The U.S. District Court for the Northern District of Illinois, Eastern Division, has ruled in favor of CareerBuilder’s motion to dismiss a lawsuit filed against it under the Employee Retirement Income Security Act (ERISA).
The court’s order explains that the complaint has failed to adequately state a claim, and it gives the plaintiffs until July 28 to attempt to remedy this and other failures. If the plaintiffs do not file an amended complaint by that deadline—or any extension of it granted by the court—then the court will convert the dismissal to “with prejudice” and enter a final judgment under Federal Rule of Civil Procedure 58.
Plaintiffs filed the complaint in October, alleging that plan fiduciaries allowed the plan’s recordkeepers, ADP and Empower, and its investment adviser and/or trustee, Morgan Stanley Smith Barney, to receive excessive and unreasonable compensation.
According to the complaint, the providers received excessive compensation through direct “hard dollar” fees paid by the plan to ADP and/or Morgan Stanley; indirect “soft dollar” fees paid to ADP and/or Morgan Stanley by mutual funds added and maintained in the plan to generate fees to ADP and/or Morgan Stanley; fees collected directly by ADP and/or Morgan Stanley from mutual funds added and maintained in the plan to generate fees to ADP and/or Morgan Stanley; and float interest, access to a captive market for 401(k) rollover materials to plan participants and other forms of indirect compensation.
The text of the dismissal ruling relies heavily on precedent set by the United States 7th Circuit Court of Appeals.
“Defendant argues that these allegations are uncannily similar to those made in Divane v. Northwestern University, where the 7th Circuit recently affirmed dismissal of an ERISA case,” the ruling states. “According to defendant, Divane is one in a line of 7th Circuit cases preventing courts from paternalistically interfering with plans’ slates of funds so long as the fiduciaries don’t engage in self-dealing and offer a comprehensive-enough menu of options.”
The court states that the 7th Circuit has repeatedly cautioned that plaintiffs and courts “cannot use ERISA to paternalistically dictate what kinds of investments plan participants make where a range of investment options are on offer.”
“It has accordingly affirmed dismissal of ERISA complaints alleging that some combination of high fees and underperforming funds signaled imprudence, where the plans in question offered some cheaper alternatives, and the complaint did not include allegations speaking to flawed decisions or self-dealing,” the ruling states. “Here, defendants are correct that under binding 7th Circuit precedent, plaintiff has not adequately pled a breach of the duty of prudence. Preliminarily, Divane resolves most of this case. … The [plan] in Divane charged fees (partially through revenue sharing) that averaged between $153 and $213 per person, essentially the same as those at issue here (which range from $131.55 to $222.43). The 7th Circuit held that such fees were not inconsistent with prudent portfolio management, particularly when revenue sharing was used to keep mandatory per-capita costs down. … Likewise, Divane clarified that a fund’s failure to invest in institutional as opposed to retail funds does not give rise to an inference of imprudence when a plan offers cheaper alternatives.”
Importantly, the ruling has been issued without prejudice, a development that is explained as follows: “Defendants moved to dismiss with prejudice. That would be overkill. Although 7th Circuit precedent dictates that some of plaintiff’s allegations are insufficient to state a claim for breach of fiduciary duty on their own, Rule 15 and circuit precedent counsel in favor of allowing an amended pleading here, as it is by no means clear that amendment would be futile.”