United States District Court, N.D. Illinois, Eastern Division
LAURA L. DIVANE, APRIL HUGHES, SUSAN BONA, KATHERINE D. LANCASTER, and JASMINE WALKER, Plaintiffs,
NORTHWESTERN UNIVERSITY, NORTHWESTERN UNIVERSITY RETIREMENT INVESTMENT COMMITTEE, PAMELA S. BEEMER, RONALD R. BRAEUTIGAM, KATHLEEN HAGERTY, CRAIG A. JOHNSON, CANDY LEE, WILLIAM H. McLEAN, INGRID S. STAFFORD, NIMALAN CHINNIAH, and EUGENE S. SUNSHINE, Defendants.
MEMORANDUM OPINION AND ORDER
L. ALONSO, United States District Judge
Laura L. Divane (“Divane”), April Hughes
(“Hughes”), Susan Bona (“Bona”),
Katherine Lancaster (“Lancaster”) and Jasmine
Walker (“Walker”) filed suit seeking relief under
the Employee Retirement Income Security Act
(“ERISA”). In plaintiffs' amended complaint
, plaintiffs assert six counts for breach of fiduciary
duty (Counts I-VI) and one count for failure to monitor
fiduciaries (Count VII). Defendants have filed a motion to
dismiss the amended complaint . In addition, plaintiffs
seek leave to file a second-amended complaint , which
includes the same six counts for breach of fiduciary duty and
the claim for failure to monitor fiduciaries (Count XI of the
proposed second amended complaint). Plaintiffs would like to
add four counts for breach of fiduciary duty and to drop one
plaintiff (Bona). Plaintiffs have also moved to file the
proposed second amended complaint under seal.
reasons set forth below, the Court grants defendants'
motion to dismiss . The Court denies the motion for leave
to file under seal . The Court denies plaintiffs'
motion for leave to amend . All other pending motions
are denied as moot.
ERISA defined-contribution plans are at issue in this case.
The first plan is the Northwestern University Retirement Plan
(the “Retirement Plan”), in which all plaintiffs
participate. Under the Retirement Plan, participating
employees can contribute a portion of their compensation to
their account within the Plan, and Northwestern makes a
matching contribution. (Am. Complt. ¶ 112). The second
plan is the Northwestern University Voluntary Savings Plan
(the “Voluntary Plan”), in which three plaintiffs
(Hughes, Lancaster and Walker) participate. Under the
Voluntary Plan, participating employees can contribute a
portion of their compensation to their account within the
Plan, but Northwestern does not make a matching contribution.
(Am. Complt. ¶ 112).
the Retirement Plan and the Voluntary Plan are 403(b) plans
that allow contributions to grow tax-free until withdrawn
(preferably in retirement). Originally, 403(b) plans allowed
investment only in insurance company annuity contracts, but
now 403(b) plans can offer investments in mutual funds. (Am.
Complt. ¶ 76). Both plans allow each participant to
choose the investments into which the money in his or her
account is invested. (Am. Complt. ¶ 18, 42).
Participants can choose among the options assembled by the
plans' fiduciaries. (Am Complt. ¶ 42).
Northwestern University (“Northwestern”) is the
plan administrator for both plans. (Am. Complt. ¶ 25).
Plaintiffs allege that Northwestern is a fiduciary by virtue
of its discretionary control of the plans. (Am. Complt.
¶ 26). Plaintiffs allege that Northwestern delegated its
fiduciary responsibility to its Executive Vice President, a
position which has been held by defendant Nimalam Chinniah
(“Chinniah”) since September 8, 2014 and was held
by defendant Eugene Sunshine (“Sunshine”) before
that. (Am. Complt.¶¶ 28-29). Plaintiffs allege
that, as of February 28, 2012, Northwestern established the
Northwestern University Retirement Investment Committee (the
“Investment Committee”) and granted it
discretionary authority to manage the assets of the plans.
The Investment Committee is made up of defendants Ronald R.
Braeutigam, Kathleen Hagerty, Craig A. Johnson, Candy Lee,
William H. McLean and Ingrid S. Stafford. (Am. Complt.
amended complaint is massive: 287 paragraphs over 141 pages.
Plaintiffs' proposed second amended complaint (which is
nearly identical, except it adds allegations for four new
counts and a few additional allegations as to the original
counts) is 376 paragraphs over 165 pages. Most of
plaintiffs' allegations, though, are not specific to the
defendants and the plans in this case. Instead, most of
plaintiffs' allegations constitute a description of
plaintiffs' opinions both on ERISA law and on a proper
long-term investment strategy for average people who lack the
time to select either individual stocks or actively-managed
their complaint, plaintiffs object to, among other things,
the mix of investment options available in the plans.
