The nation’s highest court has agreed to hear a case that the law firm of Schlichter Bogard & Denton says is having a “chilling effect” on excessive fee litigation.
The district court ruled in favor of the plan fiduciary defendants in March 2018, and the appellate court affirmed that decision in 2020. Roughly a month ago the federal government—in response to a request from the Supreme Court—said that the court should take on the case and resolve the issues it presents.
The Issue(s)
The issue that the plaintiffs—represented by the law firm of Schlichter Bogard & Denton—want the Supreme Court to resolve is what they argue is a split in the district courts in the standard to be applied in these cases. Their petition for consideration notes that “the Seventh Circuit dismissed petitioners’ ERISA claims for imprudent retirement plan management, even though the Third and Eighth Circuits have allowed lawsuits with virtually identical allegations to advance, and the Ninth Circuit has also upheld similar claims.” This, they claim is “…not a factual disagreement about whether the specific allegations at issue clear the pleading hurdle,” but rather, they claim it is “a legal disagreement about where that hurdle should be set.”
The plaintiffs argued that “most courts have properly held” that at the pleading stage, “ERISA plaintiffs are entitled to the plausible inference that excessive fees result from imprudent management.” The plaintiffs argue that “ERISA fee litigation has become an increasingly common mechanism for employees and retirees to obtain compensation for losses caused by imprudent management and to spur plan fiduciaries to improve their practices” and that “at issue here is whether such lawsuits can continue or whether they will be cut off by insurmountable pleading standards.”
Case History
The original suit, filed against Northwestern University in 2016 by the law firm of Schlichter Bogard & Denton, had argued that Northwestern had “eliminated hundreds of mutual funds provided to Plan participants and selected a tiered structure comprised of a limited core set of 32 investment options,” including five tiers—one a TDF tier, the second five index funds, the third consisting of 26 actively managed mutual funds and insurance separate account, and an SDBA. However, the suit noted that Northwestern continued to contract with two separate recordkeepers (TIAA-CREF and Fidelity) for the retirement plan, and only consolidated the Voluntary Savings Plan to one recordkeeper (TIAA-CREF) in late 2012. The suit also took issue with the alleged inability of the plan fiduciaries to negotiate a better deal based on its status as a “mega” plan, for presenting participants with the “virtually impossible burden” of deciding where to invest their money (because of too many investment choices), and for including active fund choices when passive alternatives were available.
What it Might Mean
In recommending that the Supreme Court weigh in on this case, the federal government commented that this case “…reflects a different (and incorrect) understanding of the substantive obligations that ERISA imposes on plan fiduciaries.” They noted that the Seventh Circuit had determined that because the plaintiffs had access to some low-cost investment options, they could not object to the fiduciaries’ decision to offer other investment vehicles that allegedly carried unreasonably high management or recordkeeping fees—a position inconsistent with that of the Eighth Circuit—and apparently with that of the Labor Department.
“The case presents an opportunity for this Court to clarify that ERISA requires fiduciaries to work actively to limit a plan’s expenses and remove imprudent investments, and that fiduciaries will not be excused from those responsibilities on the ground that they selected some (or even many) other prudent investments for a plan.”
The case is Hughes v. Northwestern Univ., U.S., No. 19-1401, certiorari granted 7/2/21.
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