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University of Chicago Settles Excessive Fee Suit

By Nevin Adams

Roughly a year to the day after first filing suit, plaintiffs and the University of Chicago have entered into a class action settlement for a $6.5 million cash payment and changes to the university’s $3 billion plan.

The comes several months after a federal judge reinstated claims he had previously dismissed, and directing the parties to “reevaluate their settlement positions in light of this opinion and to exhaust all settlement possibilities prior to the next status hearing (January 31).”

The original suit alleged that the University of Chicago fiduciaries violated ERISA by imprudently selecting and maintaining certain investment options, and that they breached the ERISA fiduciary duties of loyalty and prudence by failing to prudently monitor two of Plans’ investment options – the CREF Stock Account and the TIAA Real Estate Account. Additionally, the plaintiffs had claimed that the University “improperly paid excessive recordkeeping and administrative fees to the Plans’ service providers by, among things, retaining two recordkeeping companies when one would have sufficed and would have been less expensive,” as well as raising concerns that the plan’s participant loan program violated ERISA’s prohibited transactions.

According to a filing in support of the settlement agreement, the parties were on the verge of beginning fact depositions and commencing the process of producing ESI when, encouraged by the court, they agreed to mediation, which the agreement described as “extensive.” And then, after this extensive pre-mediation process, the parties participated in an all-day, in-person mediation with Judge Denlow, and “after lengthy negotiations, the parties reached the principal terms of the Settlement,” executed a term sheet based on an agreed checklist, and then negotiated the detailed terms of the settlement agreement.

In making the case for the settlement (which still must be approved by a judge), the plaintiffs (Winifred Daugherty, Walter James, and Gloria Jackson) argued that the benefit of the proposed settlement “must be considered in the context of the risk that further protracted litigation might lead to no recovery, or to a smaller recovery for Plaintiffs and proposed Class members.” They go on to note in court documents filed May 22 in the U.S. District Court for the Northern District of Illinois (Daugherty v. Univ. of Chi., N.D. Ill., No. 1:17-cv-03736, motion for preliminary approval of class action settlement 5/22/18), that the defendant “mounted a vigorous defense at all stages of the litigation, and Plaintiffs expect that it would have continued to do so during protracted discovery and trial and potentially through appeal.”

The University of Chicago

And, they explain that one factor that the parties weighed during the mediation was the fact that “one of the 19 roughly similar retirement plan lawsuits against private universities was scheduled to go to trial less than a month after the date of the mediation,” and that “as of the date of this motion, the outcome of that trial remains unknown.”

Settlement Terms

The settlement agreement provides for a cash payment of $6.5 million, which the parties say will also cover the administrative costs associated with implementing the settlement, any applicable taxes or tax-related costs, independent fiduciary fees in excess of $25,000, any case contribution awards for the plaintiffs approved by the court, and any attorneys’ fees and costs approved by the court. Undistributed funds “shall be delivered to the Plans and used for participant education, provided that the amount is not sufficient to warrant a second distribution.”

The settlement calls for $100,000 to be deposited into the escrow account within five days of entry of the preliminary approval order (to fund any administrative costs that arise before the effective date) with the remaining $6.4 million to be deposited into the escrow account within 15 days of the effective date.

Structural Changes

In addition to the monetary settlement, the university has agreed to “retain certain structural changes to the Plans that will further benefit the Plans and their participants,” including agreeing “not to increase per-participant recordkeeping fees for three years from the date of Final Approval of the Settlement, and to use commercially reasonable best efforts to continue to attempt to reduce recordkeeping fees.”

The agreement notes that effective April 2, 2018, the university implemented a new investment lineup for the plans that not only reduced the total number of investment options, but removed the CREF stock account as an investment option. However, the TIAA Real Estate Account will continue to be available as an investment option in the new investment lineup, and participants will not be required to liquidate their holdings in CREF stock, though they cannot contribute any additional money to the CREF stock account.

The settlement also notes that counsel will petition the court for case contribution awards not to exceed $10,000 per named plaintiff in recognition of their service, and that they will also petition the court for an award of attorneys’ fees not to exceed 30% of the settlement amount plus reasonable expenses.

Plaintiffs were represented by Wexler Wallace LLP, Berger & Montague P.C., and Schneider Wallace Cottrell Konecky Wotkyns LLP.