The ongoing case, Sweda v. the University of Pennsylvania, is currently before the U.S. Court of Appeals for the Third Circuit. The Third Circuit ruled that the district court erred in granting the University’s motion to dismiss. This is a major setback for the University in their current ERISA fee and fiduciary breach case.

The case alleged that the fiduciaries responsible for the University’s retirement plan failed in their decision-making process and as a result, overpaid fees for investment and plan administration by up to 600%. Further, they allege that plan fiduciary failed to remove underperforming investments from the plan’s assets. While other fee cases against institutions of higher learning have been dismissed, the court in Sweda, in a 2-1 majority opinion, chose not to dismiss the case, reminding benefits lawyers that ERISA plaintiffs have the benefit of the doubt.

Standard of Pleading

The question in front of the Court of Appeals focused on the pleading standard for ERISA cases. At the beginning of an ERISA lawsuit, plaintiffs generally have only a limited amount of information, generally garnered from plan documents or a little inside knowledge, and don’t have the full picture of the inner workings of the business processes. As a result, they have a challenge when pleading the facts of their case before completing discovery. As a result, ERISA cases often begin by basing their pleadings on plan performance against known benchmarks and using that to allege that the process plan fiduciaries followed was likely flawed.

A prudent ERISA fiduciary must meet certain standards in performing their work, but these standards are not necessarily the same as the standard of pleading that must be met for an ERISA case to move forward. Indeed, the opinion of the Court of Appeals does not say that the University plan administrators breached their fiduciary duty, only that the plaintiffs had made a compelling enough argument that the case could proceed into the discovery phase.

Of course, the complication comes in that the court still did not establish a clear rule to help guide ERISA fiduciaries in their efforts to avoid litigation. ERISA discusses what a prudent and reasonable fiduciary would do in their pleading standards, but a reasonable fiduciary may follow processes, make decisions, and still end up with a poorly performing plan or high fees. Indeed, litigation has made it past summary judgment into discovery only for the plan fiduciaries to win later in the process.

Investment Opportunities

The plan in question had a large mix of investment opportunities for plan participants from mutual funds to a brokerage window. While the Third Circuit held that a fiduciary cannot win on summary judgment just by offering a “meaningful mix” of investment options, as that would encourage plans to offer a wide variety of options, including expensive or poorly performing options. Indeed, the court stated that “[a]t this stage, her factual allegations must be taken as true, and every reasonable inference from them must be drawn in her favor.”

It is likely that, unless new regulations or the Supreme Court step in to offer a clearer pleading standard, there will likely continue to be a mixture of results on ERISA fee cases.