The text of the dismissal ruling relies heavily on precedent
set by the United States 7th Circuit Court of Appeals.
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.”
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