Divane v. Nw. Univ.

• Citation: 953 F.3d 980
• Decision Date: 25 March 2020
• Docket Number: No. 18-2569,18-2569
• Parties: Laura L. DIVANE, et al., Plaintiffs-Appellants, v. NORTHWESTERN UNIVERSITY, et al., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

953 F.3d 980

Laura L. DIVANE, et al., Plaintiffs-Appellants,

v.NORTHWESTERN UNIVERSITY, et al., Defendants-Appellees.

No. 18-2569

United States Court of Appeals, Seventh Circuit.

Argued May 23, 2019

Decided March 25, 2020

Rehearing and Rehearing En Banc Denied May 11, 2020^*

Jerome J. Schlichter, Sean E. Soyars, Michael A. Wolff, Attorneys, Schlichter, Bogard & Denton, LLP, St. Louis, MO, for Plaintiffs - Appellants Laura L. Divane, April Hughes, Katherine D. Lancaster.

Jerome J. Schlichter, Sean E. Soyars, Attorneys, Schlichter, Bogard & Denton, LLP, St. Louis, MO, for Plaintiff - Appellant Jasmine Walker.

Amanda S. Amert, Alexis Elise Bates, Brienne Letourneau, Craig C. Martin, Monika Kothari, Attorneys, Jenner & Block LLP, Chicago, IL, Matthew E. Price, Attorney, Jenner & Block LLP, Washington, DC, for Defendants - Appellees Northwestern University, Pamela S. Beemer, Ronald Braeutigam, Kathleen Hagerty.

Amanda S. Amert, Alexis Elise Bates, Brienne Letourneau, Craig C. Martin, Attorneys, Jenner & Block LLP, Chicago, IL, Matthew E. Price, Attorney, Jenner & Block LLP, Washington, DC, for Defendant - Appellee Northwestern University Retirement Investment Committee.

Dara Smith, Attorney, AARP Foundation Litigation, Washington, DC, for Amici Curiae American Association of Retired Persons, AARP Foundation.

Karen Ferguson, Attorney, Pension Rights Center, Washington, DC, for Amicus Curiae Pension Rights Center.

Brian Timothy Burgess, Attorney, Goodwin Procter LLP, Washington, DC, for Amici Curiae Chamber of Commerce of the United States of America, American Benefits Council.

Before Bauer, Manion, and Brennan, Circuit Judges.

Brennan, Circuit Judge.

Laura Divane and other plaintiffs,¹ beneficiaries of employee investment plans, sued Northwestern University for allegedly breaching its fiduciary duties under the Employee Retirement Income Security Act, 29 U.S.C. § 1001, et seq. The district court found no breach. Neither do we, so we affirm.

I

There are two ERISA defined-contribution plans at issue in this case: the Northwestern University Retirement Plan and the Northwestern University Voluntary Savings Plan. Under the Retirement Plan, participating Northwestern University employees can contribute a portion of their salary to their account and Northwestern makes a matching contribution. Employees participating in the Voluntary Savings Plan also contribute a portion of their salary, but Northwestern does not make a matching contribution. Both plans allow participants to choose the investments into which the money in their account is invested and to choose among the investment options assembled by the plans’ fiduciaries. Each plaintiff participates in one or both plans.

Northwestern is the administrator and designated fiduciary of both plans. It assigned some of its fiduciary administrative duties to university officials² and established a Retirement Investment Committee comprised of individual university officers³ who exercised discretionary authority in managing the plans’ assets. All are named defendants in this suit, and we collectively refer to them as "Northwestern" or "defendants."

Displeased with the administration of the plans, plaintiffs sued Northwestern for allegedly breaching its fiduciary duties under ERISA. Plaintiffs’ amended complaint⁴ is massive: 287 paragraphs over 141 pages. Most of plaintiffs’ allegations, though, are not specific to certain defendants or to the plans here. For example, plaintiffs object to a wide range or mix of investment options, noting that approach can overwhelm an unsophisticated investor. They believe too many choices leaves the average investor with the "virtually impossible burden" of deciding where to place their money.

Before October 2016, the plans offered investments through the Teachers Insurance and Annuity Association of America and College Retirement Equities Fund (TIAA-CREF) as well as Fidelity Management Trust Company. The Retirement Plan offered 242 investment options, and the Voluntary Savings Plan offered 187 options. Among the available options were mutual funds and insurance company annuities.⁵

In the four months leading up to October, these options were narrowed into four tiered categories from which participants could select their preferred investments:

• Tier 1 : Target-date mutual funds that automatically rebalance their portfolios to become more conservative as the funds reach their target dates;

• Tier 2 : Five index funds with a pre-selected set of stocks that eliminate trading and selection costs;

• Tier 3 : 26 actively managed funds in which a manager or management team selects stocks;

• Tier 4 : A full-service, self-directed brokerage window through which the participant invests his or her plan assets.

