Who Manages the Money Managers? Can a Retirement Plan Be Sued for Charging Excessive Fees?

Hughes v. Northwestern Univ.

No. 19-1401,
953 F.3d 980 (7th Cir. 2020),
cert. granted, 2021 WL 2742780 (U.S. July 2, 2021)

Decision (PDF) issued Jan. 24, 2022.

Result: The U.S. Supreme Court unanimously held that plan fiduciaries must eliminate investment options with excessive fees, and that giving participants a “choice” to select among investment products is not sufficient if some of those options are imprudent.

Issue: Whether allegations that a defined-contribution retirement plan paid or charged its participants fees that substantially exceeded fees for alternative available investment products or services are sufficient to state a claim against plan fiduciaries for breach of the duty of prudence under the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1104(a)(1)(B) (“ERISA”).

ERISA is the federal statute that imposes fiduciary duties on administrators of retirement plans to act with the care, skill, and diligence that a prudent person acting in a like capacity would use. The law also empowers a plan participant to sue administrators for breaching these duties.

Plaintiffs in this case are participants in the Northwestern University Retirement Plan. They allege that the retirement plan caused participants to pay excessive recordkeeping fees by retaining multiple record keepers and failing to solicit competitive bids or negotiate for lower fees. Petition for Writ of Certiorari at 1–2, Hughes v. Nw. Univ. (No. 19-1401).

On May 25, 2018, the U.S. District Court for the Northern District of Illinois granted the defendant’s motion to dismiss. Divane v. Nw. Univ., No. 16 C 8157, 2018 WL 2388118, at *14 (N.D. Ill. May 25, 2018). Plaintiffs alleged that participants in the retirement plan paid an average of between $153 and $213 per participant per year and that the plan had an average expense ratio between .14% and .197%. Id. at *7. The court held that “there is nothing wrong for ERISA purposes, with the fact that the plan participants paid the record-keeper expenses via . . . expense ratios” and that Northwestern was not required to “find a record-keeper willing to take” a lower flat fee per year. Id. at *8. Finally, the court found that participants had options to keep the expense ratios low and could have invested in different funds—despite the fact that they had hundreds of options to choose from and little, if any, guidance. Id. at *8.

On March 25, 2020, the Seventh Circuit affirmed the district court’s decision. Divane v. Nw. Univ., 953 F.3d 980, 994 (7th Cir. 2020). On appeal, the plaintiffs proposed alternative recordkeeping arrangements they would have preferred, including either a negotiated flat recordkeeping fee, instead of a fee based on revenue sharing; or soliciting competitive bids for a fixed per-capita fee, instead of using two separate record keepers. Id. at 989–90. The Court held that ERISA does not require such a fee structure, require a sole record keeper, or mandate any specific recordkeeping arrangement at all. Id. at 990. AARP and AARP Foundation filed a brief in support of the plaintiffs in this case. See Brief for AARP et al. as Amici Curiae Supporting Plaintiffs, Divane v. Northwestern Univ., 953 F.3d 980 (7th Cir. 2020).

In contrast to the Seventh Circuit, the Third and Eighth Circuits have held that a plan participant can plausibly plead a breach of fiduciary duty by claiming that the retirement plan charged excessive fees when lower-cost alternatives exist. Sweda v. Univ. of Pa., 923 F.3d 320 (3d Cir. 2019); Davis v. Wash. Univ. in St. Louis, 960 F.3d 478 (8th Cir. 2020).

WHAT’S AT STAKE

As the retirement landscape has shifted from employer-paid and guaranteed pensions to employee-paid retirement savings plans where participants assume investment risks and responsibilities, judicial attention has increasingly focused on the obligations of plan fiduciaries to prudently select and monitor investment options. Even a small decrease in the amount of fees charged by plan administrators can make a huge difference in the amount in employees’ retirement accounts when they retire. The U.S. Department of Labor has calculated that a 1 percent difference in fees and expenses would reduce an employee’s account balance at retirement by 28 percent over a 35-year career. Consequently, holding plans accountable for permitting high fees is crucial to ERISA’s effectiveness in the modern retirement landscape.

If the Supreme Court holds that plan beneficiaries cannot state a claim under ERISA against managers’ charging excessive administrative fees, participants would have to meet a virtually impossible standard to survive a motion to dismiss claims for imprudent management. Such a result would cause a rush of dismissals of other ERISA excessive fees cases across the board. This will hinder the overall enforcement of ERISA, thereby further increasing the risk that individual workers face when entrusting plan administrators with their savings.

Dara Smith
Dsmith@aarp.org

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