Last week, the Supreme Court issued its anticipated ruling in the ERISA fiduciary-breach class action Hughes v. Northwestern. In its unanimous decision, the Court vacated the Seventh Circuit’s dismissal of the case and sent the case back to the lower court for further review. The narrow decision may boost plaintiffs in similar ERISA cases involving challenges to retirement plan fees and investment options, but it also offers hope to defendants.
The case involved a putative class of current and former employees of Northwestern University who sued the school and alleged fiduciaries of two retirement plans. The claims, which narrowed by the time the case reached the Supreme Court, alleged that the fiduciaries of the 403(b) plans violated ERISA fiduciary duties by offering investment options and recordkeeping services with excessive fees. Specifically, the plaintiffs challenged: the number of recordkeepers and total amount of recordkeeping fees; offering “retail” share classes with higher fees than allegedly “identical” “institutional” share classes; and offering too many options, which allegedly confused participants. The district court dismissed the complaint and the Seventh Circuit affirmed, primarily because the less-expensive options the plaintiffs preferred were offered by the plan. The Seventh Circuit’s reasoning was based on precedent holding that a plaintiff does not state a claim of imprudence if the plan offers a diverse menu of options that included the lower-cost options the plaintiffs preferred.
The Supreme Court disagreed. It is not enough for fiduciaries to create a plan menu that contains less-expensive options that participants might want. As the Supreme Court explained in Tibble v. Edison, plan fiduciaries have a fiduciary duty to monitor every investment option in a plan, and an imprudent option is not rendered prudent by including it in a menu that also contains less-expensive options. Although a wide range of choice is a factor in determining whether a fiduciary acted prudently, lower courts cannot dismiss claims solely on the basis that a menu contained less-expensive options that participants could have selected.
The Supreme Court did not, however, hold that the plaintiffs stated a claim that must survive a motion to dismiss. The Supreme Court instead directed the Seventh Circuit to reconsider the plausibility of the plaintiff’s complaint, but without relying solely on the principle that fiduciaries meet their ERISA obligations by offering a diverse menu. Instead, each option must be prudent, in the context of the plan’s overall menu of options. Importantly, the Supreme Court reiterated a point it has emphasized previously: the duty of prudence requires a “context specific” inquiry into the allegations. In addition, lower courts must give “due regard” to the fact that there is a “range of reasonable judgments” a fiduciary may make, based on experience and expertise.
Though the Northwestern decision is a win for the plan’s participants, it is not a sweeping victory. The opinion is narrow, and it rejects an approach to assessing prudence that primarily applies on the Seventh Circuit. Fiduciaries are not shielded from claims of imprudence simply because a plan offered low-cost investment options. The Seventh Circuit could apply a context-specific approach and still affirm dismissal of the plaintiffs’ complaint on slightly, or entirely, different grounds. Until the Seventh Circuit considers these issues on remand, it is unclear how the Court’s directives will play out in the analysis on the merits.
But the impact of the Supreme Court’s decision is already being felt in the lower courts. On January 26, two days after the Supreme Court released its opinion in Northwestern, district courts denied three motions to dismiss in fiduciary class action cases — two in the Eastern District of Wisconsin by Judge Pamela Pepper, and one in the Northern District of Georgia by Judge Clay Land. See Bangalore v. Froedtert Health, Inc., No. 20-cv-893 (E.D. Wis. Jan. 26, 2022); Shaw v. Quad/Graphics, Inc., No. 20-cv-1645 (E.D. Wis. Jan. 26, 2022); Goodman v. Columbus Reg’l Healthcare Sys., Inc., No. 4:21-cv-15 (N.D. Ga. Jan 26, 2022). Noting that he had been waiting on the Supreme Court’s Northwestern decision, Judge Land reasoned that the fact that participants “had some lower cost index fund options is not dispositive” of whether the fiduciaries satisfied their duty of prudence. Other district courts may follow suit.
The Supreme Court’s decision also contains helpful language, namely the reminder that the duty of prudence requires a “context specific” inquiry and that courts must give “due regard” to the fact that there is a “range of reasonable judgments” a fiduciary may make. The Supreme Court was referring to ERISA’s fiduciary standard of prudence found in Section 404(a)(1)(B) which requires a fiduciary to act with the “care, skill, prudence, and diligence” under the “circumstances then prevailing” that a prudent person “acting in a like capacity” and “familiar with such matters” would use in the conduct of “an enterprise of a like character and with like aims.” Defendants in ERISA fiduciary-breach cases should focus courts on this provision and push back on any suggestion that ERISA mandates a “one-size-fits-all” approach to 401(k) or 403(b) plans.
The Hughes v. Northwestern decision should not be a significant cause for concern for plan fiduciaries — it does not indicate that fiduciaries should change the way that they review and choose investment options and recordkeeping fees. Ultimately, the greatest effect of Hughes v. Northwestern will be on ERISA litigation and how judges will evaluate motions to dismiss fiduciary-breach claims.