EB Flash: Supreme Court Applies Tibble's Duty to Monitor to ERISA Claims Against Northwestern’s Retirement Plan Fiduciaries
Employee Benefits Alert
The Supreme Court decided Hughes v. Northwestern University, unanimously vacating1 the Seventh Circuit Court of Appeals decision2 upholding the dismissal of alleged excessive investment and record-keeping fees claims against the fiduciaries of the university's defined contribution plans. In Hughes, the Supreme Court ruled that the university's diverse array of defined contribution plan investment options, some of which may have satisfied the plan participants' choice for low-cost investments, was not sufficient to satisfy the fiduciaries' duty of prudence under ERISA to monitor and remove imprudent investment choices, as interpreted by the Court in Tibble v. Edison Int'l, 575 U.S. 523 (2015).
The plaintiffs/plan participants argued that the Northwestern plan fiduciaries breached their ERISA duties by:
- Failing to monitor and control recordkeeping fees, allegedly resulting in unreasonably high costs to plan participants;
- Offering mutual funds and annuities in the form of retail-share classes that carried higher fees than those charged by otherwise identical institutional-share classes of the same investments; and
- Offering so many investment options (over 400) that they could confuse the participants.
The Seventh Circuit upheld dismissal of these claims based on the participants' ability to choose their own investments under the plans which "provided an adequate array of choices, including 'the types of funds plaintiffs wanted (low-cost index funds)'" and provided "plan participants [with] options to keep the expense ratios (and, therefore, recordkeeping expenses) low,'" thereby "'eliminat[ing] any claim that plan participants were forced to stomach an unappetizing menu.'"3 Recognizing that the duty of prudence indeed includes "a fiduciary's obligation to assemble a diverse menu of options," a duty on which the appellate court centered its decision, Justice Sotomayor, writing for the unanimous Court, nevertheless determined that the Seventh Circuit focused "erroneously" on this component of the duty of prudence and should have, instead, applied the principles discussed in Tibble.4
In Tibble, the Supreme Court announced that "plan fiduciaries must conduct their own independent evaluation to determine which investments may be prudently included in the plan's menu of options. If the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their duty."5 Characterizing the Northwestern plan participants' claims as alleging a "fail[ure] to monitor the Plans' investments in a number of ways, including by retaining the recordkeepers that charged excessive fees, offering options likely to confuse investors, and neglecting to provide cheaper and otherwise-identical alternative investments" and a "fail[ure] to remove imprudent investments from the Plans' offerings," the Hughes court stated that "Tibble's discussion of the duty to monitor plan investments applies here."6
On remand, the Supreme Court instructed the Seventh Circuit to "consider whether [the participants] have plausibly alleged a violation of the duty of prudence as articulated in Tibble, applying the pleading standard discussed in Ashcroft v. Iqbal, 556 U.S. 62 (2009) and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007)."7 The reference to the Iqbal/Twombly pleading standards appears to address disagreement among some circuit courts about their applicability to ERISA cases and confirms that those standards apply to claims alleging fiduciary breaches under ERISA.8
Justice Sotomayor concluded the opinion with the observation that, because the duty of prudence depends on "'the circumstances [ ] prevailing' at the time the fiduciary acts," evaluating whether allegations of imprudence are plausible under Iqbal/Twombly "'will necessarily be context specific.'"9 Further, acknowledging that "[a]t times, the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise."10
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1Hughes v. Northwestern University, 595 U.S. __ (Jan 24, 2022). The 8-0 decision was authored by Justice Sonia Sotomayor. Justice Amy Coney Barrett did not participate in the consideration or decision of the case.
2Divane v. Northwestern University, 953 F.3d 980 (7th Cir. 2020).
3Hughes, slip op. at 5-6 quoting Divane, 953 F.3d at 991.
4Hughes, slip op. at 5-6.
5Hughes, slip op. at 5 citing Tibble, 575 U.S. at 529-30.
6Hughes, slip op. at 4-5.
7Id. at 6.
8See Sweda v. Univ. of Penn., 923 F. 3d 320, 326 (3d Cir. 2019), cert. denied March 30, 2020 (stating that Twombly pleading standard is unique to antitrust cases and declining to extend Twombly to ERISA fiduciary breach claims).
9Hughes, slip op. at 6 quoting Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 425 (2014).
10Hughes, slip op. at 6.
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