In two different cases from two different regions of the country, teachers brought lawsuits to challenge alleged endorsement and kickback arrangements involving IRC § 403(b) plans on the basis of fiduciary breaches. Thus far, the courts have derailed those lawsuits. The first case is actually an update on a case we first reported in November 2009. The case involved two teachers from the Long Beach School District who alleged the fiduciary provisions of ERISA were violated in connection with a 403(b) plan sponsored by the school district. The plaintiffs claimed there was a breach of fiduciary duty under ERISA because the New York State United Teachers (NYSUT), an organization representing the employees, reportedly paid kickbacks to ING Life Insurance and Annuity Co. in connection with the program.

The District Court for the Southern District of New York dismissed the action, finding that the 403(b) plan was a governmental plan exempt from ERISA. Undeterred, those same teachers commenced another lawsuit against NYSUT in which they made claims for breach of fiduciary duty and unjust enrichment under state law rather than ERISA. Again, the courts dismissed the teachers’ lawsuit. After the case was removed to federal court, a judge ruled the federal Securities Litigation Uniform Standards Act (SLUSA) bars the pursuit of the teacher’ class-action lawsuit under state law. SLUSA generally prohibits plaintiffs from pursuing securities law violations as state law class actions in state courts, and the judge concluded that the teachers’ claims in this case fell within SLUSA’s purview. (Montoya v. New York State United Teachers, EDNY 2010)

In a second, similar case, the Court of Appeals for the Ninth Circuit ruled that the National Education Association (NEA) cannot be held liable under ERISA for a fiduciary breach because of its endorsement and marketing of annuities in 403(b) plans offered to NEA members. A lawsuit was brought by public school teachers who alleged that the NEA violated ERISA in connection with the selection and monitoring of mutual funds available to participants in a 403(b) plan. The Ninth Circuit upheld the decision of a federal trial court to grant the NEA’s motion to dismiss. The Ninth Circuit ruled that neither the 403(b) annuities nor the NEA program of endorsing the annuities constitutes an ERISA benefit plan, and that the school district 403(b) plans that offered the NEA-endorsed annuities as investment options are exempt from ERISA because they are governmental plans. (Jerre Daniels-Hall, et al. v. National Education Association, et al., 9th Cir. 2010)