By October, Northwestern had streamlined its investment offerings to about 40 options to enable "simpler decision-making by participants, reduce administrative expenses, increase participant returns, and provide access to lower cost shares when available." Appellant Br. at 9. Plaintiffs argue Northwestern’s conduct in adjusting its offerings should be treated as proof that its pre-2016 offerings were imprudent.

One of the TIAA-CREF investments that remained available to plan participants post-2016 was the TIAA-CREF Traditional Annuity, a fixed annuity contract that returns a guaranteed, contractually specified minimum interest rate. The Traditional Annuity has "severe restrictions and penalties for withdrawal," including a 2.5% surrender charge if a participant withdraws the investment in a lump sum sooner than 120 days after the termination of her employment. TIAA policy dictates that if the Traditional Annuity is offered as part of an investment plan, that plan must also offer the TIAA-CREF Stock Account fund and use TIAA as the recordkeeper for all TIAA offerings. Plaintiffs complain that the Stock Account charges excessive fees and has not historically performed well.

Among the fees included in a fund’s expense ratio are costs for recordkeeping. Defined contribution plans require recordkeepers to track the amount of each participant’s account and how the account is allocated among investment options. Recordkeepers also maintain websites for participants and sometimes provide investment advice or education materials. One way that plans (including those in this case) pay for recordkeeping is to have the fund that collects the expense ratio share part of the expense ratio with the recordkeeper.

Plaintiffs alleged Northwestern should have paid recordkeeping costs by assessing a flat annual fee based on the number of participants in each plan. Specifically, plaintiffs alleged that some of the plan funds charged retail-rate expense ratios to cover recordkeeping rather than institutional-rate expense ratios. According to plaintiffs, a reasonable rate for recordkeeping fees would have been $35 per participant per year. The amended complaint reflects that plan participants paid an average of $54 to $87 per year for the Voluntary Savings Plan and an average of $153 to $213 per year for the Retirement Plan.⁶ Plaintiffs argued these expenses are even higher for plans that use multiple recordkeepers, as was the case here.

Six days before discovery was scheduled to close, plaintiffs sought leave to file a second amended complaint alleging four new counts for breach of fiduciary duty. Aside from the four new counts, the second amended complaint mirrored the causes of action and claims in the amended complaint. The four new counts alleged that Northwestern: (1) offered retail class funds as investment options instead of using their bargaining power to offer institutional class shares at lower prices; (2) violated Northwestern’s Investment Policy Statement by failing to monitor investment performance and recordkeeping costs; and (3) allowed TIAA to access and use participant information to market its services to participants (two separate counts). These additional counts were based on information available to plaintiffs before discovery.

Plaintiffs sought monetary and injunctive relief and requested a jury trial and leave to file their proposed second amended complaint. Defendants moved to dismiss the amended complaint on every count, to deny leave to file the second amended complaint, and to strike plaintiffs’ request for a jury trial.

II

The district court granted defendants’ motion to strike the jury demand, finding that the monetary relief sought by plaintiffs did not constitute damages but rather a form of equitable restitution that did not entitle plaintiffs to a jury trial. The court also denied plaintiffs’ request for leave to file a second amended complaint and granted defendants’ motion to dismiss the amended complaint on all counts.

In dismissing the amended complaint, the district court rejected plaintiffs’ theory that Northwestern breached its fiduciary duty by offering the Stock Account and allowing TIAA to serve as the recordkeeper for TIAA funds. First, as the court observed, "no plan participant was required to invest in the CREF Stock fund or any other TIAA-CREF product," so "any plan participant could avoid what plaintiffs consider to be the problems with these products ... simply by choosing other options." Divane v. Northwestern Univ. , 2018 WL 2388118, at *6 (N.D. Ill. May 25, 2018). Moreover, "[t]he plans ... had valid reasons to use TIAA-CREF as record keeper for its products." Id. According to plaintiffs’ own allegations: "TIAA-CREF required the plans to use it as record keeper for its products and to offer [the] CREF Stock Account if the plans were going to offer the TIAA-CREF Traditional Annuity," a popular investing option. Id. The court concluded that "[i]t was prudent to keep the [TIAA-CREF] Stock Account as an option (which no one was required to choose) and to keep TIAA-CREF as record keeper for its own funds (which no one was required to choose) when the alternative was to subject some participants to [the] 2.5% surrender charge" imposed by the...