Wildcats Win 403(b) University Excessive Fee Suit

Another one of the initial 403(b) university plan excessive fee suits has had its day in court.

The suit, filed against Northwestern University in 2016 by the law firm of Schlichter Bogard & Denton, had argued that Northwestern in 2016 “eliminated hundreds of mutual funds provided to Plan participants and selected a tiered structure comprised of a limited core set of 32 investment options,” including five tiers – one a TDF tier, the second five index funds, the third consisting of 26 actively managed mutual funds and insurance separate account, and an SDBA. However, the suit notes that Northwestern continued to contract with two separate recordkeepers (TIAA-CREF and Fidelity) for the retirement plan, and only consolidated the Voluntary Savings Plan to one recordkeeper (TIAA-CREF) in late 2012.

The suit also took issue – as most of these suits do – with the alleged inability of the plan fiduciaries to negotiate a better deal based on its status as a “mega” plan (the Retirement Plan had $2.34 billion in net assets and 21,622 participants with account balances, while at the same point in time the Voluntary Savings Plan had $529.8 million in net assets and 12,293 participants with account balances), for presenting participants with the “virtually impossible burden” of deciding where to invest their money, and for including active fund choices when passive alternatives were available.

‘Massive’ Complaint

The decision, rendered by Judge Jorge L. Alonso in the U.S. District Court for the Northern District of Illinois (Divane v. Northwestern Univ., 2018 BL 186065, N.D. Ill., No. 1:16-cv-08157, order granting defendants’ motion to dismiss 5/25/18) took issue with the plaintiffs’ case right from the start, commenting on the “massive” size of the plaintiffs’ amended complaint and proposed second amended complaint (taking the time to count not only the pages, but the paragraphs in each), quickly dismissing the quantity as “not specific to the defendants and the plans in this case.” Rather, Judge Alonso said that most of the 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.”

Judge Alonso, though acknowledging that “all other things being equal, a lower expense ratio is better,” went on to note that “all things are not equal between funds,” that the participants weren’t limited to the active funds, nor were they required to choose the CREF Stock Account (a fund choice highlighted in the suit for what were alleged to be high fees, poor performance, and whose inclusion on the menu was dictated by the choice of TIAA as recordkeeper).

‘Paternalistic’ Theories

“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,” Alonso wrote, moving on to invoke the U.S. Supreme Court decision in Varity Corp. v. Howe, 516 U.S. 489, 497 (1996), noting that “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.” Alonso went on to point out that “Ultimately, plaintiff’s theory is paternalistic, but ERISA is not.”

Alonso even went so far as to contest the notion that a mega plan should be able to command a better price, citing Loomis v. Exelon Corp., 658 F.3d 667 , 672-673 (7th Cir. 2011), where the court opined “…it isn’t clear to us why mutual funds would offer lower prices just because participants in this Plan have pension wealth that in the aggregate exceeds $1 billion”). That court also pushed back on the presumption that a per-participant charge was preferable to the asset-based recordkeeping fee approach, when it noted “a flat-fee structure might be beneficial for participants with the largest balances, but, for younger employees and others with small investment balances, a capitation fee could work out to more, per dollar under management…” Not that those arguments wound up being persuasive here, because Judge Alonso noted that “in any case, the participants had options to keep the expense ratios (and, thus, record-keeping expenses) low.”

Alonso also rejected claims that:

  • the revenue sharing arrangement constituted a transfer of plan assets (“once the Fidelity fund or the TIAA-CREF fund collected the expense ratio, that amount became the property of the respective mutual fund. Thus, the transfer of some of it for record-keeping costs was not a transfer of plan assets”); and
  • the payment for services rendered via revenue-sharing to the recordkeeper for services rendered constituted a prohibited transaction as a transfer of plan assets (“…it would be nonsensical to let a party state a claim for a prohibited transaction in violation of ERISA merely by alleging a plan paid a person for a service. That would be just the sort of litigation, the Court imagines, that Congress worried would discourage employers from offering ERISA plans”).

‘Control’ Voice

All in all, Judge Alonso noted that “the amount of fees paid were within the control of participants, because they could choose in which funds to invest the money in their account,” and that funds were available with expense ratios as low as .05%. Moreover, he said that “given plaintiffs’ allegations that in 2015 the Retirement Plan held $2.34 billion in net assets and had 21,622 participants, plaintiffs’ allegations suggest an average expense ratio between .14% and .197%,” which he noted were “…reasonable as a matter of law.”

The plaintiffs attempted – unsuccessfully, as it turned out – to add some additional claims, including that the plans allowed TIAA, as record keeper, to obtain access to “participants’ contact information, their choices of investments, the asset size of their accounts, their employment status, age, and proximity to retirement” – and that the information about participants constitutes a plan asset and that defendants breached their fiduciary duties by: (1) not preventing TIAA from using that information to market products to plaintiffs; and (2) engaging in a prohibited transaction in so doing.

However, Alonso noted that “it is in no way imprudent for defendants to allow TIAA, who is alleged to be a record keeper, to have access to each participant’s contact information, their choice of investments, their employment status, their age and their proximity to retirement. TIAA needed that information in order to serve as record keeper.”

He cited defendants’ argument that the “disclosure of information does not implicate ERISA fiduciary functions,” noting that that argument has some support. However, he wrote that the plaintiff “…has not responded to this argument or cited a single case in which a court has held that releasing confidential information or allowing someone to use confidential information constitutes a breach of fiduciary duty under ERISA,” going on to note that “this Court will not be the first, particularly in light of Congress’s hope that litigation would not discourage employers from offering plans and in light of the principle that breach of fiduciary duty remedies inure to the plans.”

He further stated that while “the Court has no doubt that a compilation of the information TIAA has on participants has some value (to TIAA, at least), but the Court cannot conclude that it is a plan asset under ordinary notions of property rights.”

Judge Alonso granted defendants’ motion to dismiss, denied plaintiffs’ motion for leave to amend, and their motion for leave to file under seal. All other pending motions were denied as moot, and dismissed the case – with prejudice.

This was the second of the 403(b) university excessive fee suits to go to trial – and the second in which the university defendants prevailed. The other was brought by participants in the $3.8 billion University of Pennsylvania Matching Plan against the University of Pennsylvania and its Vice President of Human Resources – and the ruling in that case was also a solid win for the defendants last September, though it is currently under appealLast week the parties in another of these 403(b) university excessive fee cases – this brought against the fiduciaries of the University of Chicago plan – entered into a class action settlement for a $6.5 million cash payment and changes to the university’s $3 billion plan.

Add Your Comments

One Comment

  1. Philip Willauer
    Posted May 30, 2018 at 11:48 am | Permalink

    A prime example of the lack of usefulness of the original DOL fiduciary rule as it was written. Let us all hope that “new one” will minimize such greedy legal actions

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