On Monday, the Supreme Court heard oral arguments at Hughes v. Northwestern University, No. 19-1401, one of some 150 similar class actions filed across the country in recent years. The case was brought by pension plan members alleging that the plan trustees breached their obligations under ERISA with respect to record keeping and investment fees charged to plan members. Specifically, the complainants alleged that Northwestern breached its ERISA duty of care by (1) paying excessive record keeping fees (using multiple record keepers and allowing payment of record keeping fees through revenue sharing); and (2) offering mutual funds with excessive investment management fees.
The district court allowed Northwestern’s motion to dismiss, and the Seventh Circuit upheld. The Seventh Circuit found no ERISA violations based on Northwestern’s record keeping arrangement. The court explained that ERISA does not require a single registrar and that there is “nothing wrong – for the purposes of ERISA – for plan members to pay archival fees through of expense ratios ”as part of a revenue sharing agreement.
The Seventh Circuit also rejected the request for excessive investment fees, concluding that the types of funds sought by applicants (low-cost index funds) were and are available to them, “thus eliminating any allegation that plan participants were forced to endure an unappetizing menu ”.
The plaintiffs appealed to the Supreme Court, which granted certiorari to answer this question: “[w]Allegations that a defined contribution pension plan paid or charged its members a fee that significantly exceeded the fee for available alternative investment products or services are sufficient to raise a claim against the plan trustees for breach of contract. duty of care under ERISA. “
During today’s oral argument, various members of the Court appeared to have difficulty crafting a motion to dismiss the standard in these cases, with Justices Alito, Gorsuch, Breyer, Kagan and Kavanaugh each pressuring the parties to the facts which they believed should be invoked to open the door of the courthouse to the plaintiffs, in particular with regard to the investment costs. Although a key issue in the plaintiffs’ amended complaint was the use of a revenue split, rather than a per-participant fee, there has been little or no investigation or recognition by the judges on the issue. ‘impact of income sharing in compensation for expenses, as a reason for choosing a more expensive share class as an investment option.
Equally surprising was Justice Roberts ‘line of questioning on the scope of ERISA’s fiduciary duty of care, at one point asking plaintiffs’ counsel whether the standard was the “highest” obligation. or an “average” obligation, something more akin to negligence.
There seemed to be more coalescence on the demand for record keeping. Several members of the court indicated that they approved of the Seventh Circuit’s finding that ERISA does not require a single registrar, and that the plaintiffs’ argument that the regime should have been able to obtain fees of $ 35 per participant, without more, was insufficient to state a Claim.
Judge Kagan appeared to be the only legal expert clearly in favor of overturning the Seventh Circuit decision, supported by Judges Sotomayor and Breyer. With Judge Barrett’s recusal (she was still sitting on the Seventh Circuit at the time of the underlying decision), if Judge Kagan recruits just one more judge, there could be a tie, but a tie. votes would leave the decision of the Seventh Circuit intact.