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.

 

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Photo of René E. Thorne René E. Thorne

René E. Thorne is co-leader of the firm’s ERISA Complex Litigation group, and is a principal in the New Orleans, Louisiana, office of Jackson Lewis P.C. René started the New Orleans office and was the managing principal for ten years.

Her national practice…

René E. Thorne is co-leader of the firm’s ERISA Complex Litigation group, and is a principal in the New Orleans, Louisiana, office of Jackson Lewis P.C. René started the New Orleans office and was the managing principal for ten years.

Her national practice covers the full range of complex benefit litigation matters, including representation of employers, plans, plan fiduciaries, third party administrators, and trustees. In that regard, she has handled numerous ERISA class actions alleging breach of fiduciary duty; breach of the duty of loyalty; prohibited transactions; 401(k) plan asset performance, fees, and expense issues; defined benefit plan asset issues, accrual issues, and cut-back issues; cash balance plan issues; ESOP litigation; fiduciary misrepresentation claims; sophisticated preemption issues; executive compensation litigation, both pension and welfare claims; retiree rights litigation; severance plan claims; Section 510 cases; and complex benefit claim cases.

Photo of Phillip C. Thompson Phillip C. Thompson

Phillip C. Thompson is an associate in the Overland Park, Kansas, office of Jackson Lewis P.C. His practice is focused on the defense of complex ERISA actions and other employment litigation in state and federal courts, as well as representing his clients before…

Phillip C. Thompson is an associate in the Overland Park, Kansas, office of Jackson Lewis P.C. His practice is focused on the defense of complex ERISA actions and other employment litigation in state and federal courts, as well as representing his clients before administrative agencies.

Phillip represents ERISA plan fiduciaries at both public and private companies, multi-employer plans and plan fiduciaries, and financial institutions providing services to ERISA plans. He also represents employers in all matters concerning the employment relationship, including executive compensation and benefits, civil rights, reductions in force, and wage and hour issues. He has substantial experience in preparing and litigating arbitration agreements and non-compete agreements. Along with defense of claims brought by individuals, Phillip has been involved in the defense of numerous collective and class action claims, as well as the prosecution of restrictive covenants.

Phillip also routinely counsels clients on a variety of employment topics including employment contracts, employee handbooks and policies, and preventative practices.