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Northwestern University recently defeated a lawsuit alleging that it violated the Employee Retirement Income Security Act (ERISA) while managing its retirement plans. The plaintiffs brought ERISA breach of fiduciary duty and prohibited transaction claims, alleging the university’s retirement plans featured imprudent investments and paid excessive fees. On May 25, 2018, the U.S. District Court for the Northern District of Illinois dismissed the lawsuit in its entirety and denied the plaintiffs’ motion to amend to add additional counts, finding them futile.
The lawsuit is one of more than 20 brought against prominent universities regarding their 403(b) plans. For a full article regarding litigation risks for 403(b) plans, click here . University of Pennsylvania also successfully defended its suit on a motion to dismiss. Judges, however, allowed suits to proceed against Columbia, Emory, Johns Hopkins, and Princeton. New York University recently completed a bench trial and is awaiting a ruling. University of Chicago became the first college to settle, inking an agreement to pay $6.5 million to its plan.
Similar to complaints against other universities, plaintiffs took issue with Northwestern’s use of TIAA-CREF and Fidelity as dual record-keepers. They alleged that inclusion of a CREF Stock fund was a breach of fiduciary duty because the fund underperformed and charged a high expense ratio. The court refused to find that including the fund was a breach of fiduciary duty. “The court also notes that the mere fact that plaintiffs believe index funds are a better long-term investment than the CREF Stock Account does not a fiduciary breach make.”
The plaintiffs also objected to the plans’ practice of paying record-keeping expenses through revenue sharing. The court found Seventh Circuit precedent precluded the claims. The court also rejected the plaintiffs’ allegation that offering too many funds was a breach of fiduciary duty, finding the plans offered them the types of funds they wanted — low-cost index funds.
The plaintiffs alleged that the same actions also constituted prohibited transactions, claims the court rejected because plan assets were not involved and because the fees paid, based on the information in the complaint, were reasonable as a matter of law.