Supreme Court Greenlights Excessive Investment Fees Lawsuit, Sides with 401(k) Participants

On January 24, 2022, the Supreme Court of the United States unanimously ruled that Plaintiffs, 401(k) plan participants of Northwestern University (“Northwestern” or the “University”), could proceed with their lawsuit against Northwestern and the administrators of the University’s 401(k) retirement plan (the “Plan”) for alleged mismanagement of the Plan.

Northwestern, like many corporations and non-profit organizations, offers a defined contribution retirement plan, whereby eligible employees set aside a certain percentage of their income to be invested for retirement. Importantly, the employer offers a menu of investments from which employees can select, based on their personal retirement goals and risk preferences. Employees then pay investment management fees on their chosen investments, typically in the form of a percentage of their assets.  

Defined contribution plans are governed by the Employee Retirement Income Security Act of 1974 (“ERISA”), a federal statute establishing standards for plan administrators to ensure that investments offered to employees are prudently selected and monitored.

The Plaintiffs in the Northwestern lawsuit allege that the University violated ERISA’s fiduciary requirements by: (1) failing to monitor and control the fees participants paid, resulting in excessive costs; (2) offering more than 400 investment options, causing participant confusion; and (3) charging participants for “retail” share classes, instead of the cheaper and readily available “institutional” share classes.

In 2017, the University filed a motion to dismiss the lawsuit, which the United States District Court for the Northern District of Illinois granted. Plaintiffs appealed, and the Seventh Circuit Court of Appeals affirmed the dismissal. Focusing on the element of employee choice, the Seventh Circuit reasoned that because the University offered such a wide array of investment options, including the low-cost index funds Plaintiffs prefer, it “eliminat[ed] any claim” that plan participants were forced to accept poor and potentially imprudent investment options.

Plaintiffs appealed the Seventh Circuit’s decision to the Supreme Court. The Court granted certiorari in July 2021, heard oral arguments in December, and issued its decision on January 24, 2022.

Justice Sonia Sotomayor, writing for a unanimous Supreme Court, [1] explained that the lower courts incorrectly focused on participant choice, clarifying that such a broad focus was “inconsistent” with the “context-specific” inquiry that ERISA requires and emphasizing that ERISA creates a duty to monitor all plan investments and remove imprudent ones. As the Court clearly stated, “[i]f the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their duty.”

The case will now be remanded to the United States District Court for the Northern District of Illinois for reconsideration, including the possibility of a jury trial.

The Court’s ruling has already impacted similar ERISA cases throughout the country. Just two days after the Court’s decision, a federal judge in Georgia rejected a motion to dismiss filed by Columbus Regional Healthcare System Inc., citing Northwestern as controlling precedent. Similarly, a federal judge in Wisconsin cited Northwestern in sustaining a breach of fiduciary duty lawsuit against Froedtert Health Inc.

Updates to this blog will be provided as courts continue to interpret the Northwestern holding. The ruling is currently captioned Hughes v. Northwestern University, 595 U.S. ___ (2022).

The legal team at Miller Shah LLP has significant experience representing ERISA matters. If you have any questions regarding this subject or this post, please contact Alec Berin (ajberin@millershah.com) or Jonathan Dilger (jadilger@millershah.com). The firm can also be reached toll-free at (866) 540-5505.

[1] Justice Barrett took no part in the case.