The 7th U.S. Circuit Court of Appeals has affirmed a District Court’s ruling in a lawsuit alleging breaches of Employee Retirement Income Security Act (ERISA) fiduciary duties by fiduciaries of two Northwestern University retirement plans.

The appellate court’s decision notes that the plaintiffs alleged Northwestern breached its fiduciary duty by “allowing TIAA-CREF to mandate the inclusion of the CREF Stock Account” in the plans and by allowing TIAA to serve as recordkeeper for its funds. However, the court pointed out, their amended complaint also states that many plan participants invested money in TIAA’s Traditional Annuity, which was an attractive offering because it promised a contractually specified minimum interest rate.

While the plaintiffs do not allege it was imprudent for the plans to offer the Traditional Annuity—but rather, object to the plans offering additional TIAA products (including the Stock Account) and to TIAA serving as the recordkeeper for those products—the court says it ignores the arrangement that allowed participants to invest in the popular Traditional Annuity in the first place. TIAA required the plans to use it as a recordkeeper for its products and to offer participants the Stock Account if the plans offered the Traditional Annuity. “Given the favorable terms and attractive offerings of the Traditional Annuity, which are outlined in plaintiffs’ amended complaint, it was prudent for Northwestern to accept conditions that would ensure the Traditional Annuity remained available to participants. This is especially true considering participants with existing Traditional Annuity funds would be subject to a sur-render charge of 2.5% if that offering was removed,” the appellate panel wrote in its opinion.

The 7th Circuit added that rather than compare Northwestern’s actions to those of a “hypothetical prudent fiduciary,” the plaintiffs criticize what may be a rational decision for a business to make when implementing an employee benefits program. Citing the decision in Lockheed Corp. v. Spink, the court said “[n]othing 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 added: “That plaintiffs prefer low-cost index funds to the Stock Account does not make its inclusion in the plans a fiduciary breach. … It would be beyond the court’s role to seize ERISA for the purpose of guaranteeing individual litigants their own preferred investment options.”

Assuming plaintiffs’ allegations are true, the court said, they fail to show an ERISA violation. “Under the plans, no participant was required to invest in the Stock Account or any other TIAA product. Any participant could avoid what plaintiffs consider to be the problems with those products (excessive recordkeeping fees and underperformance) simply by choosing from hundreds of other options within a multi-tiered offering system. Participants were not bound to the terms of any TIAA funds simply because they were included in the plans,” the opinion states.

The plaintiffs also alleged Northwestern breached its fiduciary duties by establishing a multi-entity recordkeeping arrangement that allowed recordkeeping fees to be paid through revenue sharing.  On appeal, plaintiffs proposed alternative recordkeeping arrangements they would have preferred. For example, plaintiffs argued Northwestern should have implemented a negotiated total fee based on a flat recordkeeping fee, which could have been “allocated to participants.” But, the court said, the plaintiffs failed to support their claim that a flat-fee structure is required by ERISA or would even benefit plan participants. It suggested such a structure may have the opposite effect of increasing administrative costs by failing to match the pro-rata fee that individual participants could achieve at a lower cost through exercising their investment options in a revenue-sharing structure. “Either way, this court has recognized that although total recordkeeping fees must be known to participants, they need not be individually allocated or based on any specific fee structure,” the appellate panel wrote.

Disagreeing with the plaintiffs’ contention that Northwestern was required to seek a sole recordkeeper to reduce recordkeeping costs, the court reiterated that it was prudent to keep TIAA as a recordkeeper to allow for access to the popular Traditional Annuity and avoid the surrender charge that would be imposed if participants were to get out of that option. It added that the plaintiffs also didn’t show that the participants would have been better off if TIAA was the sole recordkeeper. The complaint does not include Fidelity’s recordkeeping costs, and it fails to allege that those costs are the reason for higher fees. “Regardless, ERISA does not require a sole recordkeeper or mandate any specific recordkeeping arrangement at all,” the appellate panel noted.

The opinion states: “Again, plaintiffs’ allegations seem to rely on their disapproval of TIAA’s role as recordkeeper rather than any imprudent conduct by Northwestern.”

The plaintiffs further alleged Northwestern breached its fiduciary duties by providing investment options that were too numerous, too expensive or underperforming. They alleged that some of these options were retail funds with retails fees, some had “unnecessary” layers of fees, and some could have been cheaper but Northwestern failed to negotiate better fees. The court said, “Plaintiffs also spill much ink in their amended complaint describing their clear preference for low-cost index funds. We understand their preference and acknowledge the industry may be trending in favor of these types of offerings.”

The court found that the plaintiffs failed to allege, though, that Northwestern did not make their preferred offerings available to them, instead finding that, in fact, the university did make them available. “Plaintiffs simply object that numerous additional funds were offered as well. But the types of funds plaintiffs wanted (low-cost index funds) were and are available to them, eliminating any claim that plan participants were forced to stomach an unappetizing menu,” the appellate panel wrote.

In conclusion, the court said, “Taken as a whole, the amended complaint appears to reflect plaintiffs’ own opinions on ERISA and the investment strategy they believe is appropriate for people without specialized knowledge in stocks or mutual funds.” Citing its decision in Loomis v. Exelon Corp., it concluded that defendants “cannot be faulted for” leaving “choice to the people who have the most interest in the outcome.”

The 7th Circuit agreed with the District Court’s denial of the plaintiffs’ request for leave to file a second amended complaint because they “unduly delayed bringing the claims, and the four proposed counts failed to state claims for relief and did not state new or additional claims.”