SCOTUS Gives Complainants Another Chance for Excessive Fees


In a ruling likely to make it harder — perhaps much harder — to dismiss excessive costs lawsuits, the U.S. Supreme Court remanded for further review a lower court ruling that favored fiduciary defendants. .

In a unanimous decision[1] (Hughes v. Northwestern University et number 19-1401, in the United States Supreme Court) written by Justice Sotomayor, the nation’s highest court did not mince words when it declared that “the Seventh Circuit erred in s relying on participants’ ultimate choice regarding their investments to allegedly excuse respondents’ imprudent decisions.

The problems)

Now, several weeks have passed since the closing arguments in the case, so remember that the question[2] that the plaintiffs – represented by the law firm Schlichter Bogard & Denton – wanted the Supreme Court to resolve is what they argued was a split in the district courts as to the standard to be applied in these cases. Their request for review notes that “The Seventh Circuit dismissed the Petitioners’ ERISA claims for reckless administration of the pension plan, even though the Third and Eighth Circuits allowed suits with virtually identical allegations, and the Ninth Circuit also upheld similar claims.” This, they assert, is “…not a factual disagreement as to whether the specific claims at issue pass the hurdle of pleading,” but rather, they assert that it it is “a legal disagreement about where this barrier should be placed”.

The plaintiffs argued that “most courts have correctly held” that at the pleading stage, “ERISA plaintiffs are entitled to plausibly infer that excessive fees resulted from reckless management.” The plaintiffs argue that “ERISA fee litigation has become an increasingly common mechanism for employees and retirees to seek compensation for losses caused by reckless management and to induce plan trustees to improve their practices.” and that “the question here is whether these lawsuits can continue or whether they will be cut short by insurmountable plea standards.

The clothe

The Supreme Court’s reasoning began by invoking that which it set out in Tibble v. Edison: this “[a] the plaintiff may allege that a fiduciary breached the duty of care by failing to properly monitor investments and removing those that were imprudent. Judge Sotomayor noted that the Seventh Circuit Court of Appeals “held that the petitioners’ claims fail in law, based in part on the court’s determination that the type of low-cost investments preferred by the petitioners was available as plan options. In the court’s opinion, this eliminated any concern that other plan options were unwise.

But Judge Sotomayor then criticized the trial court for “flawed” reasoning, commenting that what she described as a “categorical rule” was “inconsistent with the context-specific investigation that ERISA requires and disregards the duty of sponsors to monitor all plans”. investments and remove those that are imprudent.
Now, if you missed Tibble’s establishment of a standard to be applied in such cases, well, you (like me) may have been distracted by the focus on the applicable starting point for measuring the statute of limitations and the overall obligation continues to monitor. But Sotomayor invoked it here as a sort of standard,[3] and in the process concluded that “in dismissing the petitioners’ claims, the Seventh Circuit did not apply Tibble’s guidelines”, but instead focused on “…another element of the duty of care: the obligation of a fiduciary to assemble a diverse menu of options”. According to Justice Sotomayor, this objective went astray when it focused on choice, specifically that, so long as the plan provided the opportunity to select prudent choices, the trustees were basically relieved of the responsibility to include more expensive funds. , and therefore ostensibly reckless.

“In the opinion of the court,” she wrote, referring to the Seventh Circuit’s ruling, “because the petitioners’ preferred type of investment was available, they could not complain about the shortcomings of the other options. . The same goes for record-keeping expenses: the court noted that “plan participants had the option of retaining expense ratios (and, therefore, record-keeping expenses).” Basically, because participants had the ability to choose lower-cost options,”[t]The amount of fees paid was within the control of the participants. If the trustees fail to remove an imprudent investment from the plan within a reasonable time, they are in breach of duty,” Judge Sotomayor wrote.

“Given the Seventh Circuit’s repeated reliance on this reasoning, we set aside the judgment below so that the court can reevaluate the allegations as a whole,” Sotomayor wrote, noting that when this court did so, it “… should consider whether the petitioners have plausibly alleged a breach of the duty of care as set out in Tibbleapplying the pleading standard discussed in Ashcroft v. Iqba1,556 US 662 (2009), and Bell Atlantic Corp. c.Twombly550 US 544 (2007).

According to her, this “context-specific” focus meant that “sometimes the circumstances facing an ERISA fiduciary will involve difficult trade-offs, and courts must give due consideration to the range of reasonable judgments a fiduciary may make based on of his experience and expertise.

What does that mean

While we’ll still have to wait and see what the Seventh Circuit does with it, the ruling appears to be good news for those suing, and not so good news for those hoping to fire without going to trial. The exact meaning and application of “context-specific” remains to be seen (although “a range of reasonable judgments” is apparently contemplated).

What seems clear is that the main raison d’être of Hecker v. Deere– one of the first excessive fee lawsuits to be filed – that a diverse set of investment options (including a self-directed brokerage account) could prevent lawsuits against options deemed less prudent – was flatly dismissed by the highest court in the land. And that has implications for other cases that have relied on that finding.

Importantly, this – and all cases like it – should remind us all that a good fiduciary process demonstrates a reasoned selection and monitoring process for every investment in the plan – both from a performance and cost perspective.


[1] Judge Amy Comey Barrett recused herself, as she was still sitting on the Seventh Circuit at the time of the underlying ruling.

[2] The original lawsuit, filed against Northwestern University in 2016 by law firm Schlichter Bogard & Denton, argued that Northwestern had “trimmed out hundreds of mutual funds provided to plan participants and selected a tiered structure. consisting of a limited core set of 32 investment options. including five tiers – a TDF tier, the second five index funds, the third consisting of 26 actively managed mutual funds and a separate insurance account, and an SDBA. However, the lawsuit noted that Northwestern continued to enter into contracts with two separate registrars (TIAA-CREF and Fidelity) for the pension plan, and only consolidated the voluntary savings plan into a single registrar. Registry (TIAA-CREF) in late 2012. The lawsuit has also been contested. with the alleged inability of the plan’s trustees to negotiate a better deal due to its status as a “mega” plan, for presenting participants with the “virtually impossible burden” of deciding where to invest their money (due to too much number of investment choices), and to include active fund choices when passive alternatives were available.

The district court ruled in favor of the plan’s trustee defendants in March 2018, and the appeals court upheld that decision in 2020. In June, the federal government – in response to a Supreme Court request – said that the Court should take up the case. and solve the problems it presents.

[3] In Tibble, this court explained that “even in a defined contribution plan where the participants choose their investments, the trustees of the plan are required to carry out their own independent evaluation to determine which investments can be prudently included in the menu of options of the plan . If the trustees do not remove an imprudent investment from the plan within a reasonable time, they are in breach of duty.


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