Yesterday, the Supreme Court issued its unanimous decision in Hughes v. Northwestern University, No. 19-1401, just one of more than 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. Regarding the recordkeeping claim, the Seventh Circuit found no ERISA violation, explaining that ERISA does not require a sole recordkeeper, and that 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 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.”
In a unanimous decision authored by Justice Sotomayor (minus Justice Barrett, who recused herself because she sat on the Seventh Circuit at the time it decided the case), the Supreme Court held that the Seventh Circuit erred in affirming the district court’s dismissal of the claims. Importantly, the Court did not decide whether plaintiffs had plausibly alleged a violation of the duty of prudence. Instead, the Court vacated the judgment of the Seventh Circuit and remanded the case for further analysis.
With respect to the excessive investment fee claim, the Court relied on its 2015 decision in Tibble v. Edison Int’l, 575 U.S. 523 (2015), maintaining that plan fiduciaries have a duty to “conduct their own independent evaluation to determine which investments may be prudently included in the plan’s menu of options” and to “remove an imprudent investment from the plan within a reasonable time.” As such, the Hughes Court found it was not a defense that the plan offered low-cost index funds (“the types of funds plaintiffs wanted”) in addition to the challenged funds. Holding that “[t]he Seventh Circuit’s exclusive focus on investor choice elided this aspect of the duty of prudence,” the Court vacated the decision in favor of Northwestern and remanded to the Seventh Circuit to “reevaluate the allegations as a whole … consider[ing] whether [plaintiffs] have plausibly alleged a violation of the duty of prudence as articulated in Tibble.”
The Court’s stance on the recordkeeping claim is less clear. It appears to have lumped that claim in with the investment claim when referring to the application of Tibble. But Tibble did not address recordkeeping fees, and recordkeeping fees are not always a function of investment choices.
Although remanding the case, the Court took time to stress that the pleading standards set forth in Ashcroft v. Iqbal, 556 U. S. 662 (2009), and Bell Atlantic Corp. v. Twombly, 550 U. S. 544 (2007), continue to apply to Rule 12(b)(6) motions in these cases. Equally important, the Court cited to its more recent decision in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 425 (2014). There, the Court endorsed rigorous application of the 12(b)(6) pleading standard to protect plan fiduciaries from meritless, hindsight claims that second-guess fiduciary decisions, and to avoid “the threat of costly duty-of-prudence lawsuits.”
Relying on Dudenhoeffer, the Hughes Court explained that “the appropriate inquiry” into whether investment options and fees are prudent “will necessarily be context specific.” As such, the Hughes Court recognized that “[a]t times, the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.”
Moving forward, trial courts, including the Hughes district court, are tasked with weighing these or similar allegations against a “context specific” backdrop, taking into account the fiduciary’s reasonable options and decisions, and disallowing claims based on hindsight and second guessing. Context in these cases should include, among other things, what options were available and when, whether comparators offered by plaintiffs are identical to the funds selected by plan fiduciaries, and whether funds were selected because revenue sharing was available with those funds to offset recordkeeping fees, etc.