Northwestern University Beats Excessive-Fee Lawsuit

Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...

By Carmen Castro-Pagan

Northwestern University became the second prominent college to defeat a lawsuit accusing it of violating federal benefits law by offering imprudent investments and allowing excessive fees in its workers’ retirement plans.

The workers’ allegation over the TIAA-CREF investment option—that it underperformed and carried unreasonable fees—doesn’t amount to a breach of fiduciary duty under the Employee Retirement Income Security Act, Judge Jorge L. Alonso of the U.S. District Court for the Northern District of Illinois held May 25. Alonso also dismissed the workers’ claims of fiduciary breach based on allegations that they paid excessive record-keeping fees and were burdened with a range of investment options that was too broad.

The decision is a complete victory for the university, as Alonso also denied the workers’ request to amend their lawsuit to include four additional claims.

Alonso’s ruling comes the same week as another college—the University of Chicago—settled similar claims for $6.5 million. Northwestern and the University of Pennsylvania are the only colleges that have defeated claims that they allowed excessive fees and offered imprudent investment options in their retirement plans.

At least 20 prestigious colleges have been sued under ERISA in recent years over alleged mismanagement of their retirement plans. Judges have allowed similar lawsuits to proceed against Columbia, Emory, Johns Hopkins, and Princeton. Courts have granted class status in cases against New York University and Duke. A final ruling in the NYU case is expected this summer, the judge said earlier this week. Earlier this month, the University of Rochester and Long Island University were hit with similar lawsuits.

In his ruling, Alonso held that the workers’ allegation that the university breached its fiduciary duties by allowing TIAA-CREF to mandate the inclusion of certain allegedly imprudent funds wasn’t sufficient because no participant was required to invest in those funds or in any other TIAA-CREF product. Any participant could avoid these products by choosing other options, Alonso said.

The “mere fact” that participants “believe” index funds are a better long-term investment than the CREF Stock Account doesn’t make a fiduciary breach, Alonso said. The plan offered low-cost index funds, he noted. The participants’ theory is “paternalistic, but ERISA is not,” Alonso concluded, dismissing the claim.

Using the same rationale, Alonso held that the participants also had options to keep the expense ratios, and thus the record-keeping expenses, low. The fees paid were within the control of participants because they could choose in which funds to invest the money in their account, Alonso said.

Alonso also dismissed the participants’ claims that the university engaged in prohibited transactions and failed to monitor the other plan fiduciaries.

Schlichter Bogard & Denton represents the Northwestern employees. Jenner & Block represents Northwestern.

The case is Divane v. Northwestern Univ., 2018 BL 186065, N.D. Ill., No. 1:16-cv-08157, order granting defendants’ motion to dismiss 5/25/18.

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