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Certainty Sought From Justices in Northwestern Retirement Fight

July 8, 2021, 9:30 AM

Benefits attorneys are hoping a Supreme Court ruling in a case against Northwestern University will restore certainty on what employees must show to plausibly allege their retirement plans are being charged excessive fees.

The justices agreed last week to hear the long-running fight in their next term starting in October. It’s a case that could either stamp out disputes over plan mismanagement or spark a whole new wave of challenges, attorneys say.

“If the court lays out a pleading standard that’s a little more gray or allows a little more wiggle room in terms of what’s a plausible allegation, you’re only going to see more of these cases filed,” said Chris Lockman, a partner at Verrill in Portland, Maine, who represents plan fiduciaries.

“And you’re going to see employer plan sponsors, you know, the plan fiduciaries, and their insurance companies making tough economic decisions about settlements because they don’t want to engage in a very expensive, time-consuming process of discovery in these cases,” he said.

A proposed class of current and former Northwestern University employees who participate in the school’s retirement plans sued the school and its retirement plan committee for allegedly offering expensive retail class investments with excessive management fees when lower-cost funds were available and for allegedly failing to rein in unreasonable record-keeping costs.

Similar to 401(k) plans run by for-profit companies, defined-contribution plans offered by Northwestern and other tax-exempt employers are commonly called 403(b) plans. Under the Employee Retirement Income Security Act (ERISA), sponsors can be held liable for plan losses if they fail to prudently manage these plans.

Potential to Affect Every Plan

If the court sides with the Northwestern employees, it could clearly set out standards that plan sponsors must follow in selecting investments, monitoring those investments, and determining and monitoring the reasonableness of fees, said Jerry Schlichter, an attorney for the Northwestern employees and founding and managing partner of Schlichter Bogard & Denton LLP.

“This case has the potential to affect every 401(k) and 403(b) plan in America,” he said.

The U.S. Court of Appeals for the Seventh Circuit affirmed the district court’s decision to dismiss the proposed class action.

The appeals court said plans can offer a wide range of investment options and fees without breaching any fiduciary duty to act prudently, and a flat fee for record-keeping or a sole record-keeper isn’t required. The court noted Northwestern had explained it was sticking with multiple record-keepers in order to offer one particular type of investment option.

In a statement, Northwestern said it believes the lower courts were right to dismiss the lawsuit against it and that the school will continue to oppose the employees’ claims as legally and factually unmeritorious.

“The University stands by the management of its retirement benefits, and the talented and dedicated investment committee that administers its plans,” the university said.

Northwestern’s attorney, Craig Martin of Willkie Farr & Gallagher LLP, didn’t respond to a request for comment, but in the school’s reply to the court he said ERISA demands prudence not perfection.

“It does not subject plan administrators to lawsuits based merely on allegations that a negotiated mix of plan offerings (which included numerous options that petitioners deemed prudent) was not, by petitioners’ reckoning, optimal,” he wrote.

Higher Standard

The Northwestern employees argue the Seventh Circuit set the standard retirement plan participants have to meet for their case to survive a motion to dismiss so high “as to make it virtually impossible for participants of defined-contribution plans to plead a claim for imprudent management.”

“The courts below stated that so long as there’s an array of investment options, the fact that some of them have high fees does not constitute a fiduciary breach if others have lower fees,” Schlichter said. “Our position is that each investment option selected by the plan sponsor must be prudent standing on its own.”

The Seventh Circuit’s decision “really threw a wrench in the interpretation of ERISA’s pleading standard with respect to excessive fees in that circuit,” said Michelle Yau, a partner at Cohen Milstein who represents employees and plan beneficiaries.

“Before the Northwestern decision the law was pretty well settled,” she said.

Other circuits, including the Eighth, Third, and Ninth, have found that if you allege an ERISA plan, whether it be a 401(k) plan or a 403(b) plan, is being caused to pay more for the exact same investment through a more expensive share class, that those claims are meritorious, Yau said.

Excessive fees charged by retirement plans has been an ongoing source of litigation, which Schlichter’s firm has pioneered. He’s filed more than 30 lawsuits related to 401(k) plans since 2016 and a dozen lawsuits in recent years related to management of 403(b) plans.

Though Lockman thinks reversing the Seventh Circuit’s decision could lead to more litigation, Yau disagrees that would be the impetus for new claims.

“Essentially the impetus is that the conduct underlying those claims is pretty egregious,” she said. “You have a plan that would be eligible for the cheapest share class, and the fiduciary doesn’t put the plan in the cheapest share class even though they qualify based on the asset size. That’s the reason for the number of cases that have been filed.”

However, a decision in favor of Northwestern would make it harder for employees to not only plead a case to survive dismissal, but to prove a case as well, Schlichter said.

If a plan sponsor can select imprudent funds or excessively expensive funds in a plan but then have no responsibility for that selection because there are other funds that weren’t imprudent, “that’s not at all what we contend ERISA requires,” he said.

The case is Hughes v. Northwestern Univ., U.S., No. 19-1401.

To contact the reporter on this story: Lydia Wheeler in Washington at lwheeler@bloomberglaw.com

To contact the editors responsible for this story: Fawn Johnson at fjohnson@bloombergindustry.com; Brent Bierman at bbierman@bloomberglaw.com

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