Finally, something everyone could agree on — at least on the Supreme Court of the United States. The question before the court in Hughes v. Northwestern University was the plausibility of a breach of fiduciary duty claim stated by current and former participants in two university retirement plans. SCOTUS ruled that the petitioners in the case, originally dismissed by a district court and upheld by the U.S. Court of Appeals for the Seventh Circuit, did in fact plausibly state their claim. The Supreme Court vacated the Seventh Court ruling and remanded the case for further review.
The defendants in the case were alleged to have breached their fiduciary duty by:
- Failing to monitor and control excessive record keeping fees, which negatively impacted plan participants.
- Offering retail share classes of investments with higher fees than those charged by otherwise identical share classes of the same investments.
- Offering too many options that were likely to confuse investors.
SCOTUS found that the Seventh Circuit erroneously relied on “participants’ ultimate choice over their investments to excuse allegedly imprudent decisions by respondents.” In other words, the court asserted that the provision of sufficient investment choices to participants does not automatically exculpate fiduciaries from imprudent actions.
Plan sponsors looking for stricter pleading standards in such cases in the hopes of reining in the recent wave of excessive fee litigation were likely disappointed in the court’s decision. However, they may pay particular attention to some employer-friendly language found in the opinion penned by justice Sonya Sotomayor: “At times, the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs,” she wrote, “and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.”
Ultimately, the court’s decision suggests a myopic focus on either choice or cost may be misplaced. While the court voiced a need for a contextual approach to evaluating fiduciary decision making, plan sponsors must remain vigilant with respect to actively monitoring and controlling fees. They must also evaluate the prudence of including each individual investment in a plan’s lineup.
Over the prior two years, more than 150 excessive fee lawsuits have been filed. Twenty of those cases had been put on hold pending the Hughes decision.