A new fiduciary case, Kelley v. TIAA, has been filed against TIAA and Morningstar. This case is different than the typical “fees are too high and returns are too low” type of case –it contains some significant new accusations against TIAA and raises new issues. If this case succeeds, it could have some far-reaching implications.
Core Claim: Stacking the (Asset Allocation) Deck
TIAA uses an asset allocation tool—the Retirement Advisor Field View (or “RAFV”). RAFV is used by TIAA in a variety of ways: RAFV supports asset allocation recommendations provided directly to participants, is used by financial consultants to make asset allocation recommendations to plan participants, and is used in TIAA’s managed accounts. Morningstar, also a defendant in this case, creates the asset allocations in RAFV. The basic claim is that TIAA improperly directed Morningstar to favor two TIAA annuity products (TIAA Traditional and TIAA Real Estate) in making RAFV’s asset allocation recommendations.
If these accusations are proven it would represent a serious fiduciary breach by TIAA and have significant repercussions. We are a long way from any evidence supporting—or refuting—these allegations—but the seriousness of these claims and the potential repercussions justify closely monitoring this case.
Context: TIAA’s Business Picture
The complaint contains lengthy descriptions of TIAA’s business situation and why TIAA would manipulate RAFV results. The complaint makes the following assertions:
- Changes in the 403(b) market—prompted by IRS regulations issued in 2007—placed significant financial pressure on TIAA. Plan sponsors moved from multiple recordkeepers to a single recordkeeper structure and as a part of this shift these sponsors eliminated overlapping investments, scrutinized investment fees and performance more carefully and negotiated recordkeeping fees more aggressively.
- Based on these factors, TIAA was facing a net outflow of assets. In order to stem losses and increase profitability, TIAA embarked on a series of strategies to increase the utilization of more profitable products and services.
- Several of these strategies resulted in regulatory challenges and penalties in 2021 and 2024.
- A key element of TIAA’s strategies to promote these more profitable products was to include implementations of RAFV recommendations in the bonus metrics for TIAA financial consultants who interact with plan participants and to train financial consultants on how to encourage participants to implement RAFV recommendations.
These assertions do not affect the legal analysis of TIAA’s role (if any) in structuring the RAFV. Nonetheless, they paint a background picture that the plaintiffs rely on heavily in attacking RAFV.
Context: Legal Framework for Asset Allocation Tools
Under ERISA a fiduciary (such as an investment advisor) cannot use its fiduciary position to promote the fiduciary’s own financial interests. See ERISA, Section 406(b). This poses a unique challenge to investment advisors that offer asset allocation models if such models include the advisor’s own proprietary investment products. This challenge was addressed by the DOL in Advisory Opinion 2001-09A (the “SunAmerica” letter). The SunAmerica letter clarified that SunAmerica, as an investment advisor, could offer allocation recommendations that included SunAmerica funds if the allocation was based on a model portfolio based on a computer model generated by an impartial third party—and the independent third-party had “sole control” over the asset allocations.
In effect, the complaint in this case alleges that TIAA surreptitiously influenced Morningstar’s asset allocation to steer investments into TIAA’s more profitable annuities over other asset classes available in the model. It should be noted that the SunAmerica letter would accept use of proprietary investments in the model (such as TIAA annuities)—but the asset allocation from among the various asset classes should be independently determined; this suit claims TIAA and Morningstar violated the requirement of an independent allocation.
Something Old; Something New
The complaint included some well-worn claims, as well as some new legal challenges to TIAA:
- The complaint attacked the use of annuity contracts (generally) and TIAA annuities (specifically) as retirement investments, claiming that annuities are unnecessarily costly and inefficient as investment vehicles. The complaint also described underperformance of the TIAA annuities used in the RAFV model. These claims are nothing new and have been utilized in the past.
- This complaint is directly suing TIAA and Morningstar in their roles as plan fiduciaries (entities that provide investment advice for a fee). The vast majority of fiduciary breach lawsuits have been against employers (as plan sponsors) and have alleged that these sponsors breached their fiduciary responsibility by (imprudently) using TIAA products and services. TIAA (and Morningstar) are the direct targets of this case—not just indirect players.
- The complaint noted that TIAA is governed by New York state law and that TIAA’s actions also violated New York law. The complaint did not rely on a specific statutory provision—but based this claim on New York common law (i.e., court cases and historical precedence). This claim is significant because it has now opened TIAA to litigation from participants in non-ERISA plans. Indeed, two of the plaintiffs in this case worked for state universities; such participants would not, historically, have participated in the ERISA fiduciary breach litigation involving TIAA.
What Now?
If the complaint is to be believed, this case will challenge several key drivers of TIAA’s profitability. Any complex litigation takes time—and given the stakes here, we anticipate that TIAA will fight this case tooth-and-nail. In the meantime, this case (and some of the surrounding publicity) will cause plan fiduciaries to reexamine and seek to better understand how TIAA uses access to plan participants to promote TIAA