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Divane v. Northwestern University

United States District Court, N.D. Illinois, Eastern Division

May 25, 2018



          JORGE L. ALONSO, United States District Judge

         Plaintiffs 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 [38], 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 [58]. In addition, plaintiffs seek leave to file a second-amended complaint [129], 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.

         For the reasons set forth below, the Court grants defendants' motion to dismiss [58]. The Court denies the motion for leave to file under seal [133]. The Court denies plaintiffs' motion for leave to amend [129]. All other pending motions are denied as moot.

         I. BACKGROUND

         Two 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).

         Both the Retirement Plan and the Voluntary Plan are 403(b) plans that allow contributions to grow tax-free until withdrawn (preferably in retirement).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).

         Defendant 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. ¶¶ 31-33).

         Plaintiffs' 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 mutual funds.

         In 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.

         Investment options before October 2016

         Before 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).

         One of 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).

         TIAA-CREF's 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 later.)

         Investment options available by October 2016

         In 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.[1] (Am. Complt. ¶ 128).


         Among 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”).

         Among 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).

         Plaintiffs 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).

         Plaintiffs 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. ¶¶ 146).

         The 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).

         In April 2016, defendants informed plan participants that they had “negotiated a credit of fees” from both Fidelity and TIAA-CREF. (Am. Complt. ¶ 216).

         Fees 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, 202).

         Based 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 every count.


         The 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.

         In 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.


         A. Defendants' motion to dismiss

         “Nothing 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).

         Plaintiffs 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, provides:

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 ...

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