On December 6, the U.S. Supreme Court heard oral argument in the case of Hughes v. Northwestern University. The question at issue is whether allegations that a defined-contribution retirement plan paid fees that substantially exceeded fees for alternative available investment products or services are sufficient to state a claim against plan fiduciaries for breach of the duty of prudence under the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1104(a)(1)(B) (ERISA).
This case is one of a wave of cases brought under ERISA in 2016 against the universities that operated some of the largest defined-contribution retirement plans in the country. More than a dozen top research universities faced cookie-cutter complaints with substantively similar allegations. This wave of litigation against universities is part of a more significant trend in ERISA litigation. When retirement plan fees increase and investments can be identified that have underperformed, employees allege that plan managers have violated ERISA by failing to intervene.
Under ERISA, a plaintiff may recover the amount of the benefit due under the terms of the plan, as well as reasonable attorneys’ fees at the court’s discretion. For large plans, plaintiffs may claim aggregate damages in amounts totaling hundreds of millions of dollars.
The complaints brought against universities in 2016 all faced motions to dismiss. Most universities lost these motions in the district courts. A few, (the University of Pennsylvania and Washington University in St. Louis) had complete success in the district court, only to see the plaintiffs’ claims revived after appeal. New York University, which won after a trial, found itself, after appeal, facing several claims that had initially been disposed of on a motion to dismiss. Virtually all universities that were unsuccessful on motions to dismiss settled these claims for multimillion dollar amounts without conceding liability.
Northwestern University, however, was successful with its motion to dismiss both before the District Court for the Northern District of Illinois and then on appeal before the Seventh Circuit. The Supreme Court will now decide whether plaintiffs may proceed with their claims against Northwestern. The decision in this case could have important ramifications for ERISA litigation, particularly on how challenges to retirement plans’ fees and investments can survive a motion to dismiss.
Background: Northwestern’s Retirement Plan Management Challenged
The plaintiffs in this case, beneficiaries of Northwestern University’s 403(b) plans, sued the university in 2016. The class action alleged that the plan administrator and plan fiduciaries breached their fiduciary duties under ERISA in the following ways:
- Offering an over-broad range of investment options.
- Allowing a financial services provider to serve as record keeper for investment funds it offered.
- Offering investment options that charged excessive fees.
Northwestern, like many universities, used two record keepers: TIAA and Fidelity. The complaint alleged that having both record keepers and a very large number of choices for participants prevented Northwestern from getting the lowest fees from either TIAA or Fidelity. Furthermore, it was argued that having this large number of choices for participants also prevented Northwestern from qualifying for the institutional class of products for participants that plaintiffs alleged were identical to the retail class for those products except that the institutional class charged lower fees than the retail class. The complaint further alleged that Northwestern failed even to request that TIAA or Fidelity lower its fees or waive the requirements to participate in the institutional class of investments.
The District Court for the Northern District of Illinois held that the facts alleged did not constitute a breach of fiduciary duty and granted the defendant’s motion to dismiss. The court found that because plan participants had various options to choose from, no participant was required to invest in any high-fee product; therefore, participants could avoid the alleged excessive recordkeeping fees and underperformance by simply selecting a different option. The Seventh Circuit affirmed the lower court’s dismissal, concluding “it would be beyond the court’s role to seize ERISA for the purpose of guaranteeing individual litigants their own preferred investment options.”
In petitioning for certiorari, the plaintiffs argued that the Seventh Circuit’s opinion conflicted with decisions of the Third and Eighth Circuit, which decided the cases from the University of Pennsylvania and Washington University, respectively. Plaintiffs argued that their case would have survived a motion to dismiss in the Third and Eighth Circuits because ERISA plaintiffs are entitled to the plausible inference that excessive fees result from imprudent management. The United States, participating at the invitation of the Court, supported plaintiffs’ request for certiorari, emphasizing the circuit split and the importance of determining what ERISA requires of plan fiduciaries to control expenses for the “millions of employees throughout the Nation whose retirement assets are invested in ERISA-governed plans.”
Before the Supreme Court, none of the Justices appeared to be particularly enamored with the rule announced by the Seventh Circuit, which was characterized as holding that as long as a plan offers some options with low fees, it cannot be found liable for mismanagement under ERISA as a matter of law for including high-fee options in the plan.
At the same time, many members of the Court expressed concern with the arguments made by counsel for the plaintiffs. Members of the Court questioned counsel closely on whether plan fiduciaries had to be concerned with only providing the lowest cost options and whether and how other factors could be factored into plan fiduciaries’ decision-making. Justice Kagan, a member of the faculty at the University of Chicago and Harvard University before joining the Court, noted that many faculty change institutions and like to stay with the same retirement plan when they move from institution to institution. Justice Sotomayor said that it seemed reasonable to her to maintain two record keepers. In short, it appears that the Court is looking for some middle ground between the Seventh Circuit’s ruling and the broader rule advocated by plaintiffs.
A decision is expected by June 2022.
Thanks to summer associate Latazia Carter for her work on this content.