Supreme Court Give Plaintiffs a Narrow Win in 401(k) Fee Case
Since the first round of cases were filed in 2006, plaintiffs’ counsel have raised hundreds of lawsuits challenging the prudence of fees and investments in 401(k) plans. One of the critical issues in those cases is what needs to be included in a complaint to allow the case to proceed to the costly and burdensome discovery phase. In Hughes et. al. v. Northwest University et. al., the Supreme Court agreed to review the Seventh Circuit’s dismissal of one of those complaints for failure to plausibly allege a breach of fiduciary duty claim. ERISA practitioners widely expected that the Supreme Court would provide guidance on what facts would push the case past the pleading stage into the discovery phase—the burden of which often puts pressure on a defendant to settle, even if it has meritorious defenses to the claims.
Those expectations were not fulfilled, as the Court’s decision in Hughes largely delayed reviewing the critical issues. Writing for a unanimous 8-0 majority (with Justice Barrett not taking part in the case), Justice Sotomayor concluded that the Seventh Circuit applied an improper legal standard when dismissing the complaint for failing to state an actionable claim for relief. The Seventh Circuit, she concluded, improperly relied on the fact that Northwestern’s 401(k) plan included hundreds of potential investment options—including some low fee investment options that the plaintiffs thought were prudent investments. Under the Supreme Court’s prior precedent in Tibble v. Edison International, however, the mere fact that some of the 400+ plan investment options might have been (in plaintiffs’ eyes) prudent investments did not excuse the plan’s fiduciaries from monitoring and reviewing the other plan investments to ensure that they too were prudent investment options. Just because a menu of plan investment options might have been diverse did not excuse the plan’s fiduciaries from “conduct[ing] their own independent evaluation to determine which investments may be prudently included in the plan’s menu of options.” The same was true of the allegedly excessive recordkeeping fees: although due to the particular mechanics of the plan, plan participants had the ability to limit the amount of fees they were charged, that did not limit the plan’s fiduciaries from independently monitoring the fees charged to participants to ensure they were prudent and appropriate. Because the Seventh Circuit did not apply the proper legal standard, the case was remanded back to the Seventh Circuit for further proceedings under the correct legal standard, without the Supreme Court providing any comment on the substantive merits of the case.
Although the decision was generally pro-plaintiff, one cryptic line might provide some comfort to defense practitioners. At the end of the opinion, the Court noted that “[a]t times, the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.” This refers to the general principle in ERISA/Trust law that a fiduciary’s decision should generally be reviewed for reasonableness—not that it was the right decision, but that it was a reasonable one based upon the information available to the fiduciary at the time. The Court’s instruction to the Seventh Circuit suggests that this standard applies even at the pleading stage, and that the Plaintiffs might have to plead facts showing that the fiduciary’s decision was an abuse of discretion even at that stage. Whether courts will interpret this language this way, and whether it will move the needle in these cases, remains to be seen.