July 8, 2021
Benefits attorneys are hoping a Supreme Court ruling in a case against Northwestern University will restore certainty on what employees must show to plausibly allege their retirement plans are being charged excessive fees.
The justices agreed last week to hear the long-running fight in their next term starting in October. It’s a case that could either stamp out disputes over plan mismanagement or spark a whole new wave of challenges, attorneys say.
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A proposed class of current and former Northwestern University employees who participate in the school’s retirement plans sued the school and its retirement plan committee for allegedly offering expensive retail class investments with excessive management fees when lower-cost funds were available and for allegedly failing to rein in unreasonable record-keeping costs.
Similar to 401(k) plans run by for-profit companies, defined-contribution plans offered by Northwestern and other tax-exempt employers are commonly called 403(b) plans. Under the Employee Retirement Income Security Act (ERISA), sponsors can be held liable for plan losses if they fail to prudently manage these plans.
Potential to Affect Every Plan
If the court sides with the Northwestern employees, it could clearly set out standards that plan sponsors must follow in selecting investments, monitoring those investments, and determining and monitoring the reasonableness of fees, said Jerry Schlichter, an attorney for the Northwestern employees and founding and managing partner of Schlichter Bogard & Denton LLP.
“This case has the potential to affect every 401(k) and 403(b) plan in America,” he said.
The U.S. Court of Appeals for the Seventh Circuit affirmed the district court’s decision to dismiss the proposed class action.
The appeals court said plans can offer a wide range of investment options and fees without breaching any fiduciary duty to act prudently, and a flat fee for record-keeping or a sole record-keeper isn’t required. The court noted Northwestern had explained it was sticking with multiple record-keepers in order to offer one particular type of investment option.
In a statement, Northwestern said it believes the lower courts were right to dismiss the lawsuit against it and that the school will continue to oppose the employees’ claims as legally and factually unmeritorious.
“The University stands by the management of its retirement benefits, and the talented and dedicated investment committee that administers its plans,” the university said.
Northwestern’s attorney, Craig Martin of Willkie Farr & Gallagher LLP, didn’t respond to a request for comment, but in the school’s reply to the court he said ERISA demands prudence not perfection.
“It does not subject plan administrators to lawsuits based merely on allegations that a negotiated mix of plan offerings (which included numerous options that petitioners deemed prudent) was not, by petitioners’ reckoning, optimal,” he wrote.
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Higher Standard
The Northwestern employees argue the Seventh Circuit set the standard retirement plan participants have to meet for their case to survive a motion to dismiss so high “as to make it virtually impossible for participants of defined-contribution plans to plead a claim for imprudent management.”
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The Seventh Circuit’s decision “really threw a wrench in the interpretation of ERISA’s pleading standard with respect to excessive fees in that circuit,” said Michelle Yau, a partner at Cohen Milstein who represents employees and plan beneficiaries.
“Before the Northwestern decision the law was pretty well settled,” she said.
Other circuits, including the Eighth, Third, and Ninth, have found that if you allege an ERISA plan, whether it be a 401(k) plan or a 403(b) plan, is being caused to pay more for the exact same investment through a more expensive share class, that those claims are meritorious, Yau said.
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Though Lockman thinks reversing the Seventh Circuit’s decision could lead to more litigation, Yau disagrees that would be the impetus for new claims.
“Essentially the impetus is that the conduct underlying those claims is pretty egregious,” she said. “You have a plan that would be eligible for the cheapest share class, and the fiduciary doesn’t put the plan in the cheapest share class even though they qualify based on the asset size. That’s the reason for the number of cases that have been filed.”
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