Supreme Court Makes Dismissal of Retirement Plan Fee Litigation More Difficult
On January 24, 2022, the U.S. Supreme Court issued an important decision in Hughes v. Northwestern University, and plan sponsors of retirement plans should take notice. Hughes involved a challenge to the investment fees and recordkeeping fees charged to the accounts of participants in two 403(b) plans maintained by Northwestern University. In a unanimous ruling, the Supreme Court held that the Seventh Circuit erred in dismissing the employees’ challenge without making a “context-specific inquiry” that takes into account a plan fiduciary’s duty to monitor all plan investments and remove any imprudent ones. Additionally, the Supreme Court held that whether the disputed investments under the plans were imprudent depends on the circumstances prevailing at the time.
In recent years, there has been an uptick in the number of lawsuits brought under ERISA alleging breaches of fiduciary duty in connection with the fees charged to participants in 401(k) and 403(b) defined-contribution retirement plans. These “excessive fee” cases often include allegations regarding the performance of investments and the plan’s recordkeeping and other fees. Court decisions across the country have varied on what is sufficient to adequately plead a breach of the duty of prudence with respect to the selection and monitoring of investment options and the reasonableness of plan expenses. The Supreme Court weighed in on this issue in Hughes.
In Hughes, current and former employees of Northwestern University brought suit against Northwestern University, its Retirement Investment Committee, and the individual officials who administer the plans (collectively, “Northwestern”), alleging that Northwestern breached its duty of prudence under ERISA by allowing excessive investment and recordkeeping fees. Specifically, the employees argued that:
- Northwestern failed to monitor and control the fees paid for recordkeeping;
- Northwestern offered a number of “retail” share classes that carried higher fees than those charged by otherwise identical “institutional” share classes of the same investments; and
- Northwestern offered too many investment options (over 400), causing participant confusion and poor investment decisions.
The District Court granted Northwestern’s motion to dismiss the complaint for failure to adequately plead a breach of the fiduciary duty of prudence, and the Seventh Circuit affirmed the dismissal. The Seventh Circuit held that the employees’ allegations failed as a matter of law, in part based on the court’s determination that the employees’ preferred type of low-cost investments were available as plan options.
The ultimate issue before the Supreme Court was whether participants in a defined-contribution retirement plan may state a claim for breach of ERISA’s fiduciary duty of prudence on the theory that certain of the investment options offered in the plan were too costly, even though lower-cost investment options were available.
The Supreme Court held that the Seventh Circuit erred in holding that because participants had the ultimate choice over their investments and the investment options included low cost options, Northwestern’s possible imprudence in failing to remove the higher-cost funds was excused. Citing its 2015 decision, Tibble v. Edison, the Supreme Court stated that the mere availability of adequate investment options does not prevent ERISA plaintiffs from stating a plausible claim for breach of the duty of prudence. In other words, courts cannot simply dismiss breach of fiduciary actions because participants can pick from a wide array of investment options that include prudent options. If the fiduciaries fail to remove an imprudent investment option from the plan within a reasonable time, they breach their duty.
In concluding its opinion, the Supreme Court emphasized that the circumstances facing an ERISA fiduciary will at times involve difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on his or her experience and expertise. Ultimately, however, the Supreme Court did not decide whether the plaintiffs in Hughes stated a viable claim, and remanded the case to the Seventh Circuit for a decision on that issue.
Lawsuits challenging the fees and investment options in 401(k) and 403(b) plans have had mixed results at the pleading stage. With the announcement in the Hughes decision that a context-specific analysis is required to determine the adequacy of a pleading, this type of litigation will likely continue. As a result, plan sponsors of retirement plans should continue to closely and regularly monitor all investment options and remove any that have higher fees than similar available investment options or poor returns.
If you have any questions, please contact the author or another member of the Miller Johnson employee benefits practice group.