Click here to download a pdf of this newsletter.
In early 2022 the Supreme Court released its opinion in
Hughes v. Northwestern University (Hughes I), a case
involving excessive fees and underperforming investments in
retirement plans. In Hughes I, the Supreme Court did not
identify a concrete test for these lawsuits to be dismissed or move
forward. Instead, the Supreme Court reiterated its position from
Tibble v. Edison International that plans have an ongoing
duty to monitor their plans' investments. Additionally, the
Court held that offering participants prudent options in a plan
will not excuse offering them imprudent ones, reversing the Seventh
Circuit's holding in Divane v. Northwestern
University.
Since the ruling in Hughes I, courts have issued new
opinions regarding excessive fee/underperforming investment suits,
including Smith v. CommonSpirit Health from the Sixth
Circuit, Albert v. Oshkosh Corp. from the Seventh Circuit,
Matousek v. MidAmerican Energy Co. from the Eighth
Circuit, and Hughes v. Northwestern University (Hughes
II), which the Seventh Circuit revisited in light of the
Supreme Court's Hughes I decision.
Mixed Rulings on Motions to Dismiss
Unfortunately for plan sponsors, excessive fee litigation has not
slowed down and courts are still allowing cases to move forward.
However, at the appellate level, with the exception of the Seventh
Circuit's Hughes II decision, the major decisions in
this area have been trending toward dismissal. In Smith,
Matousek, and Albert, the courts dismissed a
familiar set of fiduciary breach allegations that had been brought
by plaintiffs, as well as more unique allegations that were made in
Albert.
It appears Hughes I did little to upend the status quo;
Hughes II underscores just how much of the courts'
current precedent was left intact. Revenue sharing arrangements and
actively managed funds still do not constitute a per se
fiduciary breach, plans cannot commit a fiduciary breach by
offering too many funds for investment, and fiduciaries are not
required to "scour the market to find and offer the cheapest
possible fund." The only notable change as a result of
Hughes I is that defendants cannot excuse imprudent
investments by simply offering funds with a wide variety of fee
structures.
Hughes II May Be Somewhat Unique
The Seventh Circuit in Hughes II allowed the case against
Northwestern to move forward into discovery, but there are reasons
to believe that the eventual opinion will not have far-reaching
consequences, especially if plans regularly benchmark their fees
and conduct periodic requests for proposal. For one, the imprudence
claims brought against Northwestern are partly based on an uncapped
revenue sharing model that is not used by most plans today. The
complaint also pointed to five comparable university plans that had
taken specific measures to reduce plan fees in ways that
Northwestern had not, making the case against Northwestern stronger
than most other excessive fee cases.
"All Large Plans Buy the Same Recordkeeping
Services"
A major point of contention in excessive fee litigation since
Hughes I has been allegations that recordkeeping services
provided to large plans are fungible. In other words, it does not
matter whether a large plan uses Fidelity, Vanguard, etc.—the
recordkeeping services offered will be largely identical, with
price being the only distinguishing factor. In an excessive
recordkeeping fee case, a plaintiff must compare a defendant's
imprudent actions to the actions of a benchmark plan that was
acting prudently. Such distinctions involve significant research
and a thorough analysis of the two plans. The shortcut alternative
is to allege that all large plans pay for the same services and are
thus comparable. By doing this, plaintiffs can file cases more
quickly and more cheaply.
Courts' reactions to this allegation have been mixed. District
courts in Singh v. Deloitte LLP and Laabs v. Faith
Techs., Inc. both held that these types of allegations are
conclusory and therefore cannot proceed. On the other hand, in
Hughes II, the Seventh Circuit allowed the excessive
recordkeeping claim to proceed based partly on this allegation.
Although the Seventh Circuit considered several other factors,
plaintiffs likely will continue to use this pleading tactic to
progress litigation until courts consistently rule against the
claim.
Missing Out on Good Deals is Still a Fiduciary Breach
The court in Hughes II held that plans with access to
cheaper institutional-class shares of an investment that offer
retail-class share options may be committing a fiduciary breach.
Plaintiffs have had success in the past with this claim, and
continue to find success with it today.
Like all litigation, ERISA litigation is unpredictable, but plan sponsors can mitigate the risk of a lawsuit (or win an early dismissal of the claims) by doing the following:
- Regularly review and benchmark investment fees and investment performance. Document the review process and the reasoning, especially in scenarios where there was a cheaper option that was not selected.
- Regularly review and benchmark compensation and fees paid to service providers and understand what services are being provided to the plan.
- Regularly review the plan's investment policy statement and determine whether funds offered by the plan align with it.
- Regularly review the investment menu to ensure that participants have a diverse range of investment options.
Although this area of litigation is traditionally associated with retirement plans, group health plans should also follow some of these steps, as plaintiffs' firms are using new required disclosures from group health plans to generate excessive fee complaints.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.