Plaintiffs believe they had too many options, leaving them
with the “virtually impossible burden” of
deciding where to invest their money. (Am. Complt. 167). In
the amended complaint, plaintiffs describe two line-ups of
investment options they could choose from under the plans:
the options available for some (unspecified) period of time
before October 2016 and the options available during and
after October 2016.
options before October 2016
2016, the plans offered investments through TIAA-CREF
(Teachers Insurance and Annuity Association of America and
College Retirement Equities Fund) and Fidelity Management
Trust Company (“Fidelity”). The Retirement Plan
offered 240 investment options (39 through TIAA-CREF and 203
through Fidelity) while the Voluntary Plan offered 180 (39
through TIAA-CREF and 148 through Fidelity). (Am. Complt.
¶¶112-113). Among the investment options were
mutual funds and insurance company annuities (both fixed and
variable). (Am. Complt. ¶ 110).
the TIAA-CREF investments offered under the plans is the
TIAA-CREF Traditional Annuity, a fixed annuity contract that
returns a guaranteed, contractually-specified minimum
interest rate. (Am. Complt. ¶ 117). The TIAA-CREF
Traditional Annuity has “severe restrictions and
penalties for withdrawal, ” including a 2.5% surrender
charge if a participant withdraws the investment in a lump
sum sooner than 120 days after the termination of his/her
employment. (Am. Complt. ¶¶ 117, 132).
policy was (and apparently still is) to require any plan
offering its TIAA-CREF Traditional Annuity: (1) to offer its
CREF Stock Account; and (2) to use TIAA as recordkeeper for
its products. (Am. Complt. ¶ 130). Plaintiffs
are not fond of the CREF Stock Account. (Of course, under the
plans, they could choose their investments and did not have
to choose the CREF Stock Account merely because it was
offered.) Plaintiffs allege that the CREF Stock Account fund
charged excessive fees. (Am. Complt. ¶ 135). (More on
plaintiffs' complaints about the CREF Stock Account
options available by October 2016
2016, defendants changed the line-up of investment options.
(Am. Complt. ¶¶ 123-128). Beginning in July 2016,
participants could invest in one of three tiers of options:
Tier 1 consists of target-date mutual funds (i.e., funds that
automatically rebalance their portfolios to become more
conservative as the funds reach their target dates); Tier 2
consists of five index funds; and Tier 3 consists of 26
actively-managed funds. (Am. Complt. ¶¶ 124-126,
128). Beginning in September 2016, the plans also offered
Tier 4, which allows a participant to invest his or her plan
assets via a full-service brokerage window. (Am. Complt.
¶¶ 127-128). The participants had to be out of the
old options (the ones that did not carry over, anyway) by
October 21, 2016. (Am. Complt. ¶ 128).
the investment options in the plans both before and after
October 2016 were mutual funds, each of which covers its
expenses (including profit) by charging fees in the form of
an expense ratio. (Am. Complt. ¶¶ 54, 120, 121).
The expense ratio is the percentage of fund assets the fund
keeps each year. All other things being equal, a lower
expense ratio is better. An illustration: if a fund has a 4%
return in a year but charges a 2% expense ratio, then half
the return is eaten in expenses, and the investor keeps half
of the return. If the same fund has a 1% expense ratio and
the same return, then a quarter of the return is eaten in
expenses, and the investor keeps 75% of the return. If the
fund, instead, has an expense ratio of .1%, then only 2.5% of
the return is eaten by expenses, and the investor keeps 97.5%
of the return. Over time with compound returns, all else
being equal, the difference in expense ratios makes a huge
difference in an investor's savings at retirement. Of
course, all things are not equal between funds. In practice,
the funds with the lowest expense ratios are the ones with
the least to do in terms of selecting stocks: index funds.
Index funds hold a pre-selected (usually by someone else,
like the S&P 500) set of stocks, which minimizes not only
trading costs but also eliminates the need to pay someone to
select the stocks. Actively-managed funds have to pay someone
to select the stocks, and the cost of paying the investment
managers drives up expenses (though not necessarily returns:
it is hard, it turns out, to beat the market). Index funds
tend to be less liquid, because they tend to have features
that discourage turnover. See Loomis v. Exelon
Corp., 658 F.3d 667, 670 (7th Cir. 2011) (“an
index fund typically disallows new investments for a month or
more following any withdrawal”).
the expenses included in a fund's expense ratio are costs
for recordkeeping. Defined contribution plans need to have a
record keeper to track the amount of each participant's
account and how the account is allocated among investment
options. (Am. Complt. ¶ 48). Record keepers also
maintain websites for plan participants and sometimes provide
investment advice or education materials. (Am. Complt. ¶
48). The fund that collects the expense ratio is not
necessarily the entity that handles the recordkeeping. One
way for plans to pay for recordkeeping is to have the fund
that collects the expense ratio share part of the expense
ratio with the record keeper. (Am. Complt. ¶¶
60-61). That is how fees are (and were) paid in these plans.
