Case Name and Number: Hughes v. Northwestern University, No. 18-2569
Introduction: On Thursday, March 23, 2023, the Seventh Circuit held that ERISA plaintiffs must plead facts sufficient to eliminate “obvious alternative explanations” when alleging a breach of fiduciary duty, which largely focuses on the procedural prudence of the fiduciary’s decision-making. Under the particular circumstances of the claims against Northwestern University, the court determined that the allegations sufficiently pled a plausible claim challenging the fiduciaries’ conduct with respect to recordkeeping fees and investment share class choices.
Background: Participants in Northwestern University’s retirement plans sued the University, its Retirement Investment Committee, and several individuals for allegedly breaching their fiduciary duty of prudence under the Employee Retirement Income Security Act (ERISA), specifically 29 U.S.C. § 1104(a). The district court granted Northwestern’s motion to dismiss, and the Seventh Circuit affirmed, before the Supreme Court granted certiorari and reversed in part. On remand, the Seventh Circuit focused its attention on the three ways the plaintiffs had argued to the Supreme Court that the fiduciaries supposedly breached their duty: (1) failing to monitor and control plan recordkeeping costs; (2) failing to offer “institutional” class shares of numerous investment options that would have been less expensive than the “retail” class shares the Plans offered; and (3) failing to limit the total number of investment options, supposedly “confusing” participants.
Issue: Whether the plaintiffs plausibly alleged that the defendants breached their statutory duty of prudence under 29 U.S.C. § 1104(a).
In many motions to dismiss in ERISA cases, the defendants argue that the plaintiffs have not adequately alleged a breach of fiduciary duty because there are plausible explanations, other than the breach of a duty, for the defendants’ choices. The parties in Hughes, as in many such cases, debated the standard that plaintiffs must satisfy in responding to these arguments by presenting competing theories of how to apply Bell Atlantic v. Twombly’s requirement of allegations sufficient to establish a plausible claim to relief in the ERISA context. Resolving that dispute, the Seventh Circuit concluded that the plaintiff must plead facts that, if taken as true, eliminate “only obvious alternative explanations,” not every reasonable explanation for the defendant’s choices.
Applying that standard to the allegations before it, the Seventh Circuit provided helpful guidance for future litigants—and plan administrators—on the scope of the duties imposed by ERISA. In particular, the court explained that a plan fiduciary who is able to demonstrate that it follows a prudent process of having “actually performed the requisite diligence in monitoring plan expenses and fund prudence” is “much more likely” to prevail on a motion to dismiss. In contrast, the court found that Northwestern’s substantive defenses of the choices it made, while plausible, were not so obviously correct that they would prevent the plaintiffs from pursuing their suit. The Seventh Circuit’s ruling thus confirms the value of fiduciaries focusing on the strength of their decision-making process rather than solely relying on the substantive merit of their choices. A strong process may, in cases where it is possible to put information about that process before the court at the pleading stage, permit costly litigation to be terminated as early as a motion to dismiss.
The Seventh Circuit also clarified that plaintiffs are not required to establish that the alternate course of action they propose was “actually available” to a fiduciary. Rather, plaintiffs must plead facts showing “that a prudent alternative action was plausibly available, rather than actually available.” Here, that standard was met by the plaintiffs’ allegations that other fiduciaries had been able to obtain concessions from their vendors that Northwestern had not; the plaintiffs were not required to further allege that Northwestern actually would have won those concessions had it bargained for them. While the Seventh Circuit reaffirmed its prior holdings about fiduciaries not being required to “scour the market” for the cheapest possible funds, the standard announced here—with its focus on what other fiduciaries have been able to achieve—is an important reminder of the need to be aware of and consider market trends in this area.
Finally, the court’s opinion joined “[f]ive other circuits” in holding that the plaintiffs’ claim for failure to move to cheaper share classes survived a motion to dismiss, explaining that the plaintiffs had plausibly alleged that Northwestern’s “failure to swap out retail-class for institutional-class shares was outside the range of reasonable decisions a fiduciary could take.” Given that these share class allegations continue to survive motions to dismiss, conducting an ongoing review of share class options is an important consideration for fiduciaries across the nation.
Read the opinion.