Split Perspectives on Supreme Court’s New Ruling

Attorneys representing the plaintiffs in Hughes v. Northwestern University say the Supreme Court’s ruling strengthens fiduciary protections for retirement plan investors, while those attorneys who more often serve ERISA class action defendants foresee a more muted impact.

The U.S. Supreme Court filed a ruling in an Employee Retirement Income Security Act (ERISA) lawsuit known as Hughes v. Northwestern University.

In the days since, expert attorneys have offered perspective on just what the ruling means—and doesn’t mean—for the many other examples of ERISA excessive fee litigation making their way through the federal court system. While the ruling technically sided with the plaintiffs and remanded the case back to the 7th U.S. Circuit Court of Appeals for reconsideration that more strictly adheres to the pleading precedents set in another Supreme Court ruling known as Tibble v. Edison, the consensus among ERISA defense attorneys is that the Hughes ruling may indeed be limited in its influence.

For their part, the plaintiffs’ attorneys in the case, who work for the law firm Schlichter Bogard & Denton, say the ruling affirms that ERISA fiduciaries of all retirement plans, including 401(k) and 403(b) plans, have a duty “to monitor continually every investment option in a plan and remove any imprudent ones.”

“We’re pleased that the Supreme Court has unanimously ruled in favor of employees and retirees in the Northwestern plan, as they previously did in our Tibble v. Edison case, the only other excessive fee case they have taken,” says Jerry Schlichter, managing partner of Schlichter Bogard & Denton. “With two unanimous decisions, the Supreme Court has made clear that the fiduciary duty for plan sponsors is a serious one, and requires that each fund must be monitored, and removed if imprudent. This is a victory for American workers and retirees in every plan.”

Schlichter argues that, with this decision, the Supreme Court is “making a strong statement to sponsors who load their plans with hundreds of options that they risk breaching their fiduciary duty to their employees if they fail to evaluate each one separately and that they must continue to do so.”

According to Schlichter, the Supreme Court “ruled that it is the employer’s obligation, not the employee’s, to make sure funds in the plan are prudent and not excessively costly.”

“Contrary to Northwestern’s contention, fiduciaries don’t get a pass on having unreasonably expensive or imprudent investments in a plan just because some others are prudent,” Schlichter says. “Plan sponsors also don’t get a pass on monitoring each fund by simply having a large number of fund options.”

In the viewpoint of Nancy Ross, a Chicago-based partner in and co-chair of Mayer Brown’s ERISA litigation practice, the new Hughes ruling might not turn out to be as influential as some have assumed.

“Despite some of the early headlines that have already been written suggesting this case is a really big deal, in fact, I view this as a limited ruling,” Ross says. “What I mean is that the Supreme Court did not reach any specific or detailed conclusions that any of the investments offered by the defendants in this case are actually inappropriate, nor did the justices come down and say a fiduciary can never offer retail shares of funds within their institutional retirement plans. Instead, what they said, in a nutshell, is that the 7th Circuit simply did not give enough consideration of the duty-to-monitor precedents set by Tibble.”

Ross says the straightforward discussion in the Supreme Court’s ruling, which stretches to only about eight pages, can actually offer some peace of mind to plan fiduciaries. They can now be even more sure of the exact scope of their duties when it comes to monitoring the investment menu—and that the offering of a significant range of choice to plan participants is not itself a legal shield.

“Fiduciaries can look at this ruling with their legal advisers and decide if there is anything pressing that they can learn from it with respect to their own plan,” she suggests.

Ross says she takes some additional comfort in the way the Supreme Court’s ruling, right at the end, expressly acknowledges the challenging position in which ERISA fiduciaries operate. She believes the 7th Circuit’s reconsideration of the case could very well determine that the fiduciaries lived up to their duties of prudence and loyalty.

For Emily Costin, a partner in the ERISA litigation practice team at Alston & Bird in Washington, D.C., one key takeaway from the Supreme Court ruling is the importance of keeping good minutes in committee meetings—and keeping good track of these minutes. Such minutes, alongside the testimony of fiduciaries and other documentary evidence regarding the plan management process, are all going to play a key role in the future of this case, assuming it does not end in a settlement.

“Of course, just because you take minutes doesn’t mean you are acting prudently,” Costin warns. “Rather, the minutes are meant to help you go back and remember why you made decisions and what type of deliberation occurred. You don’t need to capture every little detail in your minutes, but it is a best practice to include enough detail to show a prudent process was followed.”  

Though he doesn’t agree with their take, Andrew Oringer, a partner in Dechert’s ERISA and executive compensation group in New York City, says he expects plaintiffs’ attorneys to view the ruling as favorable to their cause—as evidenced by Schlichter’s statement about the case.

“Plaintiffs’ attorneys will look at this and argue that it is good for their goals of getting past the motion to dismiss stage and seek trials or, more often, settlements,” Oringer suggests. “I don’t think that’s necessarily true, but on the other hand, this ruling will do nothing to blunt the procession of excessive fee cases being filed, which some hoped it would do. Depending on what happens next in the lower courts, this could be either good for plaintiffs or bad in terms of creating a new pleading standard where it is easier or harder to survive dismissal motions.”