On December 6, the United States Supreme Court heard oral arguments in the case Hughes v. Northwestern University. The issue at issue is whether the allegations that a defined contribution pension plan paid fees that significantly exceed the fees for other available investment products or services are sufficient to raise a claim against the plan trustees. for breach of duty of care under the Employees Retirement Income Security Act of 1974, 29 USC § 1104 (a) (1) (B) (ERISA).
The case is part of a wave of cases brought under ERISA in 2016 against universities that operated some of the largest defined contribution pension plans in the country. More than a dozen leading research universities have faced cookie-cutter complaints with substantially similar allegations. This wave of litigation against universities is part of a larger trend in ERISA litigation. When pension plan fees rise and underperforming investments can be identified, employees claim that plan managers violated ERISA by not intervening.
Under ERISA, a claimant can recover the benefit amount owed under the plan, along with reasonable attorney fees at the discretion of the court. For large plans, claimants can claim damages totaling hundreds of millions of dollars.
The complaints lodged against the universities in 2016 were all the subject of motions for dismissal. Most universities lost these claims in district courts. A few (the University of Pennsylvania and the University of Washington in St. Louis) had complete success in district court, only to see the plaintiffs’ claims revived after the appeal. The University of New York, which won at the end of a lawsuit, found itself, after appeal, confronted with several claims which had initially been the subject of a request for dismissal. Virtually all of the universities that did not win the dismissal motions settled the multi-million dollar claims without admitting liability.
Northwestern University, however, was successful with its motion to dismiss in the District Court for the Northern District of Illinois, then on appeal to the Seventh Circuit. The Supreme Court will now decide whether the plaintiffs can pursue their claims against Northwestern. The ruling in this case could have important ramifications for the ERISA litigation, particularly on how challenges to pension plans’ fees and investments can survive a dismissal motion.
Background: the administration of the Northwestern pension plan challenged
The plaintiffs in this case, beneficiaries of Northwestern University’s 403 (b) plans, sued the university in 2016. The class action alleged that the plan administrator and the plan trustees breached their fiduciary duties under the lawsuit. ERISA in the following ways:
- Offering too wide a range of investment options.
- Allow a financial service provider to keep records of the investment funds it offers.
- Offer investment options that charge excessive fees.
Northwestern, like many universities, used two record keepers: TIAA and Fidelity. The complaint alleged that having both record keepers and a huge number of choices for attendees prevented Northwestern from getting the lowest fees from TIAA or Fidelity. In addition, it was argued that having this large number of choices for participants also prevented Northwestern from qualifying for the institutional category of products for participants which the applicants claimed were identical to the retail category for. these products, except that the institutional category charged lower fees than the retail category. to classify. The complaint further alleged that Northwestern had not even asked TIAA or Fidelity to reduce its fees or waive the requirements to participate in the institutional category of investments.
The District Court for the Northern District of Illinois ruled that the alleged facts did not constitute a breach of fiduciary duty and allowed the defendant’s motion to dismiss. The court concluded that since plan members had a number of options to choose from, no member was required to invest in a high-cost product; therefore, participants could avoid the alleged excessive record keeping costs and underperformance by simply selecting a different option. The Seventh Circuit confirmed the dismissal of the lower court, concluding “that it would be beyond the role of the court to seize ERISA in order to guarantee individual litigants their own preferred investment options”.
In seeking certiorari, the plaintiffs argued that the opinion of the Seventh Circuit conflicted with the decisions of the Third and Eighth Circuits, which ruled on the cases of the University of Pennsylvania and the University of Washington, respectively. . The plaintiffs argued that their case would have survived a motion to dismiss in the Third and Eighth Circuits because the ERISA plaintiffs are entitled to the plausible inference that excessive fees are the result of reckless management. The United States, participating at the Court’s invitation, supported the plaintiffs’ request for certiorari, stressing the split in the circuit and the importance of determining what ERISA requires of plan trustees to control spending by “ million employees nationwide whose pension assets are invested in plans governed by ERISA.
Before the Supreme Court, none of the judges seemed particularly enamored with the rule announced by the Seventh Circuit, which was characterized by the fact that as long as a plan offers options with low fees, it cannot be held responsible for wrong. management under ERISA. as a matter of law to include high cost options in the plan.
At the same time, many members of the Court expressed concern over the arguments put forward by the plaintiffs’ lawyers. Members of the court carefully questioned lawyers on whether plan trustees should be concerned with offering only the least expensive options and whether and how other factors might be considered in making the decision. decision of the plan trustees. Judge Kagan, a faculty member at the University of Chicago and Harvard University before joining the court, noted that many professors move to another institution and like to keep the same pension plan when they move on. one establishment to another. Justice Sotomayor said it seemed reasonable to her to maintain two archivists. In short, it appears the Court is seeking common ground between the Seventh Circuit ruling and the broader rule advocated by the plaintiffs.
A decision is expected by June 2022.
Thanks to summer associate Latazia Carter for her work on this content.