The Seventh Circuit Opines on What a Plaintiff Must Plead for a 401(k) Imprudence Claim to Go Forward

As ERISA watchers know, courts have been inundated with lawsuits alleging fiduciary breaches with respect to 401(k)/403(b) plans sponsored by universities and healthcare providers. The Seventh Circuit issued another decision identifying exactly what a complaint must allege in order to get past the initial pleading stage.

In Divane v. Nw. Univ., 953 F.3d 980 (7th Cir. 2020), the plaintiffs raised a series of traditional challenges to the 401(k) and 403(b) plans sponsored by Northwestern University. Plaintiffs challenged, for example, the decision to engage a recordkeeper who also managed an annuity fund for the plans. They likewise challenged the decision to pay recordkeeping fees through the practice known as “revenue sharing,” as opposed to charging a flat fee for recordkeeping services. And the plaintiffs argued that the fiduciaries failed to take advantage of the economies of scale by having too many high-cost “retail” investment options, when the plans could have negotiated better rates by having a more limited number of funds.

The Seventh Circuit’s dismissal of all of these claims struck a common theme. After holding that an ERISA complaint must allege practices that are “objectively unreasonable” to proceed past the initial pleading stage, the court suggested that each of the challenged practices simply reflected “alternative . . . arrangements” that the plaintiffs would not have preferred. In each instance, however, the practices delivered benefits that a reasonably prudent fiduciary could have favored over the perceived harm. For example, although plaintiffs complained that the plans allowed the recordkeeper to offer a higher cost annuity fund, the court noted that participants were not forced to use this fund and there were “valid reasons” why a fiduciary might want to make this fund an “option” for plan participants.

Andrew Holly

Andrew represents clients in a wide range of complex civil matters.

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