Supreme Court Set To Rule This Spring on ERISA Investment Fees, Affecting Over 150 Cases Around the Country
On December 6, 2021, the United States Supreme Court heard an oral argument in Hughes v. Northwestern University, Docket No. 19-1401. This is one of about 150 similar class action lawsuits filed nationally in the last handful of years, alleging that plan fiduciaries breached their duties under ERISA relating to recordkeeping and investment fees charged to plan participants.
The issue before the Supreme Court is "[w]hether allegations that a defined-contribution retirement plan paid or charged its participants 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 ERISA."
Background of the Case
Northwestern University offers two ERISA-governed plans that are at issue in the case: a Retirement Plan in which Northwestern makes a matching contribution and a Voluntary Savings plan in which Northwestern University does not make a matching contribution. The class action plaintiffs in the case are beneficiaries of one or both of the available plans.
The plaintiffs argue that the plans' fees would be lower if Northwestern had "consolidated" its plans such that more money would be invested in each of a smaller number of options. The plaintiffs sued Northwestern University for allegedly breaching its fiduciary duties under ERISA by (1) offering a stock account option with excessive investment management fees and a history of underperformance; and (2) using multiple record-keepers and allowing recordkeeping fees to be paid through revenue sharing.
The district court found no breach of fiduciary duties, noting that plan participants could have avoided any problems with the undesirable funds by simply choosing other plan options. The US Court of Appeals for the Seventh Circuit affirmed. Plaintiffs then appealed to the Supreme Court.
According to the plaintiffs, the Seventh Circuit's decision conflicted with similar decisions in the Third Circuit, Sweda v. University of Pennsylvania, 923 F.3d 320 (3d Cir. 2019), and the Eighth Circuit, Davis v. Washington University in St. Louis, 960 F.3d 478 (8th Cir. 2020). The Supreme Court first called for the views of the Solicitor General, which filed an amicus curiae brief arguing that the petition should be granted. Then the Supreme Court granted 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."
Reading the Tea Leaves from the Supreme Court Hearing
At oral argument, the Justices seemed to characterize the Seventh Circuit as having ruled altogether too broadly—that a plan cannot be found liable for mismanagement under ERISA so long as the plan offers some options with low fees. Meanwhile, several Justices indicated that the plaintiffs' articulation of the rule was too broad, given that it could mean fiduciaries should be concerned only with providing the lowest cost options and that other factors could be accounted for in the plan fiduciaries' decision-making process.
The Court is expected to issue a decision by the first half of 2022. Justice Kagan expressed interest in favor of overturning the Seventh Circuit's decision, with some support from Justices Sotomayor and Breyer. Because Justice Barrett is recused from the case due to her part in the underlying Seventh Circuit decision, Justice Kagan would need two additional Justices' votes, as a tie vote would keep the current decision as it stands.
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