A week ago, the U.S. Supreme Court heard oral arguments on an excessive fee suit involving Northwestern University’s 403(b) plan—in a case that could be a game changer in this type of litigation.
Their decision won’t be made for months, but pundits (including this one) have spent the hours since trying to parse the arguments, the questions, and the responses of the parties to discern how the nation’s highest court will rule on the case.
The Issue(s)
The issue[i] 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.”
What’s Next?
Now, by almost any assessment (don’t take my word for it—the transcript is here—or, if you prefer, my brief blow-by-blow summary is here) the questioning (Hughes v. Northwestern University et al., case number 19-1401, in the Supreme Court of the United States) was a bit… disjointed, as the individual justices tried to get their arms around the complex issues raised—and clearly struggled a bit to understand some of the mechanics of retirement plans and retirement plan processing that many of us who toil in that field every day take for granted.
In the days since then, many in the legal community have tried to read between the lines to ascertain the outcome of the case—and you can count on many more doing so in the months ahead (it will likely be June before we know). Most seem to feel that the plaintiffs scored points, but that ultimately the fiduciary defendants made their case—that some, but perhaps not most—of the issues raised will be allowed to resume trial.
Commentators thus far have noted that revenue-sharing was barely mentioned; that the use of multiple recordkeepers (a relatively common structure in these university 403(b) plans, at least among those sued) wasn’t seen as an issue; that choice was (largely) viewed as a positive; and that some of the justices at least seemed willing to countenance choices that were driven by factors other than cost. Cynics might note that, yes—the conservative justices (or at least those typically labelled as such) largely seemed more sympathetic to the perspectives of the plan fiduciaries, while the questions from those on the other side of the ideological aisle seemed friendlier to the plaintiffs’ arguments. But that was not exclusively the case, and it was clear that many of the operational “intricacies” of retirement plans are complex and complicated to those who don’t swim in those waters every day.
Worth noting is that Justice Amy Comey Barrett recused herself, as she was still sitting on the Seventh Circuit at the time of the underlying decision). That, of course, means that a 4-4 tie is possible—and if so, the judgment of the Seventh Circuit would remain in place.
Ultimately one must be careful to glean too much from what questions were asked—and by whom, though that’s customary among SCOTUS “watchers.” But until we actually get their decision—well, we’ll just have to wait and see.
[i] 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 2020. In 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.
