Washington D.C. – On January 24, 2022, the U.S. Supreme Court issued its much-anticipated decision in a class action alleging that the administrators of the Northwestern University 403(b) retirement plans breached their fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA). This decision is being widely hailed as a victory for employees and retirees who participate in defined contribution 401(k) and 403(b) plans.
The opinion in Hughes v. Northwestern University, No. 19-1401, 2022 WL 199351 (U.S. Jan. 24, 2022) can be found here.
Some sponsors of 401(k) and 403(b) retirement plans were hoping that the Supreme Court would make it more difficult for retirement plan participants to bring ERISA class actions. Instead, the Supreme Court seized the opportunity to reiterate the rigorous duty of prudence standard set forth in the landmark decision, Tibble v. Edison Int’l, 575 U.S. 523 (2015).
Why did the University’s employees bring a class action?
This case was filed by participants in Northwestern University’s two employee retirement plans. They alleged that the fiduciaries of these plans imprudently selected retail class shares of mutual funds, which have higher expense ratios than lower-cost institutional class shares of such funds.
An expense ratio is a fee charged by a mutual fund for investment management services. Such fees are calculated as a percentage of the assets an investor has in the fund.
The Northwestern University 403(b) plans’ participants also alleged that they were being charged excessive administrative fees for recordkeeping services. A recordkeeper tracks the balances of individual participant accounts and provides regular account statements.
Recordkeeping fees may be calculated as a percentage of the assets for which the recordkeeper is responsible—typically through an arrangement known as revenue sharing. Alternatively, these fees may be charged at a flat rate per participant account.
The plaintiffs alleged that it was imprudent for the Northwestern University 403(b) plans’ fiduciaries to approve asset-based compensation for recordkeeping and for failing to monitor and control such fees. Instead, plaintiffs claimed that the plans’ fiduciaries should have opted for lower-cost flat fees charged on a per-participant basis.
How did this case reach the Supreme Court?
The case was filed in 2016. The University filed a motion to dismiss the complaint in 2017. The District Court granted the University’s motion and denied the plaintiffs leave to amend their complaint.
The participants appealed to the U.S. Court of Appeals for the Seventh Circuit, which affirmed the dismissal of the case. See Divane v. Northwestern Univ., 953 F.3d 980 (7th Cir. 2020).
The plaintiffs then petitioned the Supreme Court to hear their case. On May 25, 2021, the Acting Solicitor General filed a brief recommending that the Supreme Court grant certiorari to review that decision. In July 2021, the Supreme Court granted certiorari. See id., cert. granted, No. 19-1401 (U.S. July 2, 2021).
Does this decision help workers?
Yes! Defendants in ERISA class actions have long argued that a fiduciary’s obligation is limited to providing a diverse menu of investment options that include some low-cost funds. They contend that having offered an adequate array of choices, “eliminat[ed] any claim that plan participants were forced to stomach an unappetizing menu.” Id. at 991.
The Supreme Court flatly rejected this argument.
Rather, the Court ruled that an ERISA fiduciary’s duty does not end when the fiduciary selects plan investments at the outset. Reiterating its holding in Tibble, the Court stated that “‘a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones.’” Id. at *3 (quoting Tibble, 575 U.S. at 530). And the fiduciary’s duty to monitor and remove imprudent investments applies to each investment in a plan.
Accordingly, “‘[a] plaintiff may allege that a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones.’” Id. at *3. And a fiduciary’s imprudent decisions are not excused by virtue of the fact that the participants had the “ultimate choice over their investments” and could have chosen lower-cost ones. Id. at *4.
Finally, the Court addressed the plaintiffs’ claim that plans’ fiduciaries failed to adequately monitor or manage the plans’ administrative expenses. Again, the Court rejected the proposition that “plan participants had options to keep the expense ratios (and, therefore, recordkeeping expenses) low,” and, thus, “[t]he amount of fees paid were within the participants’ control.” Id. at *4. Rather, ERISA requires a plan fiduciary to defray “reasonable expenses of administering the plan.” 29 U.S.C. § 1104(a)(1)(A)(ii).
How do I learn more about my rights under ERISA?
Edelson Lechtzin LLP is a national class action law firm with offices in Pennsylvania and California. In addition to cases involving employee retirement plans, our lawyers focus on class and collective litigation in cases alleging violations of the federal antitrust laws, securities and investment fraud, wage theft and unpaid overtime, consumer protection, and dangerous and defective drugs and medical devices.