit alleging that Defendant Teachers Insurance and Annuity Association of America’s (“TIAA”) collateral loan program, which requires transfer of 110% of the value of the loan to TIAA’s general account, violates ERISA’s prohibited transaction rules. In November 2020, the U.S. District Court for the Southern District of New York granted Plaintiff’s motion for class certification. See Haley v. Teachers Ins. & Annuity Ass’n of Am., 337 F.R.D. 462, 466-468 (S.D.N.Y. 2020).
In January 2021, TIAA moved for summary judgment on all of Plaintiff’s claims. The Court denied TIAA’s motion, in part, clearing the way for the case to go to trial. See Haley v. Teachers Ins. & Annuity Ass’n of America, No. 17-CV-855 (JPO), 2021 WL 4481598 (S.D.N.Y. Sept. 30, 2021) (Judge J. Paul Oetken).
What are ERISA’s Prohibited Transaction Rules?
ERISA prohibits a “party in interest” to engage in certain transactions involving retirement plan assets. Specifically, ERISA § 406(a)(1)(B) provides, “[e]xcept as provided in [§ 408] …
A fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect—
…
(B) lending of money or other extension of credit between the plan and a party in interest.
29 U.S.C. § 1106(a)(1)(B).
For a plan loan to qualify for an exemption to ERISA’s prohibited transaction rules it must “bear a reasonable rate of interest,” and be “adequately secured.” ERISA Section 408(b)(1), 29 U.S.C. § 1108(b)(1). ERISA regulations specify that a loan program “must be prudently established and administered for the exclusive purpose of providing benefits to participants and beneficiaries of the plan.” 29 C.F.R. § 2550.408b-1(a)(3)(i).
Section 408(b)(2)(A) exempts “contracting or making reasonable arrangements with a party in interest for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor.”
Why did the Court deny TIAA’s motion?
In its motion for summary judgment, TIAA argued its collateral loans were exempt from ERISA’s prohibited transaction rules because they satisfied exemptions to the prohibited transaction rules under ERISA Sections 408(b)(1) and 408(b)(2), thus requiring judgment on Plaintiff’s claims. In addition, TIAA argued that Plaintiff is not entitled to the money damages she seeks.
Plaintiff’s ERISA Section 406(a)(1)(B) Claim
The court ruled that, because the collateral secures TIAA, not the participants, the exclusive purpose of the loan program was not for the benefit of the plan participants. Therefore, the court denied TIAA’s motion for summary judgment on her 406(a)(1)(B) claim.
However, the Court found TIAA had established that its compensation spread was reasonable as a matter of law and therefore granted its motion for summary judgment on Plaintiff’s 406(a)(1)(C) claim.
Plaintiff’s ERISA Section 406(a)(1)(D) Claim
ERISA Section 406(a)(1)(D) prohibits transactions that constitute a “transfer to, or use for or by the benefit of a party in interest of any assets of the plan.” Plaintiff’s basis for her ERISA § 406(a)(1)(D) claim is TIAA’s requirement to post collateral into TIAA’s general account.
In its motion, TIAA argued that any transfers in the loan program are exempt under ERISA § 408(b)(17), which provides that the prohibitions in § 406 do not apply to transactions between a plan and a party in interest “if in connection with such transaction the plan receives no less, nor pays no more, than adequate consideration.”
The term “adequate consideration” is defined in the statute as: “the fair market value of the asset as determined in good faith by a fiduciary or fiduciaries in accordance with regulations prescribed by the Secretary.” 28 U.S.C. § 1108(b)(17)(B)(ii).
TIAA argued that because the crediting rate paid to plans is reasonable, it necessarily satisfies the “adequate consideration” requirement. The Court disagreed.
Specifically, the Court concluded that TIAA failed to establish, as a matter of law, that the crediting rate paid to the plan constitutes “adequate consideration.” Rather, the Court noted that no case law or regulation equates “adequate consideration” to the “reasonableness” requirement under ERISA § 406(a)(1)(C).
Plaintiff is Entitled to Equitable Relief
Finally, TIAA argued that because Haley is not entitled to the relief she seeks — monetary damages — the Court should grant summary judgment on all her claims. Under ERISA § 502(a)(3), TIAA claims, only the equitable remedies of disgorgement and restitution are available.
However, the Court previously concluded in denying TIAA’s two motions to dismiss the complaint that disgorgement of TIAA’s profits from its loan program is an appropriate equitable remedy under ERISA § 502(a)(3). Accordingly, the Court found “this argument to be without merit.”