Supreme Court Set to Decide Which Allegations Make a Difference in College Fees Case, With Wider Implications for ERISA Pension Plan Trustees | King and Spalding

Last month, the U.S. Supreme Court heard arguments in an ERISA case that could have broad ramifications for pension plan trustees. The case-Hughes v. Northwestern University—raises a threshold question that has vexed courts for the past decade: What must an ERISA claimant allege to assert a viable claim that the fees and expenses charged by their pension plan are too high? The Supreme Court’s answer to this question could curb or encourage the growing wave of ERISA fee class action lawsuits filed in recent years. Although the pleadings did not provide any clear clue as to how the Court will answer the central question posed in Hughes, he highlighted the common concern of judges to strike the right balance between protecting plan members from reckless conduct and protecting plan trustees from baseless claims.

CONTEXT: HUGHES V. UNIVERSITY OF THE NORTH WEST AND THE GROWING RECORD OF ERISA EXCESSIVE FEES CASES

Over the past decade, there has been a proliferation of ERISA class actions alleging that 401(k) and other defined contribution pension plans charge participants excessive fees and expenses. According to an amicus brief submitted by the U.S. Chamber of Commerce, ERISA class action lawsuits grew fivefold between 2019 and 2020 alone.

Hughes v. Northwestern University is a perfect example of this trend. Filed in 2016, Hughes was one of many cases targeting major universities over the management of their 403(b) plans (essentially the educational equivalent of a 401(k) plan). Hughes targets Northwestern University and, like complaints filed against other universities, alleges that the trustees of Northwestern’s pension plans breached their ERISA obligations by allowing participants to pay (1) fees for categories of more expensive “retail” shares of investment funds when cheaper institutional grade shares were available and (2) fees for the plan’s two registrars that were higher than the fees paid by similar regimes that used only one registrar. The complaint in Hughes allege that these excessive fees were caused, at least in part, by an investment menu with an unnecessarily high number of investment options and the use of multiple bookrunners.

The district court dismissed the complaint. The Seventh Circuit said, finding that the complaint in Hughes did not make a viable claim because Northwestern’s plans included low-cost funds that plaintiffs could have selected. She also denied the request for archiving, concluding that the applicants in Hughes did not plausibly claim that participants would have paid less if a single accountant or a different fee structure had been used. The plaintiffs sought Supreme Court review, saying the Seventh Circuit ruling conflicts with Third, Eighth and Ninth Circuit rulings that allowed similar allegations to proceed to discovery. The Supreme Court granted a review in July 2021.

ORAL ARGUMENT: SUPREME COURT ATTACKS STANDARD FOR PLEADING RELIEFUL CONDUCT UNDER ERISA

Hughes presents a fundamental and unresolved question: What must a plaintiff allege to assert a viable claim that the ERISA trustees failed to prudently manage pension plan expenses? This is not the first time the Supreme Court has considered the intersection between ERISA’s fiduciary duties and federal advocacy standards. In 2014, the Court rendered Fifth Third Bancorp vs. Dudenhoeffer, 573 US 409, a 9-0 decision that set the bar high for litigating claims that trustees breached their ERISA obligations by offering company stock in a retirement plan. During the argument of Hughes, the judges tackled several interrelated issues that will determine whether, and at what level, they set the bar for excessive fee claims:

  • What is the standard of prudent fiduciary conduct? Most of the argument focused on the overall issue presented in Hughes: What is the correct standard for arguing a viable claim that the ERISA trustees failed to prudently monitor pension plan expenses? Different groups of judges seemed to view the issue from different angles. At least five justices (Chief Justice, Thomas, Alito, Gorsuch, and Kavanaugh) expressed concerns that a standard of pleading was too lax (and thus allowing participants to sue no matter what the trustees do). Justices Sotomayor and Kagan (and sometimes Justice Breyer), meanwhile, have expressed reservations about crafting a standard that is too high (and thereby allowing trustees to escape liability for wrongdoing). ). The plaintiffs argued that the relevant standard was “objective reasonability,” but Chief Justice Roberts and Justices Gorsuch and Kavanaugh seemed unhappy with that answer and probed what that might mean in practical terms. How much must an investment underperform others, for example, before it is “objectively” unreasonable? And how much more expensive does an investment or service have to be compared to others before it is “objectively” unreasonable?
  • Excessive Fees vs. Excessive Options. The Court also attempted to disentangle claims for excessive fees from allegations that Northwestern offered too many investments and used too many archivists. In general, the Court has been less receptive to the over-investment/record-keeping (or “consolidation”) theory. Indeed, even judges who seemed inclined to side with the plaintiffs in Hughes were skeptical of their “consolidation” argument as a stand-alone theory of recklessness. Judge Sotomayor suggested the investment fee allegations were stronger and added that Northwestern’s use of two different bookrunners was “probably reasonable” on its face. And Judge Kagan sought (and obtained) confirmation from counsel that the plaintiffs’ assertion that the North West schemes’ fees were too high did not depend on their allegation that the schemes offered too many investments. and registrars.
  • What is a suitable comparator? The Court also considered another common question in ERISA fee cases: did plaintiffs identify alternative investments or registrars that were both cheaper? and available? Northwestern argued that the Hughes the plaintiffs had not alleged that the cheaper stock classes they had identified were actually available to Northwestern. The plaintiffs argued that this was a defense on the merits for the lawsuit, not a ground for motion to dismiss. But the Court seemed to assume that ERISA plaintiffs must allege real-world comparators to state a claim, and Justices Breyer and Alito focused their questions on the exact amount of detail needed to meet the plausibility standard of Twombly and Iqbal.
  • Are subsequent plan changes fair?? Although less focused on argument, Chief Justice Roberts seems keenly interested in whether the Hughes plaintiffs could rely on allegations that Northwestern later consolidated its lineup of investments in the plan to litigate a plausible claim. The plaintiffs and the United States argued that the allegations regarding the changes to the Northwest plans were appropriate (and perhaps even sufficient) support for a claim that the previous investment menu was reckless. But the chief justice expressed concern that this could discourage ERISA trustees from taking cautious steps to improve plans.

Overall, the argument showed that there is no clear consensus among the judges and several avenues for deciding (or avoiding) the fundamental question presented in Hughes. A wider notice may follow Dudenhofer‘s in providing generally applicable guidance on the standard for pleading that an ERISA trustee failed to prudently manage pension plan expenses. Indeed, if the pleading is a guide, there may be a majority of votes to establish a standard of pleading which, like the standard in Dudenhofer, actually proves fatal for excessive fee cases in the future. But a narrower decision, such as upholding the denial of the “consolidation” claims while reversing the Seventh Circuit’s decision on the grounds that the presence of cheaper funds in Northwestern’s plans did not relieve the trustees of their obligation to ensuring that the fees charged by other funds were also reasonable is also possible. A narrow track may be the only way to achieve a broader consensus given the diversity of views expressed by judges during oral argument.

Judge Barrett, a former Seventh Circuit judge, recused herself from the case. This creates the possibility of a 4-4 split decision, which would leave the Seventh Circuit decision intact. While this outcome is certainly possible, it may not be likely – the last time the Court considered ERISA’s pleading standards in Dudenhofer, his decision was unanimous.

The Court should issue a written opinion in Hughes by June 2022.

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