Dale v. NFP Corp.

• Decision Date: 01 March 2023
• Docket Number: 20-CV-02942
• Parties: KEVIN DALE, et al., Plaintiffs, v. NFP CORP., et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

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KEVIN DALE, et al., Plaintiffs,
v.
NFP CORP., et al., Defendants.

No. 20-CV-02942

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

March 1, 2023

MEMORANDUM OPINION AND ORDER

JOHN F. KNESS United States District Judge.

Plaintiffs, the Board of Trustees of a pension plan, the Northern Illinois Annuity Fund and Plan, bring this action under the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1001, et seq., on behalf of the Plan and its participants. (Dkt. 78, ¶¶ 1-3.) Plaintiffs allege that Defendants, the Plan's administrators and investment advisors, breached their fiduciary duties by structuring investments to generate excessive direct and indirect compensation for themselves; failing to disclose to Plaintiffs all compensation received from investment of Plan assets; providing false or inadequate reports on investment performance; providing inadequate or misleading investment advice; and investing Plan assets in imprudent and illiquid investments.^[1] (Id. ¶ 11.) Plaintiffs plead thirteen separate

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counts of breach of fiduciary duty. (Dkt. 78, ¶¶ 398-518.)

Defendants move to dismiss all thirteen counts on the grounds that Counts I, II, IV, VI, and VII are time-barred under ERISA's statute of limitations; Counts I, II, III, IV, V, VI, VII, VIII and XII fail to allege sufficient facts to establish a breach of fiduciary duty; and Counts IX, X, XI, and XIII “challenge certain administrative and recordkeeping actions” for which there is no fiduciary liability. (Dkt. 83 at 2-3.) Defendants' motion to dismiss is granted in part and denied in part as follows:^[2]

• Statute of Limitations: Defendants' request to dismiss Counts I, II, IV, VI, and VII as time-barred is denied, except that any breach premised on Defendants' initial recommendations to invest in the MetLife GIC investment (Count IV) and to hire First Trust Advisors, Inc. (Count VI), which occurred respectively in 2004 and 2009, is untimely

• Count I - PIMCO Class A Shares: Count I is dismissed

• Count II - Alternative Investments: Count II states a claim for breach of fiduciary duty premised on Defendants' alleged misrepresentations regarding the liquidity of the alternative investments. Plaintiffs allege insufficient facts, however, to substantiate their other theories of breach related to Defendants' failure to disclose commissions and failure to evaluate the prudence of the

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alternative investments.

• Count III - Management of Fixed-Income Investments: Count III states a claim for breach of fiduciary duty based on Defendants' churning of the fixed-income portfolio.

• Count IV - MetLife Managed GIC Investment: Count IV states a claim for breach of fiduciary duty premised on Defendant Korchak's alleged misrepresentation in 2017 regarding redemption of the investment, but otherwise fails to state a claim under Plaintiffs' additional theories relating to recordkeeping fees, financial reports, and undisclosed information.

• Count V - UIT Investment: Count V is dismissed.

• Count VI - FTA as Money Manager: Count VI is dismissed.

• Count VII - Selection of Other Money Managers: Count VII is dismissed.

• Count VIII - Failure to Provide Section 408(b)(2) Disclosures: Count VIII states a claim for breach of fiduciary duty based on Defendants' failure to provide disclosures under ERISA section 408(b)(2).

• Count XII - Charging the Plan Unreasonable and Excessive Fees: Plaintiffs state a claim for breach of fiduciary duty with respect to Defendants' fees for the period running from September 1, 2017 through December 1, 2017 due to Defendants' allegedly intentional delay in transferring assets to the Plan's new service providers. Plaintiffs, however, fail to state a claim for excessive fees from November 2016 through September 1, 2017 because Defendants were authorized and continued to provide investment services to the Plan.

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• Counts IX, X, XI, and XIII - Fiduciary Status: Plaintiffs allege sufficient facts to establish that Defendants were fiduciaries when performing the conduct at issue in Counts IX, X, XI, and XIII.

BACKGROUND

I. The Plan and its Expenses

The Northern Illinois Annuity Fund and Plan (the “Plan”) was created in 1981 to provide union workers with a fund to save money for disability, retirement, and death. (Dkt. 78, ¶ 79.) The Plan is a defined contribution, multiemployer employee pension benefit plan within the meaning of ERISA, 29 U.S.C. § 1002(2), (34), and (37). (Id. ¶ 18.) Plan participants “maintain individual investment accounts, which are funded by pretax contributions from employees' salaries and, where applicable, matching contributions from” the participants' unions and employers. See Hughes v. Northwestern University, 142 S.Ct. 737, 740 (2022). Participants' retirement benefits are equivalent to the “value of their own individual investment accounts, which is determined by the market performance of employee and employer contributions, less expenses.” Albert v. Oshkosh Corp., 47 F.4th 570, 574 (7th Cir. 2022) (quoting Tibble v. Edison Int'l, 525 U.S. 523, 525 (2015)).

