The U.S. Supreme Court heard arguments Monday in a case that could affect dozens of class suits challenging retirement plan fees, with some justices signaling a desire to protect against plan mismanagement and others concerned with coming down too hard on plan fiduciaries.
The arguments were “messy and confused,” with no clear agreement on the relevant factual allegations or legal theories up for review, Carl F. Engstrom, of counsel with Nichols Kaster PLLP in Minneapolis, told Bloomberg Law.
There “seemed to be some consensus forming” that at least one of the case’s claims—a challenge to the retail share class funds in Northwestern University’s retirement plan—should proceed, while other claims involving the size of the plan’s investment lineup and the number of plan record keepers will be rejected, Engstrom said. He added it’s “difficult to predict” what will happen given how the arguments went.
The entire court appeared to struggle with the pleading standard that should apply to these cases, but the justices “seemed unified” that merely saying a fund is too expensive isn’t enough, Stacey C.S. Cerrone, a principal and office litigation manager for Jackson Lewis PC in New Orleans, told Bloomberg Law.
The case asks the justices to consider a 2020 decision by the U.S. Court of Appeals for the Seventh Circuit rejecting a challenge to Northwestern’s retirement plan fees and investment lineup brought under the Employee Retirement Income Security Act. The Seventh Circuit opinion suggests that a plan fiduciary won’t be liable under ERISA for offering bad or expensive funds if the plan also offers prudent, inexpensive options.
The Supreme Court’s ultimate ruling—which is expected to be issued by June—could determine 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.
The justices have received more than a dozen amicus briefs in the case, and at least 12 pending lawsuits have been put on hold until the court rules.
‘Sounds Like Negligence’
Justices Elena Kagan and Sonia Sotomayor appeared most sympathetic to retirement plan participants who go to court to challenge their plan’s fees and investment options. Kagan suggested it “sounds like negligence” for a plan to offer a more expensive retail version of a mutual fund when a cheaper institutional version could be obtained merely by asking. Sotomayor agreed this was the “strongest argument” advanced by the plan participants.
This “core claim” of the lawsuit—that plan fiduciaries should have chosen cheaper, identical versions of the plan’s funds—probably “passes muster” in the Supreme Court’s ultimate ruling, Gregory Y. Porter, a partner at Bailey & Glasser LLP in Washington, told Bloomberg Law.
Sotomayor appeared less persuaded by the idea that the Northwestern plan was mismanaged because fiduciaries didn’t consolidate the number of plan record keepers, saying she assumes there’s some value in having two companies serve this role. Kagan used some of her questioning time to emphasize that the plaintiffs challenge the plan’s record keeping fees as excessive “even if you put aside the issue of consolidation.”
Chief Justice John G. Roberts Jr. appeared interested in defining the lengths plan fiduciaries must take to improve the plan. Roberts suggested that a person asked to fill a car with gas should be expected to choose the cheaper option when two gas stations are on the same corner, but he expressed skepticism that the same person should be expected to drive 10 miles out of their way to find the best deal. He also questioned whether plan fiduciaries should be expected to say no to participants who want to invest in mutual funds they see advertised on television.
This latter issue “may well be the most interesting part of the eventual decision,” Mark G. Boyko, a partner with Bailey & Glasser LLP in Missouri, told Bloomberg Law.
“Trust law requires fiduciaries to make decisions solely in the economic interest of participants,” Boyko, whose firm filed an amicus brief supporting the Northwestern plan participants, said. “A lottery ticket fund may well be popular but would be inappropriate, but the court seemed okay with the idea of buying popular brand-name sodium-chloride instead of the generic.”
Several justices signaled that participant preferences are something fiduciaries may reasonably consider, Meaghan VerGow, a partner with O’Melveny & Myers LLP in Washington, told Bloomberg Law.
“Participants may welcome a diversity of choices, and may develop affinities for particular managers and services,” VerGow, who filed an amicus brief in support of Northwestern, said. “The questioning suggested to me that the Justices want to retain latitude for fiduciaries to consider factors beyond just cost.”
Justice Stephen G. Breyer’s questioning indicated a concern with striking the right balance between discouraging bad fiduciary conduct and denying participants an incentive to challenge every plan decision in court.
The court appeared to be searching for a standard that would allow participants to challenge fees “so egregious they could only result from a breach” without allowing “full-blown litigation over small variations in cost,” O’Melveny’s VerGow said.
“There was a sense from the bench that fiduciary decisionmaking is complex, that it requires tradeoffs, and that fiduciaries are not constrained to select the cheapest possible alternative for every plan need,” she said.
Lots of Lawsuits
Justice Brett M. Kavanaugh expressed concern over the position employers and plan fiduciaries could be in if the court makes these lawsuits more viable. He pointed to amicus briefs arguing that employers face massive pressure to settle once these cases survive a motion to dismiss, and he said that treating the dispute as one over pleading requirements “forces us not to deal with the reality of what’s going on.”
The attorney representing Northwestern, Gregory G. Garre of Latham & Watkins LLP, focused much of his argument on the effect of these lawsuits. A Supreme Court ruling favoring the plan participants “not only would subject retirement plans to endless damages litigation but would thrust the federal courts into the role of micromanaging those plans,” he said.
The plan participants’ attorney, David C. Frederick of Kellogg, Hansen, Todd, Figel & Frederick PLLC, responded by pointing out that the fees associated with university retirement plans have “decreased so much” that “there are almost no new cases being filed” over these types of plans.
“That is an indication that the litigation that initially started this, coupled with Department of Labor regulations, have actually redressed the problem of breaches of fiduciary duty,” he said.
But even if this were true about university plans and other retirement plans organized under tax code section 403(b), it’s “certainly not the case in the 401(k) arena,” Tulio D. Chirinos, an associate with Proskauer Rose LLP in Boca Raton, Fla., told Bloomberg Law.
“Since the Hughes case was filed, plaintiffs have brought well over 100 fee and investment 401(k) plan suits with many containing the same type of allegations set forth in Hughes,” Chirinos said. “This wave of litigation is likely to continue if the Supreme Court does not affirm the Seventh Circuit ruling in Northwestern, or otherwise provide more structure to the pleading requirements.”
Michael R. Huston, assistant to the solicitor general, argued for the government.
The case is Hughes v. Nw. Univ., U.S., No. 19-1401, argued 12/6/21.