University of Chicago Excessive Fee Suit Gets Second Wind

If at first you don’t succeed, try, try again – and the plaintiffs in an excessive fee suit have done just that.

The suit, Daugherty v. The University of Chicago, was filed in May, seeking class action status for some 36,000 participants in plans at the University of Chicago (the University of Chicago Contributory Retirement Plan and the University of Chicago Retirement Income Plan for Employees), which had more than $3 billion in assets.

As has been the case with most of these so-called excessive fee claims, this suit, filed in federal court in Illinois by participants Winifred J. Daugherty, Gloria Jackson and Steven Millard, charged that rather than “leveraging the Plans’ substantial bargaining power to benefit participants and beneficiaries,” the plan fiduciaries “…failed to adequately investigate, examine, and understand the real cost to plan participants for administrative services, thereby causing the Plans and participant investors to pay grossly excessive and unreasonable fees for administrative services.”

Last fall, the plan fiduciaries persuaded the court to dismiss all claims related to one of the plans – the University of Chicago Contributory Retirement Plan – because the plaintiffs lacked standing to bring the action (none were participants in that particular plan, only in the University of Chicago Retirement Income Plan for Employees, which had less than $1 billion in assets). This the plaintiffs remedied by adding to their mix one Walter R. James, who not only was a participant in the former plan, but as a participant there had invested in two of the TIAA funds that had been an issue in the suit.

However, this time (Daugherty v. Univ. of Chi., N.D. Ill., No. 1:17-cv-03736, denying motion to dismiss 1/10/18) the plan fiduciaries argued that plaintiff James lacked standing because “he fails to allege that he paid excessive recordkeeping or administrative fees, and therefore fails to allege an injury-in-fact.” By way of substantiation, they cited an “independent calculation” that he “may have paid approximately $37 per year” in recordkeeping and administrative fees, and that – based on the plaintiffs’ previous allegations that the industry benchmark for such fees is $35 per year – what had been paid was neither excessive nor unreasonable.

Perhaps needless to say, the plaintiffs took issue with the independent calculation, and with the notion that they had “not alleged an injury affecting him in a personal and individual way.” And Chief Judge Rubén Castillo of the U.S. District Court for the Northern District of Illinois agreed, citing allegations that the defendant “selected and retained …investment options” that caused the plans to “incur far higher administrative fees and expenses” relative to their size, “for years failed to engage in a prudent process for the evaluation and monitoring of amounts being charged for administrative expense,” allowing the plans to be charged an asset-based fee for recordkeeping “calculated in a manner that was completely inconsistent with a reasonable fee for the service and grossly excessive,” selected retail rather than institutional share class funds, and included a “dizzying array” of fund choices.

Motion ‘Sensors’

In considering a motion to dismiss, Judge Castillo noted that it was to construe the sufficiency of the complaint “in the light more favorable to the nonmoving party, accept well-pleaded facts as true, and draw all inferences in the nonmoving party’s favor.” Turning to the issue of the independent calculation, the court said it was “simply Defendant’s calculated average of administrative fees paid by all plan participants,” and did not account for the fact that each plan participant pays a different amount, and that “each plan participant is invested in a wide variety of funds, instead of just the two funds from which Defendant bases its calculations.” Indeed, Judge Castillo noted that the independent calculation “merely underscores a factual dispute concerning the amount of administrative fees that James paid,” a point of contention that the court said it cannot resolve on a motion to dismiss.

That said, Castillo closed by noting that “the analysis may be different at the conclusion of discovery if Defendant files a motion for summary judgement on the standing issue,” though he denied the plan fiduciaries’ motion to dismiss, directing the parties to “reevaluate their settlement positions in light of this opinion and to exhaust all settlement possibilities prior to the next status hearing (January 31).”

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