Northwestern University Prevails in ERISA 403(b) Challenge

A new decision handed down by the U.S. District Court for the Northern District of Illinois, Eastern Division, strongly rejects arguments that fiduciaries of the Northwestern University 403(b) retirement program failed to act with the loyalty and diligence required by the Employee Retirement Income Security Act (ERISA).

The decision, important in its own right for the individuals and institutions involved, is also the latest step forward in a broader industry wave of 403(b) litigation targeting well-known colleges and universities. Many of the lawsuits, including this one, were filed by the law firm of Schlichter, Bogard & Denton. With some variations, the suits all call out the large number of investment options offered to participants in 403(b) plans, high expenses for some of these investment options and the use of multiple recordkeepers, allegedly resulting in duplicative expenses for recordkeeping services.

This particular lawsuit targeted the retirement plan program of Northwestern University, and the court’s ruling is complex. The text of the decision grapples with an amended complaint in which the plaintiffs asserted six counts for breach of fiduciary duty and one count for failure to monitor fiduciaries. The decision also considers that the defendants filed their own detailed motion to dismiss the amended complaint, and, in addition, plaintiffs sought leave to file a second-amended complaint in order to add four new counts for breach of fiduciary duty and to drop one plaintiff. If that weren’t enough for one decision, the plaintiffs also moved to file the proposed second amended complaint under seal.

In sum, the court weighs all these countervailing purposes and rules entirely in favor of the defendants’ motion to dismiss. The court denies the motion for leave to file under seal, and it denies plaintiffs’ motion for leave to amend. Underscoring the victory for Northwestern and potentially giving some hope to the other similarly positioned defendants, all other pending motions are denied as moot.

Details From the Decision

As the court points out early in its termination decision, the plaintiffs’ second amended complaint—which is nearly identical to the original, except it adds allegations for four new counts and a few additional allegations as to the original counts—is “massive,” stretching to 376 paragraphs and over 165 pages.

“Most of plaintiffs’ allegations, though, are not specific to the defendants and the plans in this case,” the court says. “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.”

The court early on stresses the importance of certain case law, notably Lockheed Corp. v. Spink (1996). The decision established that “nothing in ERISA requires employers to establish employee benefits plans, nor does ERISA mandate what kinds of benefits employers must provide if they choose to have such a plan.”

The court’s recitation continues: “Congress’s goals in passing ERISA were to ‘ensure employees would receive the benefits they had earned,’ vis-à-vis Conkright v. Frommert (2010), and to ‘induce employers to offer benefits by assuring a predictable set of liabilities, under uniform standards of primary conduct and a uniform regime of ultimate remedial orders and awards,’ via Rush Prudential HMO, Inc. v. Moran (2002). The Supreme Court has explained that Congress wanted to avoid creating ‘a system that is so complex that administrative costs, or litigation expenses, unduly discourage employers from offering welfare benefits plans in the first place,’ vis-à-vis Varity Corp. v. Howe (1996).”

Throughout the text of the compliant, the court points out that participants in the 403(b) plan, and a related supplemental savings plan also being considered, had a large and, over time, increasing amount of choice in terms of what active and passive investment options to use—and whether to purchase what plaintiffs suggested were overly expensive annuities. This degree of choice makes the plaintiffs’ claims that the plan was setting them up to overpay on certain investment options unjustified, the decision concludes. The court also points out that revenue sharing in itself is a reasonable practice and one of the many acceptable ways participants and plans can pay their service providers. Thus the complaint’s general allegations that revenue sharing constitutes a conflict of interest flatly failed. 

“Ultimately, plaintiffs’ theory is paternalistic,” the decision states, “but ERISA is not.”

Further along in the decision, the court questions the common notion asserted in 403(b) plan lawsuits that employers such as Northwestern are overpaying for recordkeeping. The decision, siding with the defendants’ motion to dismiss, notes that 403(b) plans are complex beings and quite a lot different in some cases than a 401(k) plan, making having multiple recordkeepers potentially advantageous and potentially making it harder for a 403(b) plan to successfully renegotiate pricing in the way a large and growing 401(k) plan can do.

The full text of the decision, available here, weighs all of these considerations and arguments in greater detail.