7th Circuit Rules on Remanded Hughes v. Northwestern Case

The Seventh Circuit Court of Appeals (Seventh Circuit) has remanded two of three of the plaintiffs’ claims for further proceedings in Hughes v. Northwestern University after the US Supreme Court overturned its previous ruling that dismissed all three claims.

The plaintiffs originally sued Northwestern in 2016, alleging breaches of ERISA fiduciary duties regarding its defined contribution retirement plans, including:

• Retaining plan recordkeepers that charged “excessive” revenue-sharing fees rather than a flat (or “per capita”) fee.
• Offering investments in “retail” share classes (generally intended for the individual investor market) rather than identical “institutional” share classes (generally made available for companies and organizations with employees that invest on behalf of others), even though institutional share classes charged lower fees than the retail classes.
• Presenting so many different and “duplicative” investment alternatives that caused confusion, “decision paralysis,” and bad investment decision making on the part of participants.

The lower district court dismissed all these claims and, on appeal, the Seventh Circuit affirmed that ruling. The Seventh Circuit reasoned, in part, that because Northwestern’s plan included the type of low-cost investment options plaintiffs claimed to prefer in addition to the “higher-cost” options complained of in their lawsuit, there was no need to further examine the latter options under ERISA.

However, in 2022, the Supreme Court (the Court) overturned the Seventh Circuit on the well-established grounds that plan fiduciaries have a continuing duty to monitor investment options separate from and in addition to the duty to prudently select those options in the first place. Please see our February 1, 2022, article on the Court’s decision.

Writing for a unanimous Court, Justice Sotomayor was especially critical of the Seventh Circuit’s rationale that the mere availability of some “prudent” investment options in a retirement plan precluded any need to review the investment options on offer: “That reasoning [is] flawed. Such a categorical rule is inconsistent with the context-specific inquiry that ERISA requires and fails to take into account [Northwestern’s] duty to monitor all plan investments and remove any imprudent ones.”

Considering this directive, the Seventh Circuit reassessed the plaintiffs’ claims as follows:

• Excessive Fees: The Seventh Circuit held that while the use of revenue sharing for plan expenses is not in and of itself a violation of a fiduciary duty under ERISA, neither does that mean that using such an arrangement necessarily fulfills a plan fiduciary’s duty of prudence. Therefore, the plaintiffs made a plausible claim of Northwestern’s breach of its fiduciary duty, which the trial court must evaluate further.
• “Retail” v. “Institutional” Share Classes: Emphasizing that “no prudent fiduciary would purposely invest in higher cost retail shares,” the Seventh Circuit requested that the trial court evaluate the plaintiffs’ plausible claims of institutional share class availability against Northwestern’s denial of same.
• Too Many Investment Options: Observing that “plans may generally offer a wide range of investment options and fees without breaching any fiduciary duty” and that the plaintiffs had failed to specify just “how [they] were confused and personally injured by the multiplicity of funds,” the Seventh Circuit dismissed this allegation as too vague and speculative to merit any further consideration and thus reaffirmed the trial court’s original dismissal of this claim.

Retirement plan fiduciaries should take this ruling (as well as the Supreme Court decision preceding it) as a stark reminder that their fiduciary obligations do not end once investment options have been selected. Rather, they’ve only just begun, given their duty to monitor those investment options on an ongoing basis, including removing the imprudent ones as may be required to comply with their obligations to plan participants under ERISA.

Hughes v. Northwestern University »