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February 24, 2022

Supreme court issues opinion in ERISA fee litigation case

Peter Scott

The U.S. Supreme Court recently issued a unanimous opinion in an ERISA fiduciary breach lawsuit Hughes v. Northwestern University, reversing the lower courts decisions. The lawsuit alleged that Northwestern’s actions in managing their $2.3 billion employee 403(b) plan breached fiduciary duties by allowing unreasonably high investment and recordkeeping fees.

Northwestern was successful in having the participant’s lawsuit dismissed prior to discovery and trial. The Seventh Circuit Court of Appeals upheld the lower court’s dismissal of the case. Both courts reasoned that the presence of high expense funds in a plan is not in itself a fiduciary breach if participants may select other funds with lower fees.

Virtually all recent ERISA excessive fee complaints support allegations of a fiduciary breach through tables or spreadsheets comparing a plan’s funds to identical but less expensive share classes of the same fund, or to similar but better performing funds. The issue in Northwestern was whether this evidence is sufficient to create the “plausible inference” of a fiduciary breach allowing the case to proceed to trial rather than a quick dismissal.

In its unanimous decision, the Supreme Court held that the lower courts used an improper standard in dismissing the Northwestern litigation. The Court reiterated its guidance from a 2015 case Tibble v. Edison Int’l. In Tibble, the Supreme Court noted that an ERISA plan fiduciary has a duty to regularly monitor all plan investments and remove imprudent investments within a reasonable time. This is a context-specific inquiry, and, per Tibble, “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”. 

The Supreme Court sent the Northwestern case back to the lower courts to determine whether the plan fiduciaries acted prudently in evaluating plan investments and fees.

The impact of the Supreme Court decision is clear. Plan sponsors need to continually monitor all plan investments. It is also likely that litigation against larger 401(k) and 403(b) plans will continue. Plan sponsors can minimize litigation risk by regularly reviewing investment expenses and performance, as well as plan administrative expenses, to document that they acted prudently.