(Am. Complt. ¶¶ 144-146).
allege that, alternatively, plans can pay directly for
recordkeeping by paying a “flat annual fee based on the
number of participants” in the plan. (Am. Complt.
¶ 61). Plaintiffs allege that a reasonable fee for
recordkeeping is $35/participant/year. (Am. Complt. ¶
148). Plaintiffs allege that participants in the Northwestern
plans paid more. Plaintiffs allege that, between 2010 and
2015, participants in the Voluntary Plan paid an average of
between $54 and $87 per participant per year (Am. Complt.
¶ 150) and that participants in the Retirement Plan paid
an average of between $153 and $213 per participant per year
(Am. Complt. ¶ 149). Plaintiffs' allege that in 2015
the Voluntary Plan held $530 million in net assets and had
12, 293 participants. (Am. Complt. ¶ 16).
Plaintiffs' allege that in 2015 the Retirement Plan held
$2.34 billion in net assets and had 21, 622 participants.
(Am. Complt. ¶ 12). Plaintiffs seem to recognize that a
per capita charge (instead of an expense ratio) tends to
discourage and punish small investors, because plaintiffs
allege that a per capita fee can, once calculated, be divided
by the plans among the participants based on the amount each
participant has invested. (Am. Complt. ¶ 64).
allege that the record keeping expense for plans generally
can be higher if plans use multiple record keepers. (Am.
Complt. ¶ 142). As to the plans in this case, plaintiffs
allege that the Retirement Plan has two record keepers
(TIAA-CREF and Fidelity) and that the Voluntary Plan has had
one record keeper (TIAA-CREF) since 2012. (Am. Complt. ¶
143). Plaintiffs allege that TIAA-CREF and Fidelity are paid
for record-keeping via expense ratios. (Am. Complt.
¶¶ 144-146). Specifically, plaintiffs allege that
the Fidelity funds in the plans charge retail rate expense
ratios in order to cover record-keeping, rather than
institutional-rate expense ratios. (Am. Complt. ¶¶
charging of higher retail expense ratios instead of
institutional-rate expense ratios is also a major theme in
plaintiffs' complaint. Plaintiffs worry that the entities
which provide services to the plans have a profit motive.
(Am. Complt. ¶ 46, 50). Plaintiffs believe that large
plans have sufficient bargaining power to obtain lower
expense ratios on funds. (Am. Complt. ¶ 45, 164).
Plaintiffs include in their complaint a ten-page list of the
funds available to plan participants, as well as the retail
expense ratios the plan participants are charged. (Am.
Complt. ¶ 161). The list also includes the expense
ratios charged by the same mutual funds to institutional
investors. (Am. Complt. ¶ 161). Five funds (Fidelity
Spartan 500 Index, Fidelity 500 Index, Fidelity International
Index, Fidelity Total Market Index and Vanguard Small Cap
Index) available to participants of the plans charged expense
ratios of .1%, even though institutional investors could get
those funds for an expense ratio of .07%. (Am. Complt. ¶
161). Other spreads were different. (Am. Complt. ¶ 161).
Plan participants could invest in the Fidelity Emerging
Europe, Middle East, Africa Fund at an expense ratio of
1.25%, while institutional investors paid 1.19% for that
fund. (Am. Complt. ¶ 161). The expense ratios of all
funds available to plan participants ranged from .05%
(Fidelity 500 Index (Inst) (FXSIX)) to 1.89% (Calvert New
Vision Small Cap (A)(CNVAX)). (Am. Complt. ¶ 161).
April 2016, defendants informed plan participants that they
had “negotiated a credit of fees” from both
Fidelity and TIAA-CREF. (Am. Complt. ¶ 216).
are one reason, as noted above, plaintiffs object to the
inclusion of the CREF Stock Account as an investment option
in the plans. While plan participants could invest in the
TIAA-CREF Equity Index for an expense ratio of .05% or the
TIAA-CREF S&P 500 Index for an expense ratio of .06%, the
CREF Stock Account charged an expense ratio of .46%. (Am.
Complt. ¶ 176). The CREF Stock Account paid TIAA-CREF
about half of the expense ratio for record keeping. (Am.
