Just this month, the Supreme Court issued its much anticipated decision in Northwestern University, the first time the Court has been called upon to examine a lawsuit alleging that a 401(k) plan’s investment and fees were mismanaged.  Although a narrow decision, the case was a solid win for the plaintiffs’ bar.

In Goodman v. Columbia Regional Healthcare System, a district court issued the post-Northwestern University decision in a 401(k) fee case.  The Complaint alleged that Columbia’s 401(k) plan included higher priced retail investment options with a poor performance history, and that the plan inappropriately focused on higher fee funds that were actively managed, as opposed to cheaper index funds that just tracked existing markets.   Further, the Plaintiffs alleged that the plan paid recordkeeping fees that were twice what plans of similar size would pay.  Expressly relying on Northwestern University, the Court held that these allegations were sufficient to state a claim for relief that allowed the case to proceed to the costly discovery phase.  The Court rejected the defendants’ argument that the plan included low cost options, finding that Northwestern held that the mere presence of low cost options did not preclude the possibility that higher cost funds were imprudent.  Further, the possibility of cheaper institutional class funds and the long history of poor performance made it plausible that the plan’s fiduciaries failed to prudently manage plan assets.

Although the decision is not shocking even prior to Northwestern, it is a ill omen for fiduciaries of 401(k) funds.   Most critically, the decision seems to suggest that the presence of  higher fee actively managed funds could be sufficient to allow for a lawsuit to proceed past the pleading stage—even though the use of such funds is ubiquitous and often makes good sense.  Whether the presence of such funds alone would be sufficient to state a claim remains to be seen.  It if did, it would mark another significant victory for the plaintiffs bar.