PLANSPONSOR - December 2021 - January 2022 - 39

INSIDE ANGLE
Excessive
Fee Suits' Future
Northwestern University's case will have massive implications
O
n December 6, 2021, the Supreme Court heard oral arguments
in Hughes v. Northwestern University. Given the
ever-present reality of excessive fee lawsuits plaguing
the retirement space, the case and the issues under consideration
require attention from plan sponsors as they navigate the rapidly
changing legal landscape. The implications of the case could be
profound, as the Supreme Court's decision could either limit
excessive fee lawsuits or open the floodgates to many more actions
of this nature. We discuss the background of the case, and the
issues that the court is considering.
Case Background
Plaintiffs are asserting claims for breach of fiduciary duty due
to excessive recordkeeping expenses and investment fees. Both
the district court and the 7th Circuit entered decisions in favor
of the defendants. Of particular interest is that the 7th Circuit
took a differing view of excessive fee litigation than have other
circuits considering similar litigation. Unlike other circuits, the
7th Circuit rejected plaintiffs' claims: 1) that recordkeeping fees
should be evaluated on a per capita fee basis, and 2) that investment
fees are " excessive " where there is an identical lower-cost
investment alternative.
The case was appealed at the stage of assessing whether the
complaint submitted by plaintiffs was sufficient to state a claim
for breach of fiduciary duty under the Employee Retirement
Income Security Act (ERISA), the first major hurdle required to
commence federal litigation.
Currently, a plaintiff must plead plausible accusations of
objectively unreasonable actions by a fiduciary to clear this hurdle.
This burden is usually met by alleging that the plan fiduciary
failed to attempt to use the size of the plan as leverage to obtain a
lower-cost investment option, or that the fiduciary failed to investigate
lower-cost options altogether. Due to the high cost of litigating
these specialized claims and consequential incentive to settle such
cases, maintaining a fair pleading standard is of crucial importance
to protect plan sponsors against frivolous or unsubstantiated
lawsuits by participants.
If the Supreme Court overturns the 7th Circuit's decision,
it will lower the pleading standard for similar cases to move
forward, and the constant deluge of excessive fee lawsuits in the
retirement space will likely intensify. Conversely, if the Supreme
Court upholds the 7th Circuit's decision, it will discourage such
litigation and lower the volume of ERISA fee litigation.
Fees and Share Class
A key allegation of plaintiffs is that many of the university's investment
options either were offered as retail share classes or were
otherwise not the lowest-cost share class available to the plan.
Allegations of this type are common in excessive fee lawsuits and,
when taken to their logical conclusion, suggest that a failure to
select the cheapest iteration of the least expensive class of funds
possibly available is a breach of fiduciary duty.
In the December 6 oral arguments, certain justices voiced
reservations regarding the contention that fiduciaries must offer
the cheapest share class available and reflected that fiduciaries
should not have to undertake extraordinary efforts to find the
cheapest available funds in the marketplace. On the other hand,
there appeared to be some justices who thought offering a retail
share class fund without requesting the institutional class of
shares could be indicia of imprudence. How the court considers
these issues in articulating a pleading standard will likely be an
important determinant of the volume of excessive fee lawsuits.
Repetitive Investment Options
The participants also alleged that the Northwestern University plan
offered duplicative fund choices in the investment menu, which
disoriented lay participants. The 7th Circuit roundly rejected this
allegation and even suggested that having a wide array of investment
choices may actually preclude fiduciary breach allegations
due to one or a few of the options being imprudent.
Based on their comments, the justices overall seemed
highly skeptical of the argument that having too many investment
options could be a basis for claiming a breach of fiduciary
duty. Conversely, however, none of the justices vocally supported
the view that a wide array of investment options could be a
defense to a claim challenging one or a subset of those options
being imprudent.
While several of the justices expressed concern during oral
arguments regarding the rising number of fee litigation cases,
this case will test their resolve to improve the situation.
Steve Saxon is a partner with Groom Law Group, Chartered,
and George Sepsakos is a principal with Groom. Offices for
Groom are in Washington, D.C.
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