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Northwestern Excessive Fee Defendants Win Some, Lose Some


Following a United States Supreme Court directive, a federal court has reconsidered its earlier conclusions in an excessive fee case.

Now, it’s been awhile, but you may recall that the case[i] (April Hughes et al. v. Northwestern University) had been dismissed by this same Seventh Circuit back in May 2018, largely on the basis that as long as the participants had access to prudent funds, it didn’t matter that all the funds on the menu might not meet that standard. That decision was affirmed by the appellate court in March 2020In June of 2021 the federal government — in response to a request from the Supreme Court — said that the Court should take on the case and resolve the issues it presents. 

And then in January 2022, in a unanimous decision[i] (Hughes v. Northwestern University et al., case number 19-1401, in the Supreme Court of the United States) written by Justice Sotomayor, the nation’s highest court minced no words in stating that “the Seventh Circuit erred in relying on the participants’ ultimate choice over their investments to excuse allegedly imprudent decisions by respondents” — going on to “vacate the judgment below so that the court may reevaluate the allegations as a whole,” Sotomayor wrote, going on to point out that when that court did so, it “…should consider whether petitioners have plausibly alleged a violation of the duty of prudence as articulated in Tibble, applying the pleading standard discussed in Ashcroft v. Iqbal, 556 U. S. 662 (2009), and Bell Atlantic Corp. v. Twombly, 550 U. S. 544 (2007).” 

Remand Revisit

In reconsidering that decision (April Hughes et al. v. Northwestern University et al., case number 18-2569), the three-judge panel[ii] outlined “three claims of breach that require reconsideration: that Northwestern (1) failed to monitor and incurred excessive recordkeeping fees, (2) failed to swap out retail shares for cheaper but otherwise identical institutional shares, and (3) retained duplicative funds.” Having done so, they concluded that the first two claims survive dismissal and remanded those to the district court for “further proceedings.” For the others, they concurred with the previous decision of that court, and affirmed their dismissal.

Some points made along the way:

“Switching from a revenue-sharing to a per capita expense model may in some cases be a proper means of reining in excessive expenses. But Hughes does not state that revenue sharing is an impermissible expense arrangement.” 

“ERISA requires a fiduciary to assess whether a given fund is prudent in light of other investment options in a plan, comparable funds, and the expenses charged, among other factors.”

“We reaffirm that a fiduciary need not constantly solicit quotes for record-keeping services to comply with its duty of prudence. But fiduciaries who fail to monitor the reasonableness of plan fees and fail to take action to mitigate excessive fees—such as by adjusting fee arrangements, soliciting bids, consolidating recordkeepers, negotiating for rebates with existing record-keepers, or other means—may violate their duty of prudence.”

“…plans may generally offer a wide range of investment options and fees without breaching any fiduciary duty. Nothing in Hughes undercuts this general proposition, but as mentioned earlier, the Supreme Court rejected this court’s reliance on a categorical rule that a plan fiduciary may avoid liability by assembling a diverse menu of investment options that includes the types of investments a plaintiff desires.”

Dudenhoeffer Dumped

The Northwestern fiduciary defendants attempted to invoke the heightened pleading standard from Fifth Third v. Dudenhoeffer — that “a plaintiff must plausibly allege an alternative action that the defendant could have taken … that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.” But the judges weren’t having it — noting that, unlike this case, “Dudenhoeffer involved an employee stock ownership plan (ESOP) in which fiduciaries allegedly had negative inside information about the stock” — and there arose a “conflict between the fiduciary’s knowledge of negative inside information about the stock versus the fiduciary’s adherence to insider trading laws and a reasonable belief that halting stock purchases ‘would do more harm than good to the fund by causing a drop in the stock price.’” This was a “unique tradeoff” that the court said “caused the Supreme Court to set a heightened pleading standard for that case” — and did not apply here.

As for what did apply, the court noted that, “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged” — and said that to prevail here “plaintiffs must have alleged enough facts to show that a prudent fiduciary would have taken steps to reduce fees and remove some imprudent investments.”

“Only obvious alternative explanations must be overcome at the pleadings stage,” they wrote, “and only by a plausible showing that such alternative explanations may not account for the defendant’s conduct. Accordingly, whether a claim survives dismissal necessarily depends on the strength or obviousness of the alternative explanation that the defendant provides.”

Compare ‘Able’

Here, and unlike other cases in other districts of late (more on that in a minute), the judges found fee comparisons to five allegedly comparable university plans sufficient, specifically plans that they said “successfully reduced recordkeeping fees by soliciting competitive bids, consolidating to a single recordkeeper, and negotiating rebates” — at least according to the plaintiffs. 

Moreover, they noted that the plaintiffs here cited industry experts who recommended soliciting bids for recordkeeping and consolidating to a single recordkeeper to reduce overall fees. The court also cited the experience of the Northwestern plan in lowering fees in an October 2016 restructuring, “which suggests that Northwestern’s recordkeeping fees were unreasonably high and that means to lower such fees were available,” the judges wrote, concluding, “Under the context-specific pleading standard specified above, all these factual averments lead us to conclude that plaintiffs have plausibly alleged that Northwestern violated its duty of prudence by incurring unreasonable recordkeeping fees.” Essentially, the plaintiffs persuaded the court that there were options that could have been undertaken to reduce the fees that Northwestern did not take.

