The Supreme Court has ruled in favour of participants in the Northwestern University retirement plans, reviving their breach of fiduciary duty claims under the Employee Retirement Income Security Act (ERISA).
In its 24 January 2022 decision, the Supreme Court unanimously (eight to zero with Justice Barrett taking no part) vacated the judgment in the university's favour that had previously been entered by the District Court and affirmed by the Court of Appeals for the Seventh Circuit, and remanded the case back to the Seventh Circuit to enable that court to revaluate the allegations as a whole.(1)
Given the wave of "excessive fee" cases brought against private employers and universities in recent years, this decision could be viewed as adding further fuel to the fire.
Northwestern University sponsors two defined contribution plans – the Northwestern University Retirement Plan and the Northwestern University Voluntary Savings Plan. The participants in these plans first sued the university in the District Court for the Northern District of Illinois in 2016, alleging that it breached its fiduciary duty of prudence by failing to monitor the plan's investments in a number of ways, including:
- retaining recordkeepers that charged excessive fees;
- offering too many options that were likely to confuse participants; and
- neglecting to provide cheaper and otherwise-identical alternative investments.
These investment options allegedly resulted in lower investment returns for participants than they otherwise would have received if Northwestern University had acted with prudence.
The District Court granted Northwestern University's motion to dismiss the amended complaint, finding the plaintiffs failed to state a claim upon which relief can be granted, and denied leave to further amend. It agreed that Northwestern University had met its fiduciary duty of prudence by offering an array of investment options that included some lower cost investments.(2)
On appeal, the Seventh Circuit affirmed the District Court's decision, which determined that the plan's fiduciaries had provided an adequate array of choices, including "the types of funds plaintiffs wanted (low-cost index funds)".(3)
The Supreme Court found that the Seventh Circuit had erred by only focusing on one component of the duty of prudence – a fiduciary's obligation to assemble a diverse menu of investment options.
Writing for the Supreme Court, Justice Sonia Sotomayor noted that the Seventh Circuit had failed to apply the Supreme Court's decision in Tibble v Edison International, 575 US 523 (2015).(4) In Tibble, the plan's fiduciaries provided "higher priced retail-class mutual funds as Plan investments when materially identical lower priced institutional-class mutual funds were available."
The Supreme Court found that the plan fiduciaries in Tibble had violated the duty of prudence by failing to monitor the plan's investment options and remove imprudent ones (ie, retail-class mutual funds). The standard under Tibble is for fiduciaries to conduct a regular, independent evaluation of each investment to determine whether that investment should prudently be included in the menu of options. Applying the same principles to Hughes, the Court held that the Seventh Circuit erred in focusing solely on the variety of investment options in the plans since fiduciaries are still required to remove imprudent investments, such as those that charge excessive investment fees.
According to the Court, "[i]f the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their duty".(5) In remanding the case, the Court stated that the Seventh Circuit:
[s]hould consider whether the plaintiffs have plausibly alleged a violation of the duty of prudence as articulated in Tibble, applying the pleading standard discussed in Ashcroft v. Iqbal, 556 U.S. 662 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007).(6)
The Supreme Court's decision certainly does not provide plan fiduciaries with a road map on how to successfully get these types of excessive fee cases disposed of on motions to dismiss. If anything, the decision suggests that lower courts should undergo a deeper analysis of the facts to determine whether fiduciaries acted prudently given the totality of the circumstances present at the time the relevant actions were taken.
One thing is clear: for sponsors of defined contribution plans, both large and small, now is a good time for employers to consult experienced ERISA counsel to conduct a compliance assessment by reviewing and monitoring investment costs, performance and diversification of their investments. Based on this assessment, employers should remove imprudent investments and document the rationale of their decisions.
Employers may also want to adopt an investment policy statement (or revise it if they have one already) to assist them with achieving these objectives. Lastly, employers should review their fiduciary liability policy to ensure there is adequate coverage should they get hit with an ERISA excessive fee lawsuit.
For further information on this topic please contact Brian S Cousin, José M Jara and Sheldon S Miles at Fox Rothschild LLP by telephone (+1 215 299 2164) or email ([email protected], [email protected] and [email protected]). The Fox Rothschild LLP website can be accessed at www.foxrothschild.com.
(1) Hughes v Northwestern University, 19-1401, Supreme Court, 24 January 2022 (Hughes).
(2) Divane v Northwestern University, 2018 WL 2388118, *14 (Northern District of Illinois, 25 May 2018).
(3) Divane v Northwestern University, 953 F.3d 980, 991 (Seventh Circuit, 2020).