Hughes v. Northwestern University ' The Seventh Circuit Upholds Plaintiffs' Excessive Fee Claims

• Published date: 18 July 2023
• Subject Matter: Employment and HR, Retirement, Superannuation & Pensions, Employee Benefits & Compensation
• Law Firm: DeBofsky Law
• Author: Mr Mark Debofsky

The Employee Retirement Income Security Act of 1974 (ERISA¹ governs both retirement and welfare benefits² (i.e., health, life, and disability benefits) provided by employers to their employees. The only employee benefit programs exempted from ERISA's reach are governmental³ and church plans,⁴ along with workers' compensation plans and plains maintained outside the United States to primarily benefit non-resident aliens.⁵ In the preamble to the statute, Congress expressed the guiding policy behind ERISA - "to protect . the interests of participants in employee benefit plans . by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and by providing for appropriate remedies, sanctions, and ready access to the federal courts."⁶ The Supreme Court underscored that paternalistic goal in Firestone Tire & Rubber Co. v. Bruch,⁷ by pronouncing: "ERISA abounds with the language and terminology of trust law."⁸ Hence, a core aspect of ERISA is the imposition of strict fiduciary obligations upon those who manage employee benefits fund. The statute explicitly describes those duties:

(a) Prudent man standard of care
(1) Subject to sections 1103(c) and (d), 1342, and 1344 of this title, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and -

(A) for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries; and
(ii) defraying reasonable expenses of administering the plan;
(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;
(C) by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and
(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter and subchapter III.⁹

ERISA Claims for Breach of Fiduciary Duty Involving Excessive Fees Charged to 401(k) and 403(b) Plan Participants

Breaches of fiduciary duty may be challenged by participants¹⁰ in and beneficiaries¹¹ of employee benefit plans in civil actions brought to redress such violations¹² In recent years, a wave, if not a tsunami of litigation, has been brought to curb excessive fees charged to participants in defined contribution retirement plans known as 401(k)¹³ or 403(b)¹⁴ plans. The theme of those cases is that various fees charged to participants by such plans are excessive and therefore harm participants by eroding their retirement savings. Some of those cases have reached the Supreme Court;¹⁵ and following the Supreme Court's most recent ruling issued in Hughes v. Northwestern University, which overturned a prior dismissal of an excessive fee brought by participants in Northwestern's defined contribution retirement plans, on March 23, 2023, the U.S. Court of Appeals for the Seventh Circuit issued a hugely significant ruling in the Hughes litigation¹⁶ that clarifies pleading standards in such cases and sets the tone for future fee litigation.

The Hughes v. Northwestern University Litigation

Hughes was brought by a class of participants in two ERISA-governed defined contribution plans sponsored by Northwestern University - the Northwestern University Retirement Plan and the Northwestern University Voluntary Savings Plan. Because Northwestern is a ' 501(c)(3)¹⁷ not-for-profit organization, pursuant to ' 403(b), the plans were set up to provide tax-deferred retirement savings for faculty and employees of the university. Participants could direct their investments to various programs such as annuities, index funds, and target day funds selected by Northwestern, the plans' administrator and fiduciary, from a menu of investment options offered by the Teachers Insurance and Annuity Association of America - College Retirement Equities Fund (TIAA) and by Fidelity Management Trust Company. Prior to 2016, the plans offered over 400 investment options from the two providers. However, in October 2016, Northwestern announced that it had "streamlined" its plans by offering only 32 investment options consisting of target date mutual funds, index funds, actively managed funds, and a self-directed brokerage window. Northwestern's stated purpose in reducing the number of offerings was to "enable simpler decision making," "[r]educe[ ] administration fees," "increase[ ] participant returns," and provide "[a]ccess to lower-cost share classes when available."

The plaintiffs' complaint alleged a variety of ERISA fiduciary breach violations. The primary claim asserted that Northwestern University committed a fiduciary breach by incurring excess recordkeeping charges. Plaintiffs maintained that the plans permitted TIAA and Fidelity to charge uncapped "revenue sharing" charges to participants, which represented a percentage of each participant's accrued investments. Plaintiffs maintained there should have been only one recordkeeper, and that the volume of money in the plans would have enabled Northwestern to solicit competitive bids and negotiate lower rates. Another count of the complaint alleged that Northwestern failed to monitor the investment options and to remove non-performing and more expensive funds from the menu of choices offered to participants. In addition, Plaintiffs claimed that the size of the funds should have permitted Northwestern to "replace retail-class shares of funds with cheaper but otherwise identical institutional-class shares of the same funds."

The district court initially ruled that the plaintiffs' claims were not...