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    May 09, 2022

    Hughes et al. v. Northwestern University et al.

    Supreme Court’s January 2022 Decision Urges Lower 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”

    Christina Hennecken

    On January 24, 2022, the 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 a potentially helpful procedural tool to plan sponsors in litigation: 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.  With this ruling, lower courts have reached mixed decisions regarding motions to dismiss on the varied facts alleged in excessive-fee complaints.

    Hughes v. Northwestern Case Background

    In Hughes v. Northwestern, plaintiffs alleged the fiduciaries of Northwestern University’s two retirement plans violated the duty of prudence under section 404(a)(1)(B) of 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 Supreme Court’s Opinion

    The Supreme Court, in a unanimous (and brief) opinion authored by Justice Sotomayor, vacated the Seventh Circuit’s decision and remanded.  It 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.”  The Court said that the Seventh Circuit improperly implied that offering plaintiffs’ 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.  In doing so, however, the Court offered some guidance for lower courts evaluating ERISA claims challenging a defined-contribution plan investment line-up or its administrative fees. 

    In particular, the Court made clear that the normal plausibility pleading requirement described in Ashcroft v. Iqbal, 556 U. S. 662 (2009), and Bell Atlantic Corp. v. Twombly, 550 U. S. 544 (2007), applies with full force in these types of cases.  And it 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.   Furthermore, 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.”  

    In rejecting the Seventh Circuit’s suggestion that plan fiduciaries need not monitor all designated investment alternatives, the Court confirmed what most plan sponsors and fiduciaries have long understood to be the law—that the duty of prudence applies to all investment selection and monitoring.  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. 

    Impact on Motions to Dismiss

    Motions to dismiss in many of the cases that were stayed pending the Supreme Court’s decision in Hughes have yet to be decided, and the Seventh Circuit has not yet decided the Hughes case on remand.  The courts that have addressed these types of claims since Hughes have reached varying conclusions about the viability of excessive-fee claims—perhaps in part as a result of the varying allegations offered in the complaints and perhaps in part reflecting confusion about the Supreme Court’s somewhat cryptic admonitions in Hughes. 

    The first appellate court to issue a decision post-Hughes is the Ninth Circuit, which recently issued an unpublished decision in Davis v. SalesForce.com, Inc., No. 21-15867, reversing (in part) a dismissal for failure to state a claim for the breach of the duty of prudence under ERISA.  The short memorandum decision did not mention Hughes but held that the plaintiffs had plausibly alleged a fiduciary breach based on plan fiduciaries’ alleged failure to investigate the use of lower-cost share classes and alleged delay in replacing the plan’s target date funds with lower-cost collective investment trusts.  However, the court agreed with the district court that the plaintiffs had not plausibly alleged a fiduciary breach based on allegations that plan fiduciaries offered actively managed funds rather than passive index funds in the plan line-up. 

    District court decisions have largely been mixed, with some courts denying motions to dismiss (at times without engaging in any substantial analysis of Hughes), and other courts granting motions to dismiss at least with respect to some claims, showing consideration of the context of alleged excessive fees.  In Lauderdale v. NFP Retirement, Inc., the Central District of California interpreted the Supreme Court’s guidance regarding “difficult tradeoffs” and the “range of reasonable judgments a fiduciary may make” as being relevant only to a more developed fact record, instead of evaluation of the pleadings—despite the fact that this admonition was made in the context of a challenge to the pleadings.  No. 21-301, 2022 WL 422831, at *8 (C.D. Cal. Feb. 8, 2022).  The Court declined to consider defendants’ arguments that documents incorporated by reference into the complaint demonstrated a prudent decision-making process, noting, though, that the defendants may well be able to prove as much down the line.  Other courts have likewise denied motions to dismiss without any substantial analysis of Hughes or the plaintiffs’ factual allegations.  See, e.g., Turpin v. Duke Energy Corp., No. 20-00528, 2022 WL 287548 (W.D.N.C. Jan. 31, 2022).

    In contrast, the District of Kansas dismissed a claim based on allegedly excessive recordkeeping fees because the complaint failed to plead facts showing that other plans with lower recordkeeping fees received the same services.  See Anderson v. Coca-Cola Bottlers’ Association et al., No. 21-2054, 2022 WL 951218 (D. Kan. Mar. 30, 2022).  But the court declined to dismiss a claim based on excessive fund fees when the complaint alleged lower-cost comparator funds substantially similar to the challenged funds were available, noting that plaintiff’s “allegation that his comparators are apt must be assumed as true at this stage". The court also noted that plaintiff had done more than solely allege that better alternatives were available, pointing to allegations regarding changes to the plan’s policy statement regarding share classes.  Id.  The Western District of Pennsylvania also recently dismissed excessive recordkeeping fee allegations, finding the plaintiffs offered “a mere price tag to price tag comparison” and lacked “detail as to the category of services.”  Mator v. Wesco Distribution Inc. et al., No. 21-00403 (W.D. Pa. Apr. 7, 2022).  The court also rejected claims that the plan should have used lower-cost share classes because the plaintiffs had “not addressed whether the [more expensive] retail share class may have offered other benefits.”  Id.

    In the coming months, more appellate decisions and district court decisions on motions to dismiss (including from the Sixth and Seventh Circuits) will likely continue to shed light on the impact of the Hughes decision.

    Christina Hennecken

    Goodwin Procter LLP

    Christina Hennecken is an associate in the firm’s Complex Litigation & Dispute Resolution, ERISA Litigation and Consumer Financial Services Litigation practices. Ms. Hennecken represents financial institutions in class actions, government enforcement proceedings and investigations, and complex civil litigation involving the Employee Retirement Income Security Act, the Consumer Financial Protection Act, and other federal and state consumer protection statutes. She joined Goodwin in 2014. During law school, Ms. Hennecken interned for the United States Attorney’s Office and was a summer associate at Goodwin. In addition, Ms. Hennecken was an articles editor for the Georgetown Journal of International Law and participated in Georgetown Law’s Public Policy Clinic.

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