“Requiring plaintiffs to prove that another recordkeeper would have offered a lower fee or that consolidation was actually available would apply Dudenhoeffer’s heightened pleading standard, rather than the lower Twombly and Iqbal plausibility requirement,” the court wrote. 

Speaking of those other cases, the court here did take note, specifically of Albert v. Oshkosh Corp., E.D. Wis., No. 20-C-901, 9/2/21. “Unlike in Albert,” the judges write, “plaintiffs here assert ‘[t]here are numerous recordkeepers in the marketplace who are equally capable of providing a high level of service to large defined contribution plans like the Plans.’” And the judges here, unlike the court in Albert, accepted the assertions that “the quality or type of recordkeeping services provided by competitor providers are comparable to that provided by Fidelity and TIAA,” that those recordkeeping services are “commoditized … recordkeepers primarily differentiate themselves based on price, and will aggressively bid to offer the best price in an effort to win the business, particularly for jumbo plans like the Plans.”  Here too, and the court distinguished this from CommonSpirit Health, another case that had a higher plausible pleading standard, the court took at face value that the plaintiffs here “plead that the fees were excessive relative to the recordkeeping services rendered.”

Alternative Avenues

As for alternate theories that might explain retaining the higher fees, the judges said the defendants here had not provided any, certainly not that would warrant “charging an alleged four to five times in recordkeeping fees to plan participants. An equally, if not more, plausible inference would be that the university neglected to keep its recordkeeping fees paid through revenue sharing at a reasonable level,” they wrote, holding that the plaintiffs had established a plausible claim in Count III. That said, the court here took pains to note that “Claims for excessive recordkeeping fees in a future case may or may not survive dismissal based on different pleadings and the specific circumstances facing the ERISA fiduciary. But here, plaintiffs have pleaded enough to cross the line from possibility to plausibility.”

The judges also dispensed with Northwestern’s arguments that “retail-class shares are superior to institutional-class shares because their higher fees allow plans, through revenue sharing, to pay for recordkeeping and other administrative expenses — a feature, it argues, that encourages small plan participants to invest.” Acknowledging that this was “one possible explanation,” but that it was not any more obvious than the plaintiffs’ arguments, “Plaintiffs allege that Northwestern failed to consider bargaining for cheaper institutional-class shares with existing fund providers to the detriment of plan participants. Plaintiffs’ version is especially plausible in light of their allegation that the Plans collectively paid about four to five times as much in recordkeeping fees as they should have.” That, plus basically the defendants failed to make the case.

As noted earlier, the court here did not find merit in the notion that Northwestern breached its duty of prudence by retaining multiple duplicative funds, and that the large number of funds “caused ‘decision paralysis’ and led to investor confusion.” They continued, “unspecific allegations that a fiduciary provided too many funds, without more, do not state a claim for breach of the duty of prudence. So, we affirm dismissal of the duplicative funds claim in Count V that is based on a theory of investor confusion.” 

And then, the court reversed the lower court’s dismissal of the excessive recordkeeping fees claim, as well as the share-class claims — and sent those issues back to the lower court for “further proceedings.” As for the other issues — well, they reinstated this court’s judgment in Divane, 953 F.3d 980, affirmed the district court’s dismissal of Plaintiffs’ First Amended Complaint on all other counts as well as the denial of Plaintiffs’ requests for an opportunity to further amend their suit — and for a jury trial

What This Means

While this court made a distinction between the allegations made here, and those in cases like CommonSpirit, this writer found those hard to glean from the information presented. This court was apparently willing to accept at face value the notion that recordkeeping services were “fungible” (other courts have demanded more detail around those services), but perhaps they found the allegation that the fees paid were so significantly higher than that alleged to have been paid by five other university plans (about which no details on the actual services rendered were proffered), and were disinclined to dismiss that gap without submitting the matter to discovery. Regardless, it’s clear here that the higher standards of plausibility that we’ve seen in other jurisdictions were not applied here (in fairness, they’ve not been applied everywhere, despite what has seemed to be a growing trend).

There is another cautionary note, and that is that changes made by the plan that appear to have reduced the fees were embraced by the judges here as evidence that more could have been done. That’s been an allegation of plaintiffs in many of these cases, but most judges to date have seen those moves as evidence of a prudent, deliberative process, rather than a faulty one.  In that sense, the finding here seems to be something of an outlier — and one that we’d hope wouldn’t forestall ongoing efforts by plan fiduciaries to improve and enhance their plans.


[i] That original suit, filed against Northwestern University in 2016 by the law firm of Schlichter Bogard & Denton, had argued that Northwestern had “eliminated hundreds of mutual funds provided to Plan participants and selected a tiered structure comprised of a limited core set of 32 investment options,” including five tiers—one a TDF tier, the second five index funds, the third consisting of 26 actively managed mutual funds and insurance separate account, and an SDBA. However, the suit noted that Northwestern continued to contract with two separate recordkeepers (TIAA-CREF and Fidelity) for the retirement plan, and only consolidated the Voluntary Savings Plan to one recordkeeper (TIAA-CREF) in late 2012. The suit also took issue with the alleged inability of the plan fiduciaries to negotiate a better deal based on its status as a “mega” plan, for presenting participants with the “virtually impossible burden” of deciding where to invest their money (because of too many investment choices), and for including active fund choices when passive alternatives were available. 

[ii] U.S. Circuit Judges Diane S. Sykes, David F. Hamilton and Michael B. Brennan sat on the panel.