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SCOTUS Gives Excessive Fee Suit Plaintiffs Another Shot

Litigation

In a ruling likely to make it harder—perhaps much harder—to dismiss excessive fee lawsuits, the U.S. Supreme Court has remanded for further consideration a lower court decision that had favored the fiduciary defendants.

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.”

The Issue(s)

Now, it’s been several weeks since oral arguments in the case, so remember that the issue[ii] that the plaintiffs—represented by the law firm of Schlichter Bogard & Denton—wanted the Supreme Court to resolve is what they argued was a split in the district courts in the standard to be applied in these cases. Their petition for consideration notes that “the Seventh Circuit dismissed petitioners’ ERISA claims for imprudent retirement plan management, even though the Third and Eighth Circuits have allowed lawsuits with virtually identical allegations to advance, and the Ninth Circuit has also upheld similar claims.” This, they claim is “…not a factual disagreement about whether the specific allegations at issue clear the pleading hurdle,” but rather, they claim it is “a legal disagreement about where that hurdle should be set.”

The plaintiffs argued that “most courts have properly held” that at the pleading stage, “ERISA plaintiffs are entitled to the plausible inference that excessive fees result from imprudent management.” The plaintiffs argue that “ERISA fee litigation has become an increasingly common mechanism for employees and retirees to obtain compensation for losses caused by imprudent management and to spur plan fiduciaries to improve their practices” and that “at issue here is whether such lawsuits can continue or whether they will be cut off by insurmountable pleading standards.”

The Holding

The Supreme Court’s rationale began by invoking the one outlined by it in Tibble v. Edison: that “[a] plaintiff may allege that a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones.” Justice Sotomayor noted that the Court of Appeals for the Seventh Circuit “held that petitioners’ allegations fail as a matter of law, in part based on the court’s determination that petitioners’ preferred type of low-cost investments were available as plan options. In the court’s view, this eliminated any concerns that other plan options were imprudent.” 

But Justice Sotomayor then slammed the lower court for “flawed” reasoning, commenting that what she described as a “categorical rule” was “inconsistent with the context-specific inquiry that ERISA requires and fails to take into account respondents’ duty to monitor all plan investments and remove any imprudent ones.” 

Now, if you missed Tibble’s establishment of a standard to be applied in such cases—well, you (like me) may have been distracted by the focus on the applicable starting point for measuring the statute of limitations, and the overall ongoing duty to monitor. But Sotomayor invoked it here as a standard of sorts,[iii] and in the process concluded that “in rejecting petitioners’ allegations, the Seventh Circuit did not apply Tibble’s guidance,” but instead focused on “…another component of the duty of prudence: a fiduciary’s obligation to assemble a diverse menu of options.” That focus went astray, according to Justice Sotomayor, when it focused on choice, more specifically that, so long as the plan provided the opportunity to select prudent choices, the fiduciaries were basically absolved of responsibility for the inclusion of funds that were higher-cost, and thus ostensibly imprudent. 

“In the court’s view,” she wrote, referring to the Seventh Circuit’s decision, “because petitioners’ preferred type of investments were available, they could not complain about the flaws in other options. The same was true for recordkeeping fees: The court noted that “plan participants had options to keep the expense ratios (and, therefore, recordkeeping expenses).” Basically, that because participants had the ability to pick lower cost options, “[t]he amount of fees paid were within the participants’ control. If the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their duty,” Justice Sotomayor wrote.

“Given the Seventh Circuit’s repeated reliance on this reasoning, we 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).” 

This “context specific” focus she commented meant that “at times, the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.”

What This Means

Though we still must wait and see what the Seventh Circuit makes of this the decision would appear to be good news for those bringing suit, and not-so-good for those hoping to dismiss without going to trial. The exact meaning and application of “context specific” remains to be seen (though “a range of reasonable judgments” is apparently contemplated). 

What does seem clear is that the primary rationale in Hecker v. Deere—one of the first excessive fee suits to be filed—that a diverse set of investment options (including a self-directed brokerage account) could forestall suit against options deemed less prudent—has been categorically rejected by the nation’s highest court. And that has implications for the other cases that have relied upon that conclusion.

But mostly, this—and all such cases—should remind us all that a good fiduciary process demonstrates a reasoned selection and monitoring process for each and every investment in the plan—both from the perspective of performance, as well as cost. 


[i] Justice Amy Comey Barrett recused herself, as she was still sitting on the Seventh Circuit at the time of the underlying decision.

[ii] The 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. 

The district court ruled in favor of the plan fiduciary defendants in March 2018, and the appellate court affirmed that decision in 2020In June 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. 

[iii] In Tibble, this court explained 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. If the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their duty.”

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