Today, the Supreme Court heard oral arguments in Hughes v. Northwestern University, No. 19-1401, just one of about 150 similar class action suits filed around the country in the last few years. The case was brought by retirement plan participants alleging that plan fiduciaries breached their duties under ERISA relating to recordkeeping and investment fees charged to plan participants. Specifically, Plaintiffs alleged that Northwestern breached its ERISA-imposed duty of prudence by (1) paying excessive recordkeeping fees (using multiple recordkeepers and allowing recordkeeping fees to be paid through revenue sharing); and (2) offering mutual funds with excessive investment management fees.

The district court granted Northwestern’s motion to dismiss, and the Seventh Circuit affirmed. The Seventh Circuit found no ERISA violation based on Northwestern’s recordkeeping arrangement. The court explained that ERISA does not require a sole recordkeeper, and there is “nothing wrong – for ERISA purposes – with plan participants paying recordkeeper costs through expense ratios” under a revenue sharing agreement.

The Seventh Circuit also rejected the excessive investment fee claim, concluding that the types of funds plaintiffs wanted (low-cost index funds) were and are available to them, thus “eliminating any claim that plan participants were forced to stomach an unappetizing menu.”

Plaintiffs appealed to the Supreme Court, which granted certiorari to address this question: “[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.”

During oral argument today, various members of the Court appeared to struggle to devise a motion to dismiss standard in these cases, with Justices Alito, Gorsuch, Breyer, Kagan, and Kavanaugh each pressing the parties about what facts they believed must be pled to open the courthouse door to plaintiffs, particularly relating to investment fees. Although a key issue in Plaintiffs’ amended complaint was the use of a revenue sharing, rather than a per-participant fee, there was little to no inquiry or recognition by the Justices on the impact of revenue sharing in offsetting fees, as a reason for selecting a more expensive share class as an investment option.

Equally surprising was Justice Roberts’ line of questioning on the scope of ERISA’s fiduciary duty of prudence, asking Plaintiffs’ counsel at one point whether the standard was the “highest” duty or an “average” duty, something more akin to negligence.

There appeared to be more coalescence on the recordkeeping claim. Several members of the Court indicated they approve of the Seventh Circuit’s finding that ERISA does not require a sole recordkeeper, and that Plaintiffs’ argument that the Plan should have been able to obtain a $35 per participant fee, without more, was insufficient to state a claim.

Justice Kagan appeared to be the only jurist clearly in favor of overturning the Seventh Circuit’s decision, with some support from Justices Sotomayor and Breyer. With Justice Barrett recused (she was still sitting on the Seventh Circuit at the time of the underlying decision), if Justice Kagan recruits only one more Justice, there could be a tie vote, but a tie vote would leave the Seventh Circuit decision intact.