For over a decade, plan fiduciaries and participants have disputed the pleading standard for claims arising under the Employee Retirement Income Security Act of 1973 (“ERISA”) that a plan fiduciary breached its duty of prudence by paying or charging its participants excessive fees. The Supreme Court took up this question in Hughes v. Northwestern University, hearing argument on December 6, 2021. An earlier analysis of oral argument can be found here. On January 24, 2022, the Supreme Court issued a unanimous opinion authored by Justice Sotomayor in which the Court narrowly ruled that the Seventh Circuit erred in upholding the dismissal of the participants’ claims on the basis that the fiduciaries offered low cost investment options to the participants.¹ At the pleading stage, the Court held that this single fact does not categorically prevent the participants from claiming that the inclusion of additional, higher expense options was imprudent.

The Court explained that the Seventh Circuit’s reasoning was “flawed” because “[s]uch a categorical rule is inconsistent with the context-specific inquiry that ERISA requires and fails to take into account respondents’ duty to monitor all plan investments and remove any imprudent ones.” Hughes v. Northwestern Univ., No. 19-1401, 2022 WL 199351, at *2 (U.S. Jan. 24, 2022). Specifically, the Court reasoned that the Seventh Circuit’s “categorical rule” conflicts with Tibble v. Edison International, 575 U. S. 523 (2015). Id. at *3–4. In Tibble, the Court held that “a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones.” 575 U.S. at 530. Because a fiduciary must “conduct a regular review of its investment,” a plan participant “may allege that a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones.” Id. at 528, 530. With this holding in mind, the Court in Hughes explained that the Seventh Circuit failed to apply Tibble and instead “focused on another component of the duty of prudence: a fiduciary’s obligation to assemble a diverse menu of options.” Hughes, 2022 WL 199351, at *4. This reliance “on the participants’ ultimate choice over their investments to excuse allegedly imprudent decisions by respondents” was error because “[t]he Seventh Circuit’s exclusive focus on investor choice elided” the plan fiduciary’s duty to independently evaluate and determine which investments may be imprudent and should be removed. Id. In sum, the simple fact that the participants’ preferred type of investments was available to them did not prevent them from complaining about the flaws in other investment options. Id. Given the lower court’s erroneous reasoning, the Court vacated the judgment so that the Seventh Circuit may reevaluate the participants’ allegations as a whole. Id. The Court instructed the court of appeals to consider Tibble and apply the pleading standards detailed in Ashcroft v. Iqbal, 556 U.S. 662 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). Id. And it concluded by citing its holding from Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014), and noting that the appropriate inquiry will be context specific; indeed, the Court observed that “[a]t times, the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.” Id.

The Court’s narrow ruling allowed it to avoid articulating a comprehensive pleading standard for ERISA excessive fees claims. Nevertheless, the decision does offer some important takeaways for plan fiduciaries. First and foremost, the availability of lower cost investment options does not automatically excuse offering imprudent higher fee plan choices. Instead, as articulated in Tibble, the fiduciary must regularly monitor the menu of options offered and remove imprudent investments from that array. Second, by instructing the Seventh Circuit to apply Iqbal and Twombly, the Court reiterated that the “plausibility” standard of pleading applies in this context. And by specifically citing Twombly, the Court rejected the view of some lower courts that Twombly’s significance is limited to the antitrust context and does not extend to ERISA excessive fees cases. This means that a bare assertion of wrongdoing will not suffice to state a claim; instead, plan participants will have to nudge their claims from conceivability to plausibility by overcoming neutral and lawful explanations for the fiduciaries’ conduct. And third, courts must always remember that plan fiduciaries regularly face difficult tradeoffs and decisions, and therefore, the court “must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.”

In sum, the Court’s decision in Hughes prevents plan fiduciaries from securing dismissal of claims of imprudence just by pointing to the fact that they offered low cost investment options, yet it also grants them latitude when making the monitoring decisions required by the duty of prudence. It is the participant’s burden to state a claim that is not merely conceivable but actually plausible. Of course, this leaves room for plan participants and fiduciaries to dispute excessive fees claims, and it is entirely possible that this issue will make its way to the Court again in the near future.

---

[1] Justice Barrett took no part in the consideration or decision of the case.

ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm whose lawyers practice throughout a network of offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the energy, technology and life sciences sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.