February 08, 2022

A unanimous US Supreme Court revived a closely watched lawsuit alleging that the fiduciaries for Northwestern University’s 403(b) plans violated ERISA by allowing excessive fees (Hughes v. Northwestern University, No. 19-1401 (US Jan. 24, 2022)). While the court didn’t address the substance of the participants’ ERISA claims, the ruling confirms that the mere presence of prudent investment options in a defined contribution (DC) plan won’t insulate fiduciaries from potential liability for other allegedly imprudent funds. But the court’s opinion provides little practical guidance to the 7th US Circuit Court of Appeals — which must now reconsider its decision upholding dismissal of the lawsuit — or the many other federal courts evaluating the viability of similar lawsuits involving both 403(b) and 401(k) plans.

An excess of ERISA fee lawsuits

Excessive fee claims have pervaded ERISA litigation for more than a decade as DC plans have come to dominate the retirement savings landscape. These lawsuits tend to involve similar allegations that DC plan fiduciaries violated their ERISA duties by agreeing to unreasonably high recordkeeping fees and selecting retail funds instead of lower-cost institutional share classes.

This case comes from the recent wave of excessive fee lawsuits targeting 403(b) plans at more than 20 private universities. Unlike 401(k) plans, 403(b) plans can have more than one recordkeeper. Cases against 403(b) plan fiduciaries typically include additional claims that using multiple recordkeepers is unnecessarily expensive and results in too many investment options, which can overwhelm participants. In cases that have settled, several universities have agreed to change their plans to address these alleged deficiencies, in addition to making monetary payments.

Standard for dismissing excessive fee cases

The justices didn’t decide the merits of the participants’ ERISA claims, ruling only on whether the 7th Circuit correctly upheld the district court’s dismissal of the case. Dismissal is proper if the participants fail to plead sufficient facts that, if true, plausibly allege a fiduciary breach. This is known as the “pleading standard.”

During oral argument, much of the debate focused on what specific facts the participants’ complaint must include to meet the pleading standard, but no clear consensus emerged among the justices. For example, one of the participants’ breach claims focused on the plans offering retail share classes instead of identical — but less expensive — institutional share classes of certain mutual funds. Plan fiduciaries countered that institutional share classes typically have minimum investment thresholds that the plans didn’t meet. This raised the question of whether participants must allege that the plans could have qualified for institutional share classes to meet the pleading standard with respect to such claims. Ultimately, the court’s ruling doesn’t resolve these questions, focusing instead on the 7th Circuit’s rationale for upholding dismissal of the lawsuit.

Diversified menu doesn’t relieve duty to monitor

The 7th Circuit upheld the lower court’s dismissal of the lawsuit because the plan’s investment lineup included lower-cost options, and participants could therefore choose to avoid more expensive funds. The Supreme Court disagreed, explaining that the fiduciaries’ failure to remove any imprudent investment option within a reasonable time violates their duty to monitor, even if other prudent options are available to participants. The court emphasized its previous ruling that the duty to monitor plan investments is an ongoing obligation (Tibble v. Edison International, No. 13-550 (US May 18, 2015)).

What happens next?

The case will now return to the 7th Circuit, which must reevaluate whether participants have alleged sufficient facts to survive dismissal in light of the Supreme Court’s ruling. As part of this review, the 7th Circuit may have to address the thorny questions the justices raised during oral argument but left unanswered in their ruling.

Adequacy of pleadings is “context specific.” The high court’s opinion gives little guidance on how to evaluate the participants’ factual allegations, merely restating the well-established principle that satisfying the pleading standard is context-specific. This means the 7th Circuit — and other courts considering whether to dismiss excessive fee cases — must consider a participant’s claims in the context of the circumstances prevailing at the time of the alleged breach.

Courts must consider range of reasonable judgments. Recognizing that “the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs,” the Supreme Court says that lower courts must “give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.” However, the court doesn’t explain how lower courts should apply this newly articulated concept to particular fiduciary breach claims. Nevertheless, plan fiduciaries will likely focus on this portion of the ruling in arguing for dismissal of participants’ excessive fee claims.

Impact on other excessive fee cases

Although a number of lower courts had paused similar cases in anticipation of the Supreme Court’s decision, this ruling does little to bring a quick resolution to ongoing excessive fee lawsuits or deter the filing of new ones. Many plan fiduciaries and sponsors were hoping for a ruling that could serve as a bulwark against protracted litigation by setting a high bar for these cases to survive a motion to dismiss. However, the high court’s ruling stops short of doing that, and lower courts will have to continue evaluating excessive fee claims on a case-by-case basis. It also remains to be seen how different federal courts will apply the “range of reasonable judgments” concept from the Supreme Court’s opinion, creating the potential for conflicting interpretations that could end up in front of the justices in the future.

Related resources

Matthew Calloway
by Matthew Calloway

Principal, Mercer’s Law & Policy Group

Margaret Berger
by Margaret Berger

Partner, Mercer’s Law & Policy Group

Brian J. Kearney
by Brian J. Kearney

Principal, Mercer’s Law & Policy Group

Speak with a Mercer consultant

Provide your contact information to get in touch
*Required Fields