CHICAGO — A federal appeals panel has ruled Northwestern University didn't violate a federal retirement securities law by allegedly "overwhelming" workers with too many retirement investment options.
On March 25, a three-judge panel of the U.S. Seventh Circuit Court of Appeals sided with university in north suburban Evanston, in a legal dispute with a group of university retirees over their funds. The ruling backed the findings of U.S. District Judge Jorge Alonso.
After Judge Alonso had found the school didn’t breach its fiduciary duties under the Employee Retirement Income Security Act, the retirees appealed, reiterating their allegations about NU’s retirement and voluntary savings plans.
Seventh Circuit Judge Michael Brennan
Seventh Circuit Judge Michael Brennan wrote the appellate opinion. Circuit Judges William Bauer and Daniel Manion concurred.
According to the panel's decision, NU only makes matching contributions under the retirement plan. Participants in both plans can choose the investments for their money, as well as to choose among investment options the plans’ fiduciaries prepared. The alleged ERISA violation included objections “to a wide range or mix of investment options, noting that approach can overwhelm an unsophisticated investor,” Brennan wrote.
The retirees said a streamlining process that ended in October 2016 revealed its earlier “offerings were imprudent,” such as those offered through the Teachers Insurance and Annuity Association of America (TIAA) and College Retirement Equities Fund. They also complained of excessive fees in a Stock Account — up to $213 per participant each year, as opposed to a “reasonable rate” of $35 — and poor performance of certain funds.
Alonso granted NU’s motion to strike the retiree’s request for a jury demand and also denied leave to file a second amended complaint, ultimately dismissing the entire suit. The panel affirmed his findings.
“Under the plans, no participant was required to invest in the Stock Account or any other TIAA product,” Brennan wrote. “Any participant could avoid what plaintiffs consider to be the problems with those products (excessive recordkeeping fees and underperformance) simply by choosing from hundreds of other options within a multi-tiered offering system.”
The panel said the retirees’ complaint laid out valid reasons for using TIAA as a recordkeeper and for keeping the Stock Account as an investment option. One such reason was that TIAA required offering the Stock Account if NU wanted to offer a traditional annuity, and “it was prudent for Northwestern to accept conditions that would ensure” participants could still select the annuity, Brennan wrote.
Although these retirees might have preferred low-cost index funds, the panel continued, they can’t prove a breach of duty just because different investment options were made available. The panel pointed to a 2011 Seventh Circuit opinion, Loomis v. Exelon Corp., as establishing the challenges of using ERISA to enforce preferences in benefit program offerings. In that instance, the panel noted Exelon’s plan “left choice to the people who have the most interest in the outcome, and it cannot be faulted for doing this.”
The panel also said Alonso was right to reject the retirees’ arguments that recordkeeping fees shouldn’t have been paid through revenue sharing. Their complaint failed “to support their claim that a flat-fee structure is required by ERISA,” Brennan wrote, or how such a plan would benefit plan participants. The panel again invoked Loomis to counter retirees’ position a flat recordkeeping fee is always prudent. Although the retirees may have disliked TIAA’s involvement in recordkeeping, the panel again said the complaint itself showed NU’s valid reasons for keeping that arrangement.
“Northwestern was not required to search for a recordkeeper willing to take $35 per year per participant as plaintiffs would have liked,” Brennan wrote. “Plaintiffs have identified no alternative recordkeeper that would have accepted such a low fee or any fee lower than what was paid.”
Turning to the argument about the variety of options available, the panel noted plaintiffs had the option to choose low-cost index funds the complaint said they preferred, and having choices beyond that can’t be grounds for an ERISA lawsuit.
Finding the first amended complaint insufficient, the panel also said Alonso was right to deny leave to file the second amendment, agreeing the plaintiffs were both tardy in bringing those additional claims and also that the four proposed additional counts had similar inherent flaws to the original pleadings.
Plaintiffs have been represented by attorney Jerome J. Schlichter and others with the firm of Schlichter Bogard & Denton LLP, of St. Louis.
Northwestern has been represented by attorney Craig C. Martin and others with the firm of Jenner & Block, of Chicago.