Complt. ¶ 188). Plaintiffs also dislike the fund,
because it has not performed well. Plaintiffs devote a lot of
ink in their amended complaint to the concept that
actively-managed funds do not have a strong track record of
beating the market. With respect to the CREF Stock Account in
particular, plaintiffs allege that it has underperformed in
one-, three-, and five-year periods relative to the Russell
3000, the Vanguard Total Stock Market Index Fund, the
Vanguard Institutional Index, the Vanguard PRIMECap-Adm and
the Vanguard Capital Opp.-Adm. (Am. Complt. ¶¶ 200,
on these allegations, plaintiffs assert three counts (Counts
I, III and V) for standard breach of fiduciary duty. For each
of those counts, plaintiffs assert a mirror-image count
(Counts II, IV and VI) for breach of fiduciary duty based on
a prohibited transaction. In Count VII, plaintiffs assert
that defendants Northwestern, Chinniah and Sunshine failed to
monitor the other fiduciaries. Defendants move to dismiss
STANDARD ON A MOTION TO DISMISS
Court may dismiss a claim pursuant to Rule 12(b)(6) of the
Federal Rules of Civil Procedure if the plaintiffs fail
“to state a claim upon which relief can be
granted.” Fed.R.Civ.P. 12(b)(6). Under the
notice-pleading requirements of the Federal Rules of Civil
Procedure, a complaint must “give the defendant fair
notice of what the . . . claim is and the grounds upon which
it rests.” Bell Atlantic Corp. v. Twombly, 550
U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355
U.S. 41, 47 (1957)). A complaint need not provide detailed
factual allegations, but mere conclusions and a
“formulaic recitation of the elements of a cause of
action” will not suffice. Twombly, 550 U.S. at
555. To survive a motion to dismiss, a claim must be
plausible. Ashcroft v. Iqbal, 556 U.S. 662 (2009).
Allegations that are as consistent with lawful conduct as
they are with unlawful conduct are not sufficient; rather,
plaintiffs must include allegations that “nudg[e] their
claims across the line from conceivable to plausible.”
Twombly, 550 U.S. at 570.
considering a motion to dismiss, the Court accepts as true
the factual allegations in the complaint and draws
permissible inferences in favor of the plaintiffs.
Boucher v. Finance Syst. of Green Bay, Inc., 880
F.3d 362, 365 (7th Cir. 2018). Conclusory allegations
“are not entitled to be assumed true, ” nor are
legal conclusions. Ashcroft v. Iqbal, 556 U.S. 662,
680 & 681 (2009) (noting that a “legal
conclusion” was “not entitled to the assumption
of truth[;]” and rejecting, as conclusory, allegations
that “‘petitioners ‘knew of, condoned, and
willfully and maliciously agreed to subject [him]' to
harsh conditions of confinement”). The notice-pleading
rule “does not unlock the doors of discovery for a
plaintiff armed with nothing more than conclusions.”
Iqbal, 556 U.S. at 678-679.
Defendants' motion to dismiss
in ERISA requires employers to establish employee benefits
plans. Nor does ERISA mandate what kinds of benefits
employers must provide if they choose to have such a
plan.” Lockheed Corp. v. Spink, 517 U.S. 882,
887 (1996). Congress's goals in passing ERISA were to
“ensure employees would receive the benefits they had
earned” (Conkright v. Frommert, 559 U.S. 506,
516 (2010)) and to “induc[e] employers to offer
benefits by assuring a predictable set of liabilities, under
uniform standards of primary conduct and a uniform regime of
ultimate remedial orders and awards” (Rush
Prudential HMO, Inc. v. Moran, 536 U.S. 355, 379
(2002)). The Supreme Court has explained that Congress wanted
to avoid creating “a system that is so complex that
administrative costs, or litigation expenses, unduly
discourage employers from offering welfare benefits plans in
the first place.” Varity Corp. v. Howe, 516
U.S. 489, 497 (1996).
seek relief under 29 U.S.C. §§ 1132(a)(2) and
1109(a). ERISA § 502(a)(2) provides a private right of
action “by a participant, beneficiary or fiduciary for
appropriate relief under section 1109 of this title.”
29 U.S.C. § 1132(a)(2). ERISA § 409(a), in turn,
Any person who is a fiduciary with respect to a plan who
breaches any of the responsibilities, obligations, or duties
imposed upon fiduciaries by this subchapter shall be
personally liable to make good to such plan any losses to the
plan resulting from each such breach, and to restore to such
plan any profits of such fiduciary which have been made
through the use of assets of the plan by the fiduciary . . .
29 U.S.C. § 1109(a). A fiduciary is required to:
discharge his duties with respect to the plan solely in the
interest of the participants and beneficiaries and-
(A) for the exclusive purpose of:
(i) providing benefits to participants and their
beneficiaries; and (ii) defraying reasonable expenses of