The Supreme Court recently agreed to hear the class action ERISA case, Hughes v. Northwestern University, Docket No. 19-1401, to determine whether a retirement plan that pays or charges its participants fees that are significantly higher than those of other available investments is breaching its fiduciary duties under the Employee Retirement Income Security Act (ERISA). In short, the Supreme Court’s review could determine what qualifies as a plausible claim for relief in a “defined contribution” retirement plan.
In Hughes, five Plaintiffs filed the action in the U.S. District Court for the Northern District of Illinois, asserting six counts for breach of fiduciary duties of ERISA by fiduciaries of two Northwestern University retirement plans. Plaintiffs are employees of Northwestern University who participate in Northwestern University’s Retirement Plan. They alleged that the retirement plans’ trustees breached their fiduciary duties and duty of prudence under ERISA by paying excessive recordkeeping fees and offering mutual funds with excessive investment management fees. The District Court granted Northwestern’s motion to dismiss the amended complaint. The Seventh Circuit Court of Appeals affirmed the District Court’s ruling, holding that the Plaintiffs failed to show an ERISA violation. Divane v. Northwestern Univ., 953 F.3d 980 (2020). The Seventh Circuit reasoned that “taken as a whole, the amended complaint appears to reflect plaintiffs’ own opinions on ERISA and the investment strategy they believe is appropriate for people without specialized knowledge in stocks or mutual funds.” Id. at 993. Thereafter, Plaintiffs filed a petition for cert and the Supreme Court granted the petition.
There is presently a Circuit split as the Third and Eighth Circuits have held, contrary to the Seventh Circuit Divane decision, that a retirement plan participant can adequately plead a breach of fiduciary duty by claiming that the retirement plan charged excessive fees when lower-cost alternatives existed. The Supreme Court’s decision in Hughes will likely resolve this Circuit split. Furthermore, the Supreme Court’s decision may be significant because it may clarify the pleading standard for ERISA litigation.