Last fall the nation’s highest court sought the federal government’s input on a case that the law firm of Schlichter Bogard & Denton says is having a “chilling effect” on excessive fee litigation—and now the federal government has weighed in.
Simply stated, “in the view of the United States, the petition for a writ of certiorari should be granted”—meaning that the Supreme Court should consider the case, April Huges, et al., v. Northwestern University, et. al. It was one of the very first university 403(b) excessive fee cases filed back in 2016.[1]
The question presented for the Supreme Court’s consideration? “Whether participants in a defined-contribution ERISA plan stated a plausible claim for relief against plan fiduciaries for breach of the duty of prudence by alleging that the fiduciaries caused the participants to pay investment-management or administrative fees higher than those available for other materially identical investment products or services.”
The Case
The issue that the plaintiffs—represented by the law firm of Schlichter Bogard & Denton—want the Supreme Court to resolve is what they argue is a split in the district courts in the standard to be applied in these cases. Their petition for consideration notes that “the Seventh Circuit dismissed petitioners’ ERISA claims for imprudent retirement plan management, even though the Third and Eighth Circuits have allowed lawsuits with virtually identical allegations to advance, and the Ninth Circuit has also upheld similar claims.” This, they claim is “…not a factual disagreement about whether the specific allegations at issue clear the pleading hurdle,” but rather, they claim it is “a legal disagreement about where that hurdle should be set.”
The plaintiffs argued that “most courts have properly held” that at the pleading stage, “ERISA plaintiffs are entitled to the plausible inference that excessive fees result from imprudent management.” The plaintiffs argue that “ERISA fee litigation has become an increasingly common mechanism for employees and retirees to obtain compensation for losses caused by imprudent management and to spur plan fiduciaries to improve their practices” and that “at issue here is whether such lawsuits can continue or whether they will be cut off by insurmountable pleading standards.”
U.S. Government Response
In responding (Hughes v. Nw. Univ., U.S., No. 19-1401, amicus brief 5/25/21) to the Supreme Court’s request for comment, the government cites at least two plausible claims for breach of ERISA’s duty of prudence, and says that the court of appeals’ decision reaching the opposite conclusion is “incorrect in certain important respects.”
The feds say that (accepting factual allegations as true at this stage) the participant/plaintiffs “have shown that respondents caused the Plans’ participants to pay excess investment-management and administrative fees when respondents could have obtained the same investment opportunities or services at a lower cost” (specifically that they chose retail-class investment funds when institutional class funds were available). They also point to allegations that the plan’s fiduciaries “failed to use any of several available methods to monitor and reduce the Plans’ cost of recordkeeping services.”
“The decision below warrants this Court’s review,” their comments note. “The court of appeals’ reasoning conflicts with decisions of the Third and Eighth Circuits, both of which have held that essentially the same factual allegations and legal claims at issue here stated plausible claims for breach of ERISA’s duty of prudence. Moreover, the question of what ERISA requires of plan fiduciaries to control expenses is important to millions of employees throughout the Nation whose retirement assets are invested in ERISA-governed plans. And that question frequently recurs.”
Other Options
None of which is to say that the feds are saying the case(s) have been made. Rather, they are saying that the allegations made are sufficiently credible to warrant more than a cursory dismissal. “If petitioners succeed in proving those allegations, then respondents breached ERISA’s duty of prudence by offering higher-cost investments to the Plans’ participants when respondents could have offered the same investment opportunities at a lower cost,” they write.
“That is not to say that an ERISA plaintiff could state a claim for relief by alleging merely that alternative investment funds with lower management fees than those included in a plan were available in the marketplace,” they continue, going on to explain that even as plan fiduciaries are allowed/expected to consider factors other than fees, “…courts evaluating imprudence claims likewise should consider all relevant factors in determining whether the plaintiff has plausibly alleged that the fiduciary acted unreasonably.”
Here, they note, the plaintiffs had alleged that there was no difference in the funds other than cost. “If petitioners prove their allegations that respondents had the opportunity to offer those identical lower-cost institutional-class investments for the Plans, then there is no apparent justification for respondents’ failure to do so.”
Calling the lower court’s reasoning “unsound,” and referencing the law of trusts, “which informs ERISA’s fiduciary standards, fiduciaries are not excused from their obligations not to offer imprudent investments with unreasonably high fees on the ground that they offered other prudent investments,” they wrote.
Recordkeeping Fees
As for the allegation that the plan fiduciaries “failed to use any of several methods to reduce recordkeeping fees,” the government said that “Petitioners did not merely present a conclusory assertion that the Plans’ recordkeeping fees were too high; they substantiated their claim with specific factual allegations about market conditions, prevailing practices, and strategies used by fiduciaries of comparable Section 403(b) plans.”
But ultimately, the rationale for the Supreme Court’s review was the apparent disparity in the threshold for trial. The government noted that “the Third Circuit concluded that the plaintiffs’ complaint had satisfied federal pleading requirements by alleging (among other things) that the defendant fiduciaries “paid excessive administrative fees, failed to solicit bids from service providers, failed to monitor revenue sharing, failed to leverage the Plan’s size to obtain lower fees and rebates,” and “selected higher cost investments when identical lower-cost investments were available.” And it also seemed at odds with a ruling in the Eighth Circuit which similarly held that the plaintiffs had stated a claim by alleging that the defendants “fail[ed] to replace” the retail-class investments they offered “with their lower-cost counterparts.”
‘Substantive Obligations’
However, the government argued that the decision in this case “reflects more than just a different outcome than in Sweda and Davis; it reflects a different (and incorrect) understanding of the substantive obligations that ERISA imposes on plan fiduciaries.” They noted that the Seventh Circuit had determined that because the plaintiffs had access to some low-cost investment options, they could not object to the fiduciaries’ decision to offer other investment vehicles that allegedly carried unreasonably high management or recordkeeping fees—a position inconsistent with that of the Eighth Circuit—and apparently with that of the Labor Department.
“The case presents an opportunity for this Court to clarify that ERISA requires fiduciaries to work actively to limit a plan’s expenses and remove imprudent investments, and that fiduciaries will not be excused from those responsibilities on the ground that they selected some (or even many) other prudent investments for a plan.”
What This Means
Interestingly enough, the plan fiduciaries prevailed at the district court in the cases cited in the Third and Eighth circuits (as did the Northwestern fiduciaries), only to have those decisions overturned upon appeal. The U.S. Supreme Court, in deciding whether or not to weigh in on these issue(s), has now been told by the Acting Solicitor of Labor that it should. And, considering the apparent split in perspectives, it should.
How it will rule, if in fact it does consider the issues, is another question altogether.
Footnote
[1] The original suit, filed against Northwestern University in 2016 by the law firm of Schlichter Bogard & Denton, had argued that Northwestern had “eliminated hundreds of mutual funds provided to Plan participants and selected a tiered structure comprised of a limited core set of 32 investment options,” including five tiers—one a TDF tier, the second five index funds, the third consisting of 26 actively managed mutual funds and insurance separate account, and an SDBA. However, the suit noted that Northwestern continued to contract with two separate recordkeepers (TIAA-CREF and Fidelity) for the retirement plan, and only consolidated the Voluntary Savings Plan to one recordkeeper (TIAA-CREF) in late 2012. The suit also took issue with the alleged inability of the plan fiduciaries to negotiate a better deal based on its status as a “mega” plan, for presenting participants with the “virtually impossible burden” of deciding where to invest their money (because of too many investment choices), and for including active fund choices when passive alternatives were available. The district court ruled in favor of the plan fiduciary defendants in March 2018, and the appellate court affirmed that decision in 2020.
- Log in to post comments