The Plan's expenses consist of various fees paid for administrative and advisory services. For example, the Plan paid investment management fees, which “compensate a fund, such as a mutual fund or index fund, for designing and maintaining the fund's investment portfolio.” Id. Typically, investment management fees are calculated as a “percentage of the money a plan participant invests in a

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particular fund, which is known as an expense ratio.” Id. Expense ratios tend to be higher for actively managed funds than passive funds such as those that track an index like the S&P 500. Id.

The Plan also paid administration (or recordkeeping) fees. These fees compensate the plan's administrator for “track[ing] balances of individual accounts, provid[ing] regular account statements, and offer[ing] informational and accessibility services to participants.” Id. (quoting Hughes, 142 S.Ct. at 740). Administration fees are typically assessed as a “flat fee per participant or via an expense ratio.” Id. A plan's administrator may occasionally also be paid via “revenue sharing,” where a portion of the investment management fees collected through an expense ratio goes to the administrator. Id. This portion, called 12b-1 fees, is charged to investors “to pay for distribution expenses and shareholder service expenses.” Lange v. Infinity Healthcare Physicians, S.C., 2021 WL 3022117, at *4 (W.D. Wis. July 16, 2021). Expense ratios and revenue-sharing payments generally “move in tandem: the higher a given share class's expense ratio, the more the fund pays the [administrator] in revenue sharing.” Albert, 47 F.4th at 574 (quoting Leimkuehler v. Am. United Life Ins. Co., 713 F.3d 905, 909 (7th Cir. 2013)). A “share class” refers to the “groups of investors who invest in the same investment option.” Id. A “retail” share class pays the same fees as the general public, while an “institutional” share class pays a discounted rate. Id.

The Plan also paid investment advisory fees. These fees compensate the plan's investment advisor for researching and recommending investment of the plan's

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assets and providing individualized advisory services to the plan's participants. See id. at 575-76, 582; see also Scott v. Aon Hewitt Financial Advisors, LLC, 2018 WL 1384300, at *1-2 (N.D. Ill. Mar. 19, 2018).

II. The Parties and Their Responsibilities

The Plan's Board of Trustees oversees the Plan as fiduciary and is listed as the Plan Administrator in the governing Plan documents. (Dkt. 78, ¶ 19, 21, 90) The Board, however, delegated its responsibilities to NFP Corp (“NFP”). NFP, through its subsidiaries and employees, Stephen Curry and Jerry Korchak (collectively, “Defendants”), acted as the Plan's administrator, third-party administrator (“TPA”), investment advisor,^[3] and broker-dealer.^[4] (Id. ¶¶ 24-25, 28, 38-42, 52-58, 90-91.)

Defendants were required to manage Plan assets consistent with the objectives and standards laid out in the Plan's Investment Policy Statement (“IPS”). (Id. ¶ 84.) The IPS specifies that the Plan was to maintain a “diversified balanced portfolio to be managed at a reasonable expense.” (Id. ¶ 85.) The Plan's portfolio “consisted of fixed-income investments and equity asset classes.” (Id. ¶ 86.) The IPS “set minimum and maximum fixed income and equities asset allocation requirements,” and changes

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in the asset allocation between fixed income and equities were required to be approved by the Trustees. (Id. ¶ 87.) The IPS prohibited transacting or investing through “non-marketable securities, commodity trading, short selling, option trading with the exception of covered calls, and private placements.” (Id. ¶ 89.)

Defendants charged the Plan a flat fee for administrative services, based on the number of Plan participants, and a quarterly investment advisory fee equal to “three-eighths of one percent (.375%) of the average ‘fixed income assets' under NFP's management.” (Id. ¶¶ 106, 111.) Defendants also negotiated the Plan's contract with First Trust Advisors, Inc. (“FTA”) for investment management services for the equity portion of the Plan's portfolio, under which the Plan agreed to pay FTA investment management fees equal to 57 basis points (0.57%) of equity assets under FTA's management. (Id. ¶¶ 117-19, 121.) FTA then paid Defendants a portion of this fee under a revenue-sharing agreement. (See id. ¶¶ 116-124.)

In late 2017, the Trustees selected new investment service providers and terminated their relationship with Defendants. (Dkt. 78, ¶¶ 329, 335.) The Trustees (now, “Plaintiffs”) then filed suit against Defendants on behalf of the Plan and its participants. Plaintiffs allege in their first amended complaint that Defendants breached their fiduciary duties while servicing the Plan. Defendants...