Burst of 401(k) Fee Litigation Gets Boost From Supreme Court (2)

The U.S. Supreme Court revived a lawsuit against Northwestern University Monday in a decision that may breathe new life into dozens of lawsuits across the country that take aim at retirement plans with poorly performing investments and excessive recordkeeping fees.

In a unanimous ruling, the Supreme Court vacated an appellate court’s decision to toss out a lawsuit university employees brought challenging the school’s retirement plan fees and investment lineup. The ruling is a boost for employees who argue that an array of investment options isn’t enough, and that retirement plans have a duty to pick the most prudent fund options available.

The Supreme Court ruled plan fiduciaries must conduct their own independent evaluation to determine which investments may be prudently included in the plan’s menu of options.

“If the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their duty,” Justice Sonia Sotomayor said in the court’s opinion.

Evaluation Needed

Jerry Schlichter, founding and managing partner of Schlichter Bogard & Denton LLP which brought the case against Northwestern University, called the court’s decision a victory.

It reaffirms the already existing law as set by the Supreme Court, “which is that fiduciaries and these plans must monitor every fund in the plan and remove those that are imprudent,” he said.

The justices were asked to consider a 2020 decision by the U.S. Court of Appeals for the Seventh Circuit rejecting the challenge employees brought against the university under the Employee Retirement Income Security Act. The Seventh Circuit opinion suggested that a plan fiduciary wouldn’t be liable under ERISA for offering bad or expensive funds if the plan also offers prudent, inexpensive options.

The Supreme Court, however, said the appeals court erred in relying on the participants’ ultimate choice over their investments to excuse allegedly imprudent decisions.

In a 2015 ruling, Tibble v. Edison International, Sotomayor said that, even in a defined-contribution plan where participants choose their investments, plan fiduciaries are required to conduct their own independent evaluation to determine which investments may be prudently included in the plan’s menu of options.

“The Seventh Circuit’s exclusive focus on investor choice elided this aspect of the duty of prudence,” she wrote.

The appeals court had dismissed the case on the basis that as long as there’s an array of investment choices that’s enough. “Clearly the Supreme Court unanimously disagreed with that, and we have said all along that just because an employer offers some prudent funds doesn’t eliminate the need for them to monitor all funds and remove those that are imprudent,” Schlichter said.

The justices sent the case back to the Seventh Circuit to re-evaluate the allegations as a whole and consider whether the employees have plausibly alleged a violation of the duty of prudence as articulated in Tibble.

‘Short, Sweet, and Pretty Clear’

Monday’s decision provides guidance on what information retirement plan participants must include in their complaints to move forward with ERISA class actions challenging plan fees. These lawsuits have exploded in recent years, with about 150 lawsuits filed in federal court over the past two years and more than a dozen cases put on hold while the parties awaited the Supreme Court’s ruling.

Michelle Yau, a partner at Cohen Milstein who represents retirement plan participants, said she appreciated how clear the court’s decision was.

“The decision was short, sweet, and pretty clear that the proper focus for ERISA breach of fiduciary duty claims is on fiduciaries’ actions,” she said.

Even though it filed a friend-of-the-court brief in support of Northwestern in this case, the American Benefits Council said it was pleased to see the court recognize that fiduciaries have to make decisions that have difficult tradeoffs. Sotomayor said “courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.”

“There’s a variety of things that go into selecting investment funds, and cheaper isn’t the only factor,” said Lynn Dudley, senior vice president of global retirement and compensation policy at ABC, a trade group that advocates for employer-sponsored health, retirement, and other benefit plans.

Sotomayor’s statement provides some hope that judges will see there are tradeoffs a fiduciary has to weigh, but showing those tradeoffs will lengthen the litigation, said Chris Lockman, a partner and fiduciary compliance attorney at Verrill in Portland, Maine.

“The beauty of the Northwestern decision was the court decided at the motion-to-dismiss stage, before the litigation got really expensive,” he said, referring to the district court’s decision that the Seventh Circuit affirmed.

In a statement, Northwestern University said it’s disappointed the Supreme Court disagreed with the reasoning adopted by the Seventh Circuit, but is pleased the court asked the Seventh Circuit to reconsider whether plaintiffs’ allegations fail to state a claim.

“As Northwestern has explained, the University did not violate its fiduciary duty with regard to the recordkeeping or the investment fees related to its retirement plans, and nothing in the Court’s decision today prevents the Seventh Circuit from reaching that conclusion in reexamining the allegations on remand,” Jon Yates, a spokesperson for the school, said via email.

Justice Amy Coney Barrett took no part in the decision.

Latham & Watkins LLP represents Northwestern. Kellogg, Hansen, Todd, Figel & Frederick PLLC represents the Northwestern workers. The U.S. solicitor general’s office represents the government.

The case is Hughes v. Nw. Univ., U.S., No. 19-1401, 1/24/22.