Implications of the Supreme Court’s Ruling in Hughes v. Northwestern
In January, the United States Supreme Court issued its much-anticipated ruling in a retirement plan expense lawsuit. The Hughes v. Northwestern University opinion did not necessarily break new ground. However, it may have further stabilized the grounds on which courts across the country will consider motions to dismiss. Plan fiduciaries will be well-served to understand the potential implications.
Recapping the Facts. On the day the Court released the opinion, our News Alert addressed the procedural background and arguments advanced in Hughes. Here’s an even shorter summary of those issues:
- The plaintiffs are current or former participants in two defined contribution plans sponsored by Northwestern University.
- They filed suit against the University, an investment committee, and individual officials who administer the plans.
- The lawsuit alleged fiduciary breaches relating to: (1) the failure to monitor and control recordkeeping fees; and (2) offering “retail” share class funds instead of “institutional” share class funds.
- The defendants asked the lower court to dismiss the case, arguing in large part that they were immune from liability for some poor performing and/or expensive investment options because they had chosen many funds that performed well and/or were not expensive. (Offering 400 fund options provided a lot of variety across the performance and expense spectrum.)
- The court of appeals upheld the dismissal of the plaintiffs claims.
SCOTUS Disagrees. The Court assessed the lower court’s conclusion in a simple manner: “That reasoning was flawed.” The Court stressed that its prior guidance in Tibble v. Edison International confirmed fiduciaries’ continuing duty of prudence. It also disagreed with the notion that a fiduciary’s satisfaction of the duty of diversification (by offering around 400 options) would somehow eliminate the duty of prudence with respect to each and every option. In a six-page opinion, the Court swiftly vacated the lower court’s decision and sent the case back with instructions to follow Supreme court precedence.
Immediate Thoughts: Part 1. For most, the outcome was not terribly surprising; the Court’s opinion was unanimous (with one justice abstaining). It merely confirmed the importance of the principles set forth in Tibble, which also was not a surprising decision. Thus, one could easily conclude that Hughes is not terribly significant from a substantive perspective.
However, it is likely to be significant from a procedural perspective. The plaintiffs were not asking the Supreme Court to declare, as a matter of law, that institutional share class funds are superior to retail share class funds. They were simply arguing that their complaint had appropriately set forth claims and facts that should allow the suit to survive a motion to dismiss and move toward discovery. The lower court had said: “dismiss”. The Supreme Court said: “not so fast”.
Immediate Thoughts: Part 2. It did not take long for us to experience the potential reach of the Hughes outcome. The day after the Court published its Hughes opinion, a Georgia district court denied defendants’ motion to dismiss in a different lawsuit involving excessive retirement plan expenses. That federal trial court began its Goodman v. Columbus Regional Healthcare System order with this statement: “The Court has been awaiting the Supreme Court’s decision in Hughes v. Northwestern . . . before ruling on Defendant’s pending motion to dismiss.” It proceeded to rely heavily on the Hughes opinion in refusing to dismiss fiduciary breach claims relating to retail share class funds, underperforming investment options, actively managed funds, and recordkeeping costs.
That court’s conclusion wasn’t altogether surprising, but one of its statements indicates the degree to which some courts might stretch the substantive nature of the Supreme Court’s opinion. The Georgia federal court said: “The Supreme Court has suggested that a defined contribution plan participant may state a claim for breach of ERISA’s duty of prudence by alleging that the plan fiduciary offered higher priced retail-class mutual funds instead of available identical lower priced institutional-class funds.”
Closing Thoughts. The Supreme Court would probably disagree with that sentence. At a minimum, it would soften it or dive into the broad and flexible meaning of the word “may”. (Contrary to the arguments my law school moot court partner advanced more than 20 years ago, “may” probably does not mean “shall”.) Many lower courts will read the Georgia court’s opinion and conclude, “the Supreme Court didn’t really say that.”
However, many will indeed apply Hughes in a way that results in more cases advancing to discovery. Fiduciaries would be well-served to consider the potential implications by exploring some key questions:
(1) Does our plan use any retail share class funds?
(2) Even when using institutional share class funds, have we explored whether a cheaper collective investment trust version might be available?
(3) How closely are we monitoring all of our core fund options?
(4) Are we still using a lot of revenue sharing to pay for recordkeeping expenses?
(5) When did we last benchmark our plan’s recordkeeping expenses?
Please join us for the upcoming Fiduciary 15 webinar in which we’ll expand upon those questions and address any additional court rulings that cite to Hughes.