Noting that “the flawed complaint in this case flunks” ERISA’s pleading standards, the defendants in an excessive fee suit before the nation’s highest court say the case against them should be dismissed.
The Issue(s)
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.”
Case History
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. In June 2021 the federal government—in response to a request from the Supreme Court—said that the Court should take on the case and resolve the issues it presents.
The Defendants’ Response(s)
The defendants here (April Hughes et al. v. Northwestern University et al., case number 19-1401, before the U.S. Supreme Court) describe the plaintiffs’ “core theory” as being that the plans generated excessive fees by offering participants “too many options” from which to choose, and that Northwestern’s decision to offer a wide range of options “depriv[ed] the Plans of their ability to qualify for lower cost share classes of certain investments.” And moreover, that using multiple recordkeepers necessary to service these options led to excessive recordkeeping fees.
However, and “As the district court explained,” Northwestern commented, “petitioners’ theory is paternalistic, but ERISA is not.” They go on to note not only that “ERISA permits plan sponsors to offer participants a “menu that includes high-expense ... funds, together with low-expense ... funds,” but that “here, the kind of low-expense funds petitioners prefer were and are available to them” through Northwestern’s plans; the fact that the plans also “offered additional funds that they did not want” is not actionable.
“Indeed,” they continue, “petitioners could avoid the fees they now object to simply by direct[ing] their dollars to lower cost funds.”
‘Paternalistic’ Pushback
The defendants then turn to the case presented to the Supreme Court for consideration, noting that the plaintiffs “double down on their paternalistic view of ERISA’s duty of prudence,” asserting that participants lack the capacity to make “intelligent” investment choices from among a wide array of options. “Thus, petitioners—now joined by the government—argue that it is not enough for plan administrators to provide a ‘reasonable array’ of options” from which participants may choose. Rather, they contend, “ERISA authorizes damages actions based solely on the fact that the menu of investment options includes marginally more expensive funds in addition to the lower cost options they claim are required.”
Not only do the defendants argue that this is “inconsistent with ERISA’s emphasis on participant choice in this context and the very trust law on which petitioners,” they continue by claiming that “if adopted, it would expose nearly all fiduciaries to the threat of damages litigation (since all a plaintiff would have to allege is that a single option may have been marginally more expensive than necessary) and invite judicial micromanagement of fees.”
‘Alternative’ (Re)Actions
In the alternative, the defendants argue that even if such a paternalistic view was appropriate, that the plaintiffs have failed to state a claim because they have not plausibly alleged an “alternative action that the defendant could have taken” and that a prudent fiduciary necessarily would have taken, consistent with the Supreme Court’s ruling in Fifth Third Bancorp v. Dudenhoeffer.
“The complaint at issue fails to do so for either of their excessive-fee claims,” they write. “In particular, it fails to allege that the institutional-class shares petitioners claim should have been offered were even available, because it fails to identify the minimum investment requirements for those shares, much less allege facts showing they were met. Instead, it relies on conclusory allegations concerning ‘jumbo 401(k) plans’; but 401(k) plans differ in material respects from the 403(b) plans at issue here, including as to liquidity and bargaining leverage. Likewise, the complaint fails to identify a single other recordkeeper that charged the recordkeeping fees petitioners deem reasonable, and it ignores the adverse effects that consolidating to a single recordkeeper would have had on participants—which no doubt explains why most university plans have multiple recordkeepers.”
“ERISA’s duty of prudence provides an important check on plan administration. But it must take into account the nature of the plan at issue, and is subject to the same pleading standards as other claims,” they conclude. “The flawed complaint in this case flunks those standards.”
Will SCOTUS find these arguments persuasive? We shall see.
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