Supreme Courtroom desires to handle pleading customary in Northwest pension plan lawsuits – labor and human assets
On July 2, 2021, the Supreme Court agreed to hear Hughes v Northwestern, which included a challenge to investment fees and accounting fees in two Northwestern University 403 (b) plans. The district court dismissed the lawsuit for failing to reasonably invoke a breach of fiduciary duty of care, and the Seventh Circuit upheld the dismissal. The Supreme Court will now deal for the first time with the critical question of which allegations are sufficient to assert a plausible breach of the duty of loyalty and to assert excessive investment and bookkeeping fees. 1
The Supreme Court will review the case in its next term starting October 2021 and is expected to reach a decision in the first half of 2022.
Hundreds of class action lawsuits have been filed under ERISA over the past few years in relation to fiduciary breach claims related to 401 (k) and 403 (b) defined contribution option fees. These “overcharge” cases often include allegations about the performance of investments and the accounting costs of the plan. At the district court level, the court decisions are very different about what is sufficient for a breach of duty of care in the selection and monitoring of investment options and the appropriateness of the planned effort.
Plaintiffs in these cases generally ask the court to conclude that the plan’s trustees did not have a prudent process of overseeing investments and accounting services, otherwise the plan would have paid less. Plaintiffs rely largely on publicly available information from the annual Form 5500 of the plans and often claim that the plans:
- The cheapest available share class was not used (e.g. institutional shares);
- Failure to offer index funds in place of more expensive actively managed funds;
- Too few or too many investment opportunities offered;
- investment options offered that underperformed other funds;
- have paid excessive recording fees compared to an allegedly fair market fee or fees paid by allegedly comparable plans;
- Paid for accounting as a percentage of plan assets and not per participant; and or
- Failed to regularly request proposals to consider alternate clerks.
The Northwestern case raises many of these theories and, along with a case against the University of Pennsylvania, was among a dozen similar lawsuits filed by the same law firm against major universities in 2016. Given the unique history of private university plans, these cases generally involve allegations of the use of pensions, numerous investment opportunities, and multiple records. District courts in the Northwestern and Penn cases upheld motions for dismissal. While the Seventh Circuit confirmed the Northwest’s layoff in March 2020, the Third Circuit partially overturned Penn’s layoff in May 2019.
When asking the Supreme Court to hear the Northwestern case, plaintiffs argued that the Seventh Circuit’s decision created a split in the circuit that warranted a review by the Supreme Court. In May 2021, the acting Attorney General of the Biden Administration, working with the Department of Labor, advised the Supreme Court to accept the case because the decisions of Northwestern and Penn were contradictory, the issues raised were of major concern and “[a]at least two of them [Northwestern
plaintiffs’] Expectations . . . make a plausible claim for breach of ERISA’s duty of care. “
Problems in the Supreme Court
The Supreme Court in the case identified by the Solicitor General is likely to address at least two of the lawsuits: not using the lowest cost share class and not taking steps to try to reduce recording fees. The Supreme Court may also consider other issues, including what allegations to include in relation to investment benchmarks, as well as the relevance of the overall mix of investments offered in the plan, the use of index funds, and revenue sharing. Some of these issues are highlighted below.
Share Classes: The Solicitor General took the position that plaintiffs had asserted that the trustees of the plan knew, or should have known, that identical, lower-cost share classes were available for large plans and that similarly appointed trustees were available for less expensive share classes. Lower courts disagree on whether to use the lowest cost share class alone. In addition, plan trustees sometimes include higher cost Share Classes when those Share Classes offer revenue sharing in the plan to cover expenses such as recording fees. Although the Supreme Court in its landmark decision in Bell Atlantic v. Twombly ruling that conduct “consistent with a wide range of rational … business strategies” cannot be the basis for suspicion of wrongdoing, the Penn Third Court found that principle does not apply to cases of ERISA- Violations of fiduciary duties.
Impact of Wide Range of Investment Options: The Attorney General also opposed the Seventh Circuit’s finding that plaintiffs failed to claim that the plans falsely included more expensive funds versus cheaper index funds because the plans offered a wide range of investment options with different expense ratios, including index funds. The Seventh Circuit argued that the wide range of investment options enabled plan participants to choose cheaper index funds. The attorney general argued that each and every investment option should be assessed independently and that offering a wide range of investment options at different costs does not excuse the inclusion of careless investment options.
Investment benchmarks: The Supreme Court can also clarify the standard for analyzing an appropriate “benchmark” for attacked assets at the stage of the application for rejection. As the Attorney General acknowledged, most courts hold that a plaintiff cannot, at least outside of the stock class context, assert a claim simply by claiming that there is a lower cost or higher performing alternative investment option. Nonetheless, some courts have declined to consider an appropriate benchmark comparison for a particular investment in the dismissal phase in order to give plaintiffs functionally free rein.
Recording Fees: The Attorney General took the position that plaintiffs had made a claim alleging that the plan’s trustees could have lowered recording fees by negotiating lower fees, conducting a competitive bidding process, or using one record holder in place of two would have. In particular, the Attorney General stated that these allegations led to the conclusion that “a reasonable plan trustee would have monitored the fees for the records and attempted to reduce them without affecting the benefits.” Many complaints allege few, if any, facts about the quality of the services that would be available under an alternative, lower-cost documentation regime – and lower courts currently disagree on whether such allegations are necessary to survive a dismissal motion. While most courts recognize that there is no need to submit requests for proposal, others have made such allegations as grounds for rejecting a request for dismissal.
Lawsuits contesting fees and investment options related to 401 (k) and 403 (b) had mixed results in the pleading phase. The Supreme Court’s decision in the Northwestern case could bring some degree of clarity and consistency to the pleading standard for allegations of fiduciary violations related to plan costs and investment options. The impact of the Supreme Court’s intervention on this issue will largely depend on which standard of pleading it ultimately adopts.
1 In his decision, Tibble v. In 2015, Edison, the Supreme Court ruled that there was an “ongoing duty” to monitor investments but failed to address the allegations sufficient to make a plausible claim.
The content of this article is intended to provide general guidance on the subject. You should seek expert advice regarding your specific circumstances.