Divane v. Nw. Univ.

• Decision Date: 25 May 2018
• Docket Number: No. 16 C 8157,16 C 8157
• Parties: LAURA L. DIVANE, APRIL HUGHES, SUSAN BONA, KATHERINE D. LANCASTER, and JASMINE WALKER, Plaintiffs, v. NORTHWESTERN UNIVERSITY, NORTHWESTERN UNIVERSITY RETIREMENT INVESTMENT COMMITTEE, PAMELA S. BEEMER, RONALD R. BRAEUTIGAM, KATHLEEN HAGERTY, CRAIG A. JOHNSON, CANDY LEE, WILLIAM H. McLEAN, INGRID S. STAFFORD, NIMALAN CHINNIAH, and EUGENE S. SUNSHINE, Defendants.
• Court: U.S. District Court — Northern District of Illinois

LAURA L. DIVANE, APRIL HUGHES, SUSAN BONA,
KATHERINE D. LANCASTER, and JASMINE WALKER, Plaintiffs,
v.
NORTHWESTERN UNIVERSITY, NORTHWESTERN UNIVERSITY RETIREMENT INVESTMENT COMMITTEE,
PAMELA S. BEEMER, RONALD R. BRAEUTIGAM, KATHLEEN HAGERTY,
CRAIG A. JOHNSON, CANDY LEE, WILLIAM H. McLEAN,
INGRID S. STAFFORD, NIMALAN CHINNIAH, and EUGENE S. SUNSHINE, Defendants.

No. 16 C 8157

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

May 25, 2018

Judge Jorge L. Alonso

MEMORANDUM OPINION AND ORDER

Plaintiffs Laura L. Divane ("Divane"), April Hughes ("Hughes"), Susan Bona ("Bona"), Katherine Lancaster ("Lancaster") and Jasmine Walker ("Walker") filed suit seeking relief under the Employee Retirement Income Security Act ("ERISA"). In plaintiffs' amended complaint [38], plaintiffs assert six counts for breach of fiduciary duty (Counts I-VI) and one count for failure to monitor fiduciaries (Count VII). Defendants have filed a motion to dismiss the amended complaint [58]. In addition, plaintiffs seek leave to file a second-amended complaint [129], which includes the same six counts for breach of fiduciary duty and the claim for failure to monitor fiduciaries (Count XI of the proposed second amended complaint). Plaintiffs would like

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to add four counts for breach of fiduciary duty and to drop one plaintiff (Bona). Plaintiffs have also moved to file the proposed second amended complaint under seal.

For the reasons set forth below, the Court grants defendants' motion to dismiss [58]. The Court denies the motion for leave to file under seal [133]. The Court denies plaintiffs' motion for leave to amend [129]. All other pending motions are denied as moot.

I. BACKGROUND

Two ERISA defined-contribution plans are at issue in this case. The first plan is the Northwestern University Retirement Plan (the "Retirement Plan"), in which all plaintiffs participate. Under the Retirement Plan, participating employees can contribute a portion of their compensation to their account within the Plan, and Northwestern makes a matching contribution. (Am. Complt. ¶ 112). The second plan is the Northwestern University Voluntary Savings Plan (the "Voluntary Plan"), in which three plaintiffs (Hughes, Lancaster and Walker) participate. Under the Voluntary Plan, participating employees can contribute a portion of their compensation to their account within the Plan, but Northwestern does not make a matching contribution. (Am. Complt. ¶ 112).

Both the Retirement Plan and the Voluntary Plan are 403(b) plans that allow contributions to grow tax-free until withdrawn (preferably in retirement). Originally, 403(b) plans allowed investment only in insurance company annuity contracts, but now 403(b) plans can offer investments in mutual funds. (Am. Complt. ¶ 76). Both plans allow each participant to choose the investments into which the money in his or her account is invested. (Am. Complt. ¶ 18, 42). Participants can choose among the options assembled by the plans' fiduciaries. (Am Complt. ¶ 42).

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Defendant Northwestern University ("Northwestern") is the plan administrator for both plans. (Am. Complt. ¶ 25). Plaintiffs allege that Northwestern is a fiduciary by virtue of its discretionary control of the plans. (Am. Complt. ¶ 26). Plaintiffs allege that Northwestern delegated its fiduciary responsibility to its Executive Vice President, a position which has been held by defendant Nimalam Chinniah ("Chinniah") since September 8, 2014 and was held by defendant Eugene Sunshine ("Sunshine") before that. (Am. Complt.¶¶ 28-29). Plaintiffs allege that, as of February 28, 2012, Northwestern established the Northwestern University Retirement Investment Committee (the "Investment Committee") and granted it discretionary authority to manage the assets of the plans. The Investment Committee is made up of defendants Ronald R. Braeutigam, Kathleen Hagerty, Craig A. Johnson, Candy Lee, William H. McLean and Ingrid S. Stafford. (Am. Complt. ¶¶ 31-33).

