The U.S. Supreme Court began hearing oral arguments this week in Hughes v. Northwestern University (No. 19-1401), the case brought by plaintiffs alleging that retirement plan fiduciaries breached their fiduciary duties under the Employee Retirement Income Security Act of 1974 (“ERISA”). According to a brief from Jackson Lewis PC, the plan’s participants “alleged that Northwestern breached its ERISA-imposed duty of prudence by (1) paying excessive recordkeeping fees (using multiple recordkeepers and allowing recordkeeping fees to be paid through revenue sharing); and (2) offering mutual funds with excessive investment management fees.”
The plaintiffs are being represented by the “big guns” with excessive fee litigation specialist Jerry Schlichter of St. Louis-based Schlichter Bogard & Denton helming the case. Despite the rash of litigation, it’s only the second excessive fee case to be heard by the Court under ERISA. The first was Tibble vs. Edison, which was also argued by Schlichter, who triumphed with a unanimous (and rare) 9-0 decision.
Earlier, the case wound its way through the lower courts with the district court granting the elite university’s motion to dismiss, which the Seventh Circuit then affirmed. Schlichter and the plaintiffs then appealed to the Supreme Court, which granted certiorari in July 2021 to address the following: “[w]hether allegations that a defined-contribution retirement plan paid or charged its participants fees that substantially exceeded fees for alternative available investment products or services are sufficient to state a claim against plan fiduciaries for breach of the duty of prudence under ERISA,” according to Jackson Lewis’ brief.
Justices divided on case merits
The brief also details the “struggle” some of the justices appear to be having to “devise a motion to dismiss standard” in these types of cases. The conservative side of the bench–Alito, Gorsuch, Breyer, Kagan, and Kavanaugh–asked the sides what facts they believed must be pleaded, particularly those relating to investment fees. (Justice Barrett recused herself as she was serving on the Seventh Circuit at the time of the initial decision.) It was also noted that a key issue in the plaintiffs’ amended complaint was the use of a revenue sharing, rather than a per-participant fee; however, there was minimal inquiry or recognition by the court on the impact of revenue sharing in offsetting fees, as a reason for selecting a more expensive share class as an investment option.
As reported by Reuters, Justices Kavanaugh and Thomas noted that allowing more excessive-fee cases to proceed toward trial had “real-world implications” for retirement plans, including a “potential uptick in lawsuits attacking plans’ investment decisions rather than the negligent conduct deemed imprudent” under ERISA, which could pressure plan administrators to enter into multimillion-dollar settlements.
Justice Roberts reportedly questioned the scope of ERISA’s fiduciary duty of prudence, asking Schlichter’s team whether the standard was the “highest” duty or an “average” duty, something more akin to negligence.
Justice Kagan is apparently in favor of overturning the Seventh Circuit’s decision, and garnered some support from Justices Breyer and Sotomayor.
Lynn Brackpool Giles is a contributing editor to 401(k) Specialist. Giles is a former Managing Director of Communications and Consumer Services for the Financial Planning Association (FPA), where she oversaw all corporate, legislative, and consumer communications. In her current journalistic practice, she is a frequent contributor to numerous financial services industry publications.
