Goodwin Insights October 12, 2021

The Second Circuit Court of Appeals Affirms and Vacates Rulings in Case Challenging New York University’s 403(b) Plans

Key Takeaway: The Second Circuit Court of Appeals agreed with plaintiffs that allegations that retail class shares were offered as retirement plan options instead of less expensive institutional class shares can be sufficient to overcome a motion to dismiss. This ruling may make it more difficult for defendants to prevail on a motion to dismiss in the Second Circuit where the plaintiffs make allegations regarding the availability of cheaper share classes.

On August 16, 2021, the Second Circuit Court of Appeals affirmed and reversed several rulings by the Southern District of New York in a case challenging the investments offered in — and recordkeeping fees paid in connection with — two of New York University’s 403(b) plans. As part of its decision, the Second Circuit affirmed the district court’s trial verdict in favor of the defendants, as well as its rulings in favor of the defendants on several post-trial motions. However, the Second Circuit’s most impactful ruling may be its reversal of the district court’s 2017 decision that had, in part, granted the defendants’ motion to dismiss with respect to allegations that the plan offered retail share classes of certain investments rather than less expensive institutional share classes. 

The plaintiffs alleged that the defendants included 63 retail share class options in two 403(b) plans when identical, less expensive institutional class shares of the same investments were available. The district court held, consistent with rulings by several other courts, that these allegations were not sufficient to state a claim because there are a number of valid reasons why a fiduciary might decide to include retail class shares as plan options. The Second Circuit disagreed. It ruled that such allegations state a claim for relief where the plaintiffs allege, as these plaintiffs had, that the fiduciaries were aware (or should have been aware) that cheaper share classes of the same investments were available, but failed to include them in the plan. The Second Court reasoned that, although there may be valid reasons for fiduciaries to make available retail share class options, such a determination should be made at a later stage of the proceedings. The case has been remanded to the district court for further proceedings. 

The case is Sacerdote v. N.Y. Univ., No. 18-2707, in the U.S. Court of Appeals for the Second Circuit. The decision is available here.