Overview
The Supreme Court's narrow ERISA ruling in Hughes v. Northwestern Univ., No. 19-1401 (U.S. Jan. 25, 2022) is disappointing for ERISA plan fiduciaries facing suits for allegedly imprudent investments, but it has some bright spots, too.
In light of the recent explosion of ERISA suits alleging imprudent investment decisions by plan fiduciaries in managing participant-directed individual account plans, fiduciaries had hoped that the Supreme Court's decision in Northwestern University would provide the lower courts with some clarification of the ground rules for assessing the viability of such challenges. The result of the decision—a win for the plaintiffs and a remand to the Seventh Circuit for further proceedings—was no doubt disappointing for plan fiduciaries. But it was an exceedingly narrow victory for plaintiffs challenging allegedly imprudent investment decision-making, and the decision has some high notes for defendants facing these claims.
As in many of the recently decided and currently pending ERISA cases, the plaintiffs in Northwestern University—current and former employees who participated in the university's retirement plans—claimed that the university’s retirement plan fiduciaries violated their fiduciary duty of prudence by "offering needlessly expensive investment options and paying excessive recordkeeping fees."1 Plaintiffs' claims included allegations that the university failed to monitor the plan’s recordkeeping costs, which were alleged to be unreasonably excessive; that it invested in more expensive retail share classes of mutual funds when it had access to cheaper institutional share classes; and that it offered too many investment options in its plan menu, leading to plan participant confusion and bad choices. The university moved to dismiss the claims, and its motion was granted by the district court, and affirmed by the Seventh Circuit.
In the Supreme Court, the plaintiffs, supported by the United States as amicus curiae, launched a full frontal assault on the Seventh Circuit's decision, asking the Supreme Court to hold that 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 ERISA."2 But the Court’s opinion, an 8-0 decision written by Justice Sotomayor, declined to reach that far and did not conclude that the plaintiffs had properly pled an imprudence claim.3
Instead, the Supreme Court focused on a narrow aspect of the decision below. In vacating the Seventh Circuit's decision and remanding the case for further proceeding, the Supreme Court faulted the Seventh Circuit for failing to apply its prior instruction in Tibble v. Edison Int'l, 575 U.S. 523 (2015). Tibble had reasoned that a plaintiff may allege a breach of the duty of prudence based on the failure to properly monitor investments and remove imprudent ones. In its Northwestern Univ. decision, the Court concluded that the lower court "did not apply Tibble's guidance."4 It held that the Seventh Circuit erroneously focused on the fact that the university’s plan had provided a wide array of choices, which, the lower court had concluded, eliminated any concerns that other plan options were imprudent.
Thus, the narrow holding of Northwestern University is that a court cannot rely exclusively on plan participants' ultimate choice over their investments to excuse allegedly imprudent investment choices.5 Even where plan participants are given broad choices as part of a retirement plan menu, plan fiduciaries are still required to prudently determine which investment may be included in that menu of options. By focusing exclusively on investor choice and not considering the prudence of the fiduciaries' decisions regarding the retention of investment options and recordkeepers in light of the allegations of the complaint as a whole, the Court of Appeals decision erred.
Notably, the Court did not reach the broader issues in the case as to whether plaintiffs had adequately pled an actionable breach of the plan fiduciary's duty of prudence. Instead, it remanded to the Court of Appeals for further proceedings. But in doing so, the Court offered hope for plan fiduciaries regarding the sort of analysis that lower courts must conduct in reviewing these claims.
First, the Court made clear that, in considering a motion to dismiss ERISA imprudence claims, lower courts must conduct the rigorous plausibility analysis of Iqbal and Twombly. See Ashcroft v. Iqbal, 566 U.S. 662 (2009); Bell Atlantic v. Twombly, 550 U.S. 554 (2007). Twombly explains that, where actions are "just as much in line with a wide swath of rational and competitive business strategy" as they are with plaintiffs' theory of illegal conduct, plaintiffs must do more to negate the less nefarious explanations for the conduct at issue. They must at least assert facts "tending to exclude the possibility of" the lawful alternative explanation for the challenged conduct.6
Some courts of appeals had rejected this analysis in ERISA breach of fiduciary duty claims because requiring an ERISA plaintiff to rule out every possible lawful explanation for the conduct he challenges would "'invert the principle that the complaint is construed most favorably to the nonmoving party.'"7 But the Supreme Court left no doubt that district courts must “apply the pleading standard discussed” in Iqbal and Twombly in the ERISA context.8
Second, in evaluating a duty of prudence claim, the district court’s inquiry will necessarily be "context specific" and will turn "'on the circumstances . . . prevailing' at the time the fiduciary acts"9—not based on the 20/20 hindsight that may come from later factual developments.
Finally, in conducting that review, the Court warns that lower courts must be solicitous of the "difficult tradeoffs" involved in the fiduciary's investment decisions, essentially placing a thumb on the scale of the analysis: courts "must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise."10
Endnotes
1 Hughes v. Northwestern Univ., No. 19-1401, 2022 WL 199351 (Jan. 24 2022).
2 Northwestern University, Merits Brief of Petitioners at i (Question Presented).
3 Justice Barrett did not participate in the decision.
4 Twombly, 550 U.S. at 554.
5 Id.
6 Northwestern University, 2022 WL 199351, * 4
7 See Sacerdote v. New York Univ.,9 F.4th 95, 108 & nn. 45, 46 (2d Cir. 2022) (quoting Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 597 (8th Cir. 2009)); Sweda v. Univ. of Pennsylvania, 923 F.3d 320, 326 (3d Cir. 2019).
8 Northwestern University, 2022 WL 199351, * 4 (quoting Fifth Third Bancorp v. Dudenhoeffer, 573 U. S. 409, 425 (2014)).
9 Id., *4.
10 Id.
