Supreme Court Unanimously Vacates Seventh Circuit ERISA Investment Fees Case

As discussed in our December 2021 alert, Hughes v. Northwestern University, Docket No. 19-1401 is one of about 150 similar class action “excessive fee” lawsuits filed nationally in recent years, alleging that plan fiduciaries breached their duties under ERISA relating to recordkeeping and investment fees charged to plan participants. The plaintiffs argue in this case that the plans’ fees would be lower if Northwestern had “consolidated” its plans such that more money would be invested in each of a smaller number of options. The plaintiffs sued Northwestern University for allegedly breaching its fiduciary duties under ERISA by (1) offering a stock account option with excessive investment management fees and a history of underperformance; and (2) using multiple record-keepers and allowing recordkeeping fees to be paid through revenue sharing.

On January 24, 2022, the U.S. Supreme Court published a unanimous decision authored by Justice Sonia Sotomayor (Justice Barrett recused herself due to her part in the underlying Seventh Circuit decision). The Court vacated the Seventh Circuit decision and reversed dismissal of the case. Justice Sotomayor wrote that “the Seventh Circuit erred in relying on the participants’ ultimate choice over their investments to excuse allegedly imprudent decisions by respondents.” The Court applied a reasoning previously outlined in Tibble v. Edison International, 575 U.S. 523 (2015), explaining that the Seventh Circuit failed to consider the claims in the context of fiduciaries’ duty to conduct their own independent evaluation and to monitor all plan investments and remove any options with excessive fees or poor performance.  

The Court reasoned that the Seventh Circuit “erroneously focused” on a fiduciary’s obligation to host diverse investment options, which does not excuse the fiduciary’s duty to conduct an independent evaluation and remove imprudent investment options from the plan. The Court advised that, “If the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their duty.” 595 U.S. ___ at 2 (2022). The Court remanded the case so that the allegations that the respondents failed to remove imprudent investments from the plan options can be considered in the context of this reasoning, to determine whether petitioners stated a plausible claim for relief and thus could proceed past a motion to dismiss.

However, the opinion unfortunately provides little guidance to the Seventh Circuit on remand or to ERISA practitioners seeking clarity on the applicable pleading standards for an ERISA breach of fiduciary duty claim. The Court held that “[d]etermining whether petitioners state plausible claims against plan fiduciaries for violations of ERISA’s duty of prudence requires a context-specific inquiry” and asked the Seventh Circuit to “reevaluate the allegations as a whole, considering whether petitioners have plausibly alleged a violation of the duty of prudence… under applicable pleading standards.” Id. at 1-2. The Court went on to explain that because the content of the duty of prudence necessarily relies on “the circumstances prevailing at the time the fiduciary acts, the appropriate inquiry will necessarily be context specific.” Id. at 6. However, the Court provided no further details as to the pleading standard or what the Seventh Circuit should look for in determining whether the allegations are sufficient. The decision is somewhat disappointing in this regard, as it reflects a lost opportunity to further define and clarify ERISA pleadings standards that could have been immensely helpful to ERISA fiduciaries and practitioners.