Plaintiffs' amended complaint is massive: 287 paragraphs over 141 pages. Plaintiffs' proposed second amended complaint (which is nearly identical, except it adds allegations for four new counts and a few additional allegations as to the original counts) is 376 paragraphs over 165 pages. Most of plaintiffs' allegations, though, are not specific to the defendants and the plans in this case. Instead, most of plaintiffs' allegations constitute a description of plaintiffs' opinions both on ERISA law and on a proper long-term investment strategy for average people who lack the time to select either individual stocks or actively-managed mutual funds.

In their complaint, plaintiffs object to, among other things, the mix of investment options available in the plans. Plaintiffs believe they had too many options, leaving them with the "virtually impossible burden" of deciding where to invest their money. (Am. Complt. 167).

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In the amended complaint, plaintiffs describe two line-ups of investment options they could choose from under the plans: the options available for some (unspecified) period of time before October 2016 and the options available during and after October 2016.

Investment options before October 2016

Before 2016, the plans offered investments through TIAA-CREF (Teachers Insurance and Annuity Association of America and College Retirement Equities Fund) and Fidelity Management Trust Company ("Fidelity"). The Retirement Plan offered 240 investment options (39 through TIAA-CREF and 203 through Fidelity) while the Voluntary Plan offered 180 (39 through TIAA-CREF and 148 through Fidelity). (Am. Complt. ¶¶112-113). Among the investment options were mutual funds and insurance company annuities (both fixed and variable). (Am. Complt. ¶ 110).

One of the TIAA-CREF investments offered under the plans is the TIAA-CREF Traditional Annuity, a fixed annuity contract that returns a guaranteed, contractually-specified minimum interest rate. (Am. Complt. ¶ 117). The TIAA-CREF 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 his/her employment. (Am. Complt. ¶¶ 117, 132).

TIAA-CREF's policy was (and apparently still is) to require any plan offering its TIAA-CREF Traditional Annuity: (1) to offer its CREF Stock Account; and (2) to use TIAA as recordkeeper for its products. (Am. Complt. ¶ 130). Plaintiffs are not fond of the CREF Stock Account. (Of course, under the plans, they could choose their investments and did not have to choose the CREF Stock Account merely because it was offered.) Plaintiffs allege that the CREF

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Stock Account fund charged excessive fees. (Am. Complt. ¶ 135). (More on plaintiffs' complaints about the CREF Stock Account later.)

Investment options available by October 2016

In 2016, defendants changed the line-up of investment options. (Am. Complt. ¶¶ 123-128). Beginning in July 2016, participants could invest in one of three tiers of options: Tier 1 consists of target-date mutual funds (i.e., funds that automatically rebalance their portfolios to become more conservative as the funds reach their target dates); Tier 2 consists of five index funds; and Tier 3 consists of 26 actively-managed funds. (Am. Complt. ¶¶ 124-126, 128). Beginning in September 2016, the plans also offered Tier 4, which allows a participant to invest his or her plan assets via a full-service brokerage window. (Am. Complt. ¶¶ 127-128). The participants had to be out of the old options (the ones that did not carry over, anyway) by October 21, 2016.¹ (Am. Complt. ¶ 128).

Fees

Among the investment options in the plans both before and after October 2016 were mutual funds, each of which covers its expenses (including profit) by charging fees in the form of an expense ratio. (Am. Complt. ¶¶ 54, 120, 121). The expense ratio is the percentage of fund assets the fund keeps each year. All other things being equal, a lower expense ratio is better. An illustration: if a fund has a 4% return in a year but charges a 2% expense ratio, then half the return is eaten in expenses, and the investor keeps half of the return. If the same fund has a 1% expense ratio and the same return, then a quarter of the return is eaten in expenses, and the investor keeps 75% of the return. If the fund, instead, has an expense ratio of .1%, then only 2.5% of the return is eaten by expenses, and the investor keeps 97.5% of the return. Over time

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with compound returns, all else being equal, the difference in expense ratios makes a huge difference in an investor's savings at retirement. Of course, all things are not equal between funds. In practice, the funds with the lowest expense ratios are the ones with the least to do in terms of selecting stocks: index funds. Index funds hold a pre-selected (usually by someone else, like the S&P 500) set of stocks, which minimizes not only trading costs but also eliminates the need to pay someone to select the stocks. Actively-managed funds have to pay someone to select the stocks, and the cost of paying the investment managers drives up expenses (though not necessarily returns: it is hard, it turns out, to beat the market). Index funds tend to be less liquid, because they tend to have features that discourage turnover. See Loomis v. Exelon Corp., 658 F.3d 667, 670 (7th Cir. 2011) ("an index fund typically disallows new investments for a month or more following any withdrawal").

Among the expenses included in a fund's expense ratio are costs for recordkeeping. Defined contribution plans need to have a record keeper to track the amount of each participant's account and how the account is allocated among investment options. (Am. Complt. ¶ 48). Record keepers also maintain websites for plan participants and sometimes provide investment advice or education materials. (Am. Complt. ¶ 48). The fund that collects the expense ratio is not...