Supreme Court Revives Northwestern University Workers’ Class Action Lawsuit Alleging ERISA Violations

In Hughes v. Northwestern University et al., case number 19-1401, Supreme Court of the United States, the high Court unanimously vacated and remanded the case to the U.S. Court of Appeals for the Seventh Circuit. The Supreme Court found that the lower court had erred in finding that the ultimate decision-making authority resting in the retirement plan participants was sufficient to excuse the allegedly imprudent oversight by plan administrators.

Hughes concerned the duty of a plan fiduciary under ERISA to control retirement plan fees and manage its investment options and under what circumstances plan participants could sue for breach of fiduciary duties. Northwestern University employees who participated in at least one of their employer’s 403(b) retirement plans filed a class action lawsuit against their employer. They alleged in their suit that plan fiduciaries were paying unreasonably excessive recordkeeping and investment management fees. More specifically, the participants alleged that the fiduciaries breached their duties by:

• Failing to use methods used by other large plans to reduce their expenses
• Imprudently choosing investment options with high management fees
• Selecting “retail-class” mutual funds when identical “institutional-class” mutual funds were available at lower prices
• Offering too many investment plan choices

The district court dismissed the plaintiffs’ suit for failure to articulate a cognizable ERISA violation. The Seventh Circuit affirmed the district court’s ruling, reasoning that plan participants could keep their costs low by making their investment selections from the broad range of available options. In addition, relying on its earlier precedent, the Court ruled that plans could offer multiple investment opportunities to plan participants without breaching their fiduciary duties under ERISA. However, the U.S. Supreme Court disagreed.

Writing the opinion for the court, Justice Sonia Sotomayor stated that the legal analysis that the Seventh Circuit used was incomplete. Instead, as per the Supreme Court’s decision in Tibble v. Edison International, 135 S. Ct. (2015), the court should have completed a “context-specific inquiry.” In other words, the court should have determined whether plan participants made plausible claims of ERISA violations against plan administrators for acting with imprudence as to the plan’s fees and investment options. Its singular focus on “investor choice” did not excuse potential breaches of fiduciary duty, such as by failing to eliminate poor investment choices from the plan’s available options.

The Supreme Court’s revival of the Northwestern class action could lead to further ERISA litigation focused on university retirement benefits plans. As a result, plan sponsors should understand that offering a wide range of investment options does not discharge its fiduciary duties under ERISA. Likewise, plan sponsors should take proactive steps to monitor plan investments periodically and eliminate any that appear unwise.