Supreme Court Revives the Excessive Fee Lawsuit Against Northwestern University

In a unanimous decision, the Supreme Court has revived the excessive fee lawsuit Hughes v. Northwestern University by returning it to the 7th Circuit for further review. The plaintiffs alleged Northwestern violated their duty of prudence under ERISA in the following ways:

  • Failing to monitor and control the fees paid for recordkeeping
  • Offering a retail share class when lower-cost institutional share classes were available
  • Offering too many investment options causing participant confusion and poor investment decisions

Previously, the 7th Circuit Court had affirmed Northwestern’s Motion to Dismiss. The Supreme Court vacated that judgment and remanded the case to the 7th Circuit for further review.

The Supreme Court relied heavily on their 2015 decision in Tibble v. Edison Int’l where the court stated that “a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones.” The 7th Circuit erred in their determination that the investment menu provided an adequate array of choices that included some of the funds that plaintiffs wanted. This “eliminated any claim that plan participants were forced to stomach an unappetizing menu.” The 7th Circuit appeared to look at the investment menu as a whole rather than focusing on individual investment options within the plan.

The Supreme Court decision noted that Tibble stated that ‘even in a defined contribution plan where participants choose their investments, plan fiduciaries are required to conduct their own independent evaluation to determine which investments may be prudently included in the plan’s menu of options.” More important, the opinion further states that “if the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their fiduciary duty.” Therefore, the case is remanded for further factual consideration regarding the investments offered in the plan.

This is the second time an appellate review has revived an ERISA excessive fee lawsuit. In Sacerdote v. New York University, the 3rd Circuit revived the case by vacating the District Court’s decision to dismiss two of the plaintiff’s claims. In both cases, the lower courts appeared to look at the available investments collectively in dismissing the claims. Both the 3rd Circuit and the Supreme Court seem to suggest that a review of individual investments offered in the plan may be needed to determine if a fiduciary acted imprudently.

Each case will require further factual review to determine if any imprudent investments were in the plans, and if so, what action the defendants took related to those investments.

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