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The 7th Circuit Revives 403(b) Participants’ ERISA Claims Against Northwestern University

by | Apr 3, 2023 | ERISA Cases

On March 23, 2023, the U.S. Court of Appeals for the Seventh Circuit issued an opinion that revived certain breach of fiduciary claims brought by participants in the Northwestern University ERISA class action. A copy of the Court’s opinion in Hughes v. Nw. Univ., — F.4th —-, 2023 WL 2607921 (7th Cir. Mar. 23, 2023) can be found HERE.

Why is this decision important?

The Seventh Circuit appears to have retreated from its ruling last year in another ERISA class action, Albert v. Oshkosh Corp., 47 F.4th 570 (7th Cir. 2022), which defendants have relied upon as support for motions to dismiss class action complaints alleging violations of the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1104(a).

No heightened pleading standard for non-ESOP cases

The Court clarified that the heightened pleading standard articulated in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014), requiring plaintiff to plausibly allege “an alternative action that the defendant could have taken … that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it,” is only applicable to cases involving employee stock ownership plans (“ESOPs”).

In non-ESOP cases, the more relaxed plausibility standard articulated in Ashcroft v. Iqbal, 556 U.S. 662 (2009) and Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) applies. Applying the Twombly/Iqbal standard, the Court ruled that the plaintiffs in Hughes had plausibly alleged that defendant Northwestern Univ. had breached its duty of prudence by failing to monitor recordkeeping expenses and other administrative costs. The Court also found that plaintiffs stated a claim based on defendant’s alleged failure to swap out retail mutual fund shares for cheaper but otherwise identical institutional mutual fund shares.

A plaintiff must allege fiduciary decisions outside a range of reasonableness

The Court held that “[t]o plead a breach of the duty of prudence under ERISA, a plaintiff must plausibly allege fiduciary decisions outside a range of reasonableness.” Hughes, 2023 WL 2607921, at *9. “[T]hat range of reasonableness will depend on the circumstances … prevailing at the time the fiduciary acts.” Id. Moreover, “‘a well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable…’ At the pleading stage, a plaintiff must provide enough facts to show that a prudent alternative action was plausibly available, rather than actually available.” Id. at *10 (quoting Bell Atlantic Corp., 550 U.S. at 556).

Plaintiffs stated a claim for excessive administrative fees

As articulated by the Seventh Circuit, “the duty of prudence includes a continuing duty to monitor plan expenses and ‘incur only costs that are reasonable in amount and appropriate’ with respect to the services received.’” Id. at *10 (quoting Tibble v. Edison Int’l, 843 F.3d 1187, 1197 (9th Cir. 2016)). As such, plaintiffs were required only to allege facts to “render it plausible that Northwestern incurred unreasonable recordkeeping fees and failed to take actions that would have reduced such fees.” Id.

In applying this standard to the facts alleged by plaintiffs, the Seventh Circuit held that plaintiffs had met this standard by alleging that: (1) the plans at issue paid between four to five million a dollars a year in fees; (2) a more reasonable fee would have been one million based on a $35 flat fee per participant based on features of the plans, nature of the services provided by the recordkeepers, the number of participants, and the recordkeeping market; (3) there were “numerous recordkeepers in the marketplace who are equally capable of providing a high level of service;” and (4) recordkeeping services are “commoditized” where recordkeepers primarily differentiate based on price (or in the words of the court, itself, recordkeeping services are “fungible and the market for them is highly competitive”). Id. at *11. The court differentiated the more specific factual allegations in Hughes from the less robust factual allegations in Albert, 47 F.4th 570. Id. *11-*12.

The Court refused to give preference to Northwestern’s alternate explanations as to why it failed to consolidate recordkeepers or switch to a per capita fee agreement. “At the pleadings stage, plaintiffs were required to plausibly allege that Northwestern’s failure to obtain comparable recordkeeping services at a substantially lesser rate was outside the range of reasonable actions that the university could take as plan fiduciary. They have done so.” Id. at *12. That Northwestern may have had a reason not to take action on recordkeeping fees, the proffered reasons “are not strong enough to justify dismissal of the recordkeeping claim on the pleadings.” Id.

Plaintiffs stated a claim based on imprudent investment decisions

The Seventh Circuit also held that investment selection is subject to “the continuing duty to monitor plan investments outlined in Tibble [v. Edison International, 575 U.S. 523 (2015)],” and under the standard articulated there, and thus plaintiffs share-class claim survived. Hughes, 2023 WL 2607921, at *13. Specifically, plaintiffs had alleged that identical shares were available at lower prices and that Northwestern could have negotiated for institutional-class shares based on the plans’ size and corresponding bargaining power. Therefore, plaintiffs’ allegations rendered it plausible that institutional-class shares were available to Northwestern and plaintiffs need not allege that institutional-class shares were actually available. Id. at *14.

Northwestern’s alternative explanations were “not so much more obvious than plaintiffs’ account that this issue can be resolved on the pleadings.” Id. Defendants’ alternative inferences suggested only that institutional-class shares were possibly unavailable and, thus, “these alternative inferences are not strong enough to overcome the equally, if not more, reasonable inference that Northwestern failed to use its size to bargain for cheaper institutional shares.” Id. at *15.