February 8, 2025

A federal judge has refused to dismiss a lawsuit against the fiduciaries of the Northern Trust Company Thrift-Incentive Plan alleging that because the defendants failed to remove bad funds from the plan or negotiate with lower, reasonable fees, the account balances of the participants suffered.

The defendants moved to dismiss the complaint for failure to state a claim, arguing that the plaintiffs’ allegations were insufficient to lead to a finding that they breached their fiduciary duties. Judge Charles Ronald Norgle of the United States District Court for the Northern District of Illinois denied the motion.

Norgle noted in his opinion that the plaintiffs allege that the defendants breached their duty of loyalty by selecting and retaining investment options in the plan that created unreasonable management fees for Northern Trust and by to pay unreasonable record keeping fees. In particular, the plaintiffs take issue with the defendants’ decision to retain the 11 Northern Trust Focus Funds, a target-date fund suite, despite being able to offer the allegedly better performance of TDFs in same or less cost.

According to the court’s opinion, since 2013, Focus Funds are the only target-date retirement investing options in the plan, and they are the default investment option for plan participants. Norgle noted that according to the complaint, even before they were selected for the plan in 2013, the Focus Funds had underperformed relative to benchmark indices and similar TDFs for three years.

The plaintiffs also allege that the defendants failed to conduct a proper competitive bidding process to negotiate low prices and improperly selected and retained higher-cost parts of the options. investment, when the “only difference between the share classes is the amount of the fees.”

Norgle pointed out that in their motion to dismiss, the defendants relied on the 2020 decision of Divane v. Northwestern University, where the 7th US Circuit Court of Appeals emphasized that “any participant may avoid . . . excessive recordkeeping fees and poor performance. . . just by choosing from hundreds of other options.” However, he added, in a unanimous opinion, the Supreme Court vacated and reinstated that decision in the case now known as Hughes vs. Northwestern University. The high court said the 7th Circuit’s reliance and “exclusive focus on investor choice” was flawed reasoning.

Defendants also cite the words of the 7th Circuit’s opinion at spoon to emphasize that the Employee Retirement Income Security Act does not “mandate what type of benefits employers must provide” in an employee benefit plan. Norgle agreed that ERISA does not require that a plan offer TDFs, for example, but he pointed out that the plaintiffs did not argue that it did. “They say that a failure of adequate fiduciary process can reasonably be inferred from the totality of their allegations,” he said. Norgle agreed with the plaintiffs’ statement.

According to the court’s opinion, in addition to their motion to dismiss, the accused compared their case Smith v. Health of the Common Spirit, where the 6th US Circuit Court of Appeals stated that “the mere designation of another investment that performs better in a five-year snapshot of the life span of a fund that is supposed to grow within fifty years is not enough to reasonably plead a reckless decision.” Norgle noted that in contrast to the CommonSpirit case, the plaintiffs in the Northern Trust case “claimed consistent, consistently poor performance over a decade.” Additionally, he said the CommonSpirit plaintiffs compared active management to those fund to passively managed funds, which the court described as “comparing apples and oranges,” while the plaintiffs in the Northern Trust case compared Focus Funds to similar TDFs. “The court was not persuaded that it case is comparable to Smith, and the motion is denied,” Norgle wrote in his opinion.

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