September 12, 2022

ERISA Litigation Roundup: In the Aftermath of Hughes, Seventh Circuit Affirms Dismissal of Excessive Fee Lawsuit

On August 29, 2022, the Seventh Circuit decided Albert v. Oshkosh Corporation, affirming a district court’s dismissal of breach of fiduciary claims related to Oshkosh Corporation’s management of its 401(k) plan, and striking another blow to plaintiffs in such cases in the wake of the Supreme Court’s decision in Hughes v. Northwestern earlier this year.

The plaintiff’s allegations against Oshkosh are familiar to practitioners in this area: he alleged that Oshkosh caused its 401(k) plan to incur excessive recordkeeping and investment management fees, primarily relying on comparisons between the fees paid by the Oshkosh plan and those paid by a “random assortment of nine other plans from around the country.” The Eastern District of Wisconsin dismissed the claims under the Seventh Circuit’s holding in Divane v. Northwestern, 935 F.3d 980 (7th Cir. 2020), in which the Seventh Circuit applied a categorical rule barring these claims as long as the plan included low-cost investment options in which participants could choose to invest.

The Supreme Court rejected Divane’s “categorical” rule earlier this year in Hughes v. Northwestern, 142 S. Ct. 737 (2022). But, as the Seventh Circuit held in Oshkosh, the Supreme Court left the Seventh Circuit’s pre-Divane rules intact, including that fiduciaries are not required to “regularly solicit quotes or competitive bids from service providers” or “scour the market to find and offer the cheapest possible fund.” The Seventh Circuit therefore affirmed the district court’s dismissal, holding that the plaintiff failed to state a plausible claim that the Oshkosh fiduciaries had acted imprudently merely by identifying cheaper options the plan could have chosen, without providing a “sound basis for comparison” between those and the fees incurred by the Oshkosh plan.

The Seventh Circuit joins the Sixth Circuit in holding plaintiffs in these cases to a high pleading standard post-Hughes. In Smith v. CommonSpirit Health, 37 F.4th 1160 (6th Cir. 2022), and Forman v. TriHealth, Inc., 40 F.4th 443, 449 (6th Cir. 2012), the Sixth Circuit affirmed the dismissal of similar excessive fee and imprudent investment claims, similarly noting that Hughes rejected the Seventh Circuit’s categorical rule from Divane but does not require plans to offer the cheapest investment options just because they are the cheapest. And like the Seventh Circuit, the Sixth Circuit rejected plaintiffs’ bare comparisons between the defendant plans’ investment options and those identified by the plaintiffs as comparators, holding that a “side-by-side comparison of how two funds performed in a narrow window of time, with no consideration of their distinct objectives, will not tell a fiduciary which is the more prudent long-term investment option.” CommonSpirit, 37 F.4th at 1167.

Faegre Drinker Perspective

In Hughes, the Supreme Court instructed courts to remember that “the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs,” and to “give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.” The Oshkosh decision confirms that this analysis includes rigid scrutiny of a plaintiff’s complaint when it is based on nothing but allegations that cheaper or better-performing options might have been available to the plan. Defendants should continue to remind courts that nothing in ERISA requires a “one-size-fits-all” approach to investment management or plan expenses, or requires fiduciaries to select the cheapest possible investment options or service providers.

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