Hughes et al v. Northwestern University et al – Supreme Court Urges Courts to Undertake a Context-Specific Scrutiny of Excessive-Fee Claims in ERISA Cases and Pay Heed to the “Range of Reasonable Judgments a Fiduciary May Make”

On Monday, the U.S. Supreme Court vacated the Seventh Circuit’s decision in Hughes v. Northwestern University, an important ERISA case. Although the Court’s decision vacated a Seventh Circuit victory for plan sponsor Northwestern, it provided helpful guidance to plan sponsors: The Court made clear that the plausibility pleading requirement as articulated in Twombly and Iqbal applies with full force in ERISA excessive-fee cases, and it reaffirmed the importance of a context-sensitive scrutiny of allegations at the pleading stage. 

Background

In Hughes v. Northwestern, plaintiffs alleged the fiduciaries of Northwestern University’s two retirement plans violated the duty of prudence under the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1104(a)(1)(B), by failing to monitor and control the fees they paid for recordkeeping, offering “retail” share classes of mutual funds that carried higher fees than those charged by otherwise identical “institutional” share classes, and offering “too many” investment options, allegedly causing participant confusion and poor investment decisions. The Seventh Circuit affirmed dismissal of the claims, holding that the allegations failed in part because the plans offered a diverse menu of options, including many lower-cost investments the plaintiffs preferred.

The Court’s Opinion

The Supreme Court, in a unanimous (and brief) opinion authored by Justice Sotomayor, vacated the Seventh Circuit’s decision and remanded. The Court rejected the Seventh Circuit’s suggestion that offering a diverse menu of investments eliminated concerns that other plan options were imprudent: “Such a categorical rule is inconsistent with the context-specific inquiry that ERISA requires and fails to take into account respondents’ duty to monitor all plan investments and remove any imprudent ones.” Order at 2. The Court said that the Seventh Circuit improperly implied that offering plaintiff’s preferred type of investment (low-cost index funds) effectively immunized the fiduciaries from complaints about other investment options. The Court did not directly address the plausibility of the plaintiffs’ claims, instead leaving it to the Seventh Circuit to reevaluate the allegations as a whole on remand. 

The Court did, however, provide some guidance for lower courts evaluating ERISA claims challenging a defined-contribution plan investment line-up or its administrative fees. First, the Court rejected the position taken by many ERISA plaintiffs that ERISA claims are somehow exempt from the plausibility pleading requirement established by Federal Rule of Civil Procedure 8(a) and interpreted in Ashcroft v. Iqbal, 556 U. S. 662 (2009), and Bell Atlantic Corp. v. Twombly, 550 U. S. 544 (2007). That position had been embraced by the U.S. Court of Appeals for the Third Circuit in Sweda v. University of Pennsylvania, 923 F.3d 320 (3d Cir. 2019), and the U.S. Court of Appeals for the Second Circuit in Sacerdote v. New York University, 9 F.3th 94 (2d Cir. 2021), but the Supreme Court rejected it, and directed courts to “apply[] the pleading standard discussed in” Iqbal and Twombly. Second, the Court cautioned that evaluating ERISA claims “will necessarily be context specific,” citing its earlier decision in Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014), in which the Court made clear that carefully scrutinizing a plaintiff’s allegations is particularly important in ERISA cases because fiduciaries commonly find themselves “between a rock and a hard place” — sued no matter what decisions they make. Third, the Court emphasized the wide range of reasonable fiduciary judgments that can be made in any given situation, noting that “the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs” and instructing courts to “give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.” These principles are precisely what a coalition of business organizations, led by the Chamber, advocated in the amicus brief filed in this case.

Takeaways

In rejecting the Seventh Circuit’s suggestion that plan fiduciaries need not monitor all designated investment alternatives, the Court confirmed what plan sponsors and fiduciaries have long understood to be the law — that the duty of prudence applies to all investment selection and monitoring. As a result, the Court’s decision should not impact current plan management practices. Moreover, the Court’s nod to the range of reasonable judgments fiduciaries may make underscores what many plan sponsors and industry groups have consistently argued in defending ERISA suits — there is no one-size-fits-all approach to plan management and fiduciary decisions, which need to be evaluated based on the context in which they were made. Although this decision is unlikely to slow the onslaught of new lawsuits plan sponsors have faced in recent years, it confirms the appropriate pleading standard that should be used to examine these lawsuits and directs courts to consider the range of reasonable judgments a fiduciary may make.

Jaime Santos is a partner in Goodwin’s Supreme Court and Appellate Litigation practice. Christina Hennecken is an associate in Goodwin’s ERISA Litigation practice.

Note: This content was initially created for and posted on the U.S. Chamber of Commerce Blog and can be found here.