Supreme Court Revives ERISA Fiduciary Breach Case Against Northwestern

​The U.S. Supreme Court gave new life to a proposed class-action lawsuit brought by participants in Northwestern University's retirement plan. The participants claim that plan fiduciaries breached their duty of prudence under the Employee Retirement Income Security Act (ERISA) by charging excessive fees and offering some poor investment choices. Here's what employers need to know about the ruling handed down Jan. 24.

Duty of Prudence

In Hughes v. Northwestern University, current and former employees who participated in the university's defined contribution retirement plan alleged that plan fiduciaries violated ERISA by:

• Failing to monitor and control the fees they paid for record keeping, which forced participants to pay unreasonably high costs.
• Offering mutual funds and annuities with high fees even though identical lower-cost options were available.
• Causing confusion by offering too many investment options.

The 7th U.S. Circuit Court of Appeals rejected the participants' claims, noting that they had multiple investment options and could have chosen to invest in other funds. However, the Supreme Court vacated the 7th Circuit's ruling in an 8-0 opinion. (Justice Amy Coney Barrett did not participate.)

Under ERISA, determining whether plan fiduciaries violated their duty of prudence requires "a context-specific inquiry of the fiduciaries' continuing duty to monitor investments and to remove imprudent ones," according to Supreme Court precedent. In a 2015 ruling, Tibble v. Edison Int'l, the high court said that "a fiduciary is required to conduct a regular review of its investment."

In Hughes, the high court noted that the 7th Circuit did not apply Tibble's guidance. "Instead, the Seventh Circuit focused on another component of the duty of prudence: a fiduciary's obligation to assemble a diverse menu of options," Justice Sonia Sotomayor wrote for the court. Thus, the 7th Circuit must re-evaluate the plan participants' allegations and apply Tibble's guidance, the high court ruled.

"The decision does not purport to break new legal ground, does not decide whether plaintiffs stated a viable claim, and does not address what allegations would be sufficient to plead a viable claim under plaintiffs' theories (including theories focused on recordkeeping fees)," noted law firm Gibson Dunn in a legal insight.

"In evaluating whether the plan participants' allegations were sufficient to survive a motion to dismiss, the court applied well-settled pleading rules and did not adopt an ERISA-specific standard," Gibson Dunn observed.

Sotomayor noted, "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."

The Debate

The case provided the Supreme Court "an opportunity to flesh out the 'careful, context-sensitive scrutiny of a complaint's allegations' required in assessing prudence claims under ERISA," said Nancy Ross and Jed Glickstein, attorneys with Mayer Brown in Chicago, citing Supreme Court precedent.

In support of Northwestern University, Ross and Glickstein had submitted a friend-of-the-court amicus brief for the American Council on Education and 17 other education groups.

"Since 2016, nearly two dozen universities and their employees have been sued for allegedly causing participants to pay too much for plan administration and offering imprudent investment options," they wrote. "Amici have a strong interest in ensuring that this court provides workable guidance for evaluating the plausibility of those claims."

Gregory Garre, an attorney with Latham & Watkins in Washington, D.C., who represented Northwestern at oral argument, raised concerns about the potential impact of a ruling in favor of the plan participants.

"If the claims here can proceed, then any plaintiff can subject a plan to the threat of massive damages and millions of dollars of discovery just by alleging that a cheaper fee, asset or service was available, even if they provide no facts that would support an inference that [the] fee or service was actually available to the plans," he argued.

David Frederick, an attorney with Kellogg Hansen in Washington, D.C., represented the plan participants. He argued that the 7th Circuit "erred by announcing a new rule that immunizes ERISA fiduciaries from suit for including imprudent options, so long as some of the plan options are prudent."

Siding with the participants, the Supreme Court said, "If the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their duty." The court added, "The Seventh Circuit's exclusive focus on investor choice elided this aspect of the duty of prudence."