Hughes v. Nw. Univ.
| Decision Date | 24 January 2022 |
| Docket Number | 19-1401 |
| Citation | 142 S.Ct. 737,211 L.Ed.2d 558 |
| Parties | April HUGHES, et al., Petitioners v. NORTHWESTERN UNIVERSITY, et al. |
| Court | U.S. Supreme Court |
David C. Frederick, Washington, DC, for the petitioners.
Michael R. Huston for the United States as amicus curiae, supporting the petitioners.
Gregory G. Garre, Washington, DC, for the respondents.
Jerome J. Schlichter, Andrew D. Schlichter, Sean E. Soyars, Michael A. Wolff, Schlichter Bogard & Denton, LLP, St. Louis, Missouri, David C. Frederick, Counsel of Record, Jeremy S. B. Newman, Jimmy A. Ruck, Kellogg, Hansen, Todd, Figel & Frederick, P.L.L.C., Washington, D.C., Counsel for Petitioners.
Craig C. Martin, Amanda S. Amert, Brienne M. Letourneau, Largue L. Robinson, Willkie Farr & Gallagher LLP, Chicago, IL, Mark T. Stncil, Willkie Farr & Gallagher LLP, Washington, DC, John L. Brennan, Willkie Farr & Gallagher LLP, New York, NY, Gregory G. Garre, Charles S. Dameron, Blake E. Stafford, Shannon M. Grammel, Latham & Watkins LLP, Washington, DC, Counsel of Record, Stephanie M. Graham, Priya J. Harjani, Thalia L. Myrianthopoulos, Northwestern University, Evanston, IL 60208, Counsel for Respondents.
Under the Employee Retirement Income Security Act of 1974 (ERISA), 88 Stat. 829, as amended, 29 U.S.C. § 1001 et seq. , ERISA plan fiduciaries must discharge their duties "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." § 1104(a)(1)(B). This fiduciary duty of prudence governs the conduct of respondents, who administer several retirement plans on behalf of current and former employees of Northwestern University, including petitioners.
In this case, petitioners claim that respondents violated their duty of prudence by, among other things, offering needlessly expensive investment options and paying excessive recordkeeping fees. The Court of Appeals for the Seventh Circuit held that petitioners’ allegations fail as a matter of law, in part based on the court's determination that petitioners’ preferred type of low-cost investments were available as plan options. In the court's view, this eliminated any concerns that other plan options were imprudent.
That reasoning was flawed. Such 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. See Tibble v. Edison Int'l , 575 U.S. 523, 530, 135 S.Ct. 1823, 191 L.Ed.2d 795 (2015). Accordingly, we vacate the judgment below and remand the case for reconsideration of petitioners’ allegations.
This case comes to the Court on review of respondents’ motion to dismiss the operative amended complaint. Accepting the allegations in that complaint as true, see Rotkiske v. Klemm , 589 U. S. ––––, ––––, n. 1, 140 S.Ct. 355, 357–58, 205 L.Ed.2d 291 (2019), the relevant facts are as follows.
Northwestern University offers two retirement plans to eligible employees: the Northwestern University Retirement Plan (Retirement Plan) and the Northwestern University Voluntary Savings Plan (Savings Plan). Both Plans are defined-contribution plans. In such plans, participating employees maintain individual investment accounts, which are funded by pretax contributions from the employees’ salaries and, where applicable, matching contributions from the employer. Each participant chooses how to invest her funds, subject to an important limitation: She may choose only from the menu of options selected by the plan administrators, i.e., respondents. The performance of her chosen investments, as well as the deduction of any associated fees, determines the amount of money the participant will have saved for retirement.
Two types of fees are relevant in this case. First, the investment options typically offered in retirement plans, such as mutual funds and index funds, often charge a fee for investment management services. Such fees compensate a fund for designing and maintaining the fund's investment portfolio. These fees are usually calculated as a percentage of the assets the plan participant chooses to invest in the fund, which is known as the expense ratio. Expense ratios tend to be higher for funds that are actively managed according to the funds’ investment strategies, and lower for funds that passively track the makeup of a standardized index, such as the S&P 500.
In addition to investment management fees, retirement plans also pay fees for recordkeeping services. Recordkeepers help plans track the balances of individual accounts, provide regular account statements, and offer informational and accessibility services to participants. Like investment management fees, recordkeeping fees may be calculated as a percentage of the assets for which the recordkeeper is responsible; alternatively, these fees may be charged at a flat rate per participant account.
Petitioners are three current or former employees of Northwestern University. Each participates in both the Retirement and Savings Plans. In 2016, they sued: Northwestern University; its Retirement Investment Committee, which exercises discretionary authority to control and manage the Plans; and the individual officials who administer the Plans (collectively, respondents).
Petitioners allege that respondents violated their statutory duty of prudence in a number of ways, three of which are at issue here. First, respondents allegedly failed to monitor and control the fees they paid for recordkeeping, resulting in unreasonably high costs to plan participants. Second, respondents allegedly offered a number of mutual funds and annuities in the form of "retail" share classes that carried higher fees than those charged by otherwise identical "institutional" share classes of the same investments, which are available to certain large investors. App. 83–84, 171. Finally, respondents allegedly offered too many investment options—over 400 in total for much of the relevant period—and thereby caused participant confusion and poor investment decisions.
In 2017, respondents moved to dismiss the amended complaint. The District Court granted the motion and denied leave to amend. Divane v. Northwestern Univ. , No. 16-C-8157, 2018 WL 2388118, *14 (ND Ill., May 25, 2018). The Seventh Circuit affirmed. Divane v. Northwestern Univ. , 953 F.3d 980, 983 (2020). This Court granted certiorari. 594 U. S. ––––, 141 S.Ct. 2882, 210 L.Ed.2d 989 (2021).1
In Tibble , this Court interpreted ERISA's duty of prudence in light of the common law of trusts and determined that "a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones." 575 U.S. at 530, 135 S.Ct. 1823. Like petitioners, the plaintiffs in Tibble alleged that their plan fiduciaries had offered "higher priced retail-class mutual funds as Plan investments when materially identical lower priced institutional-class mutual funds were available." Id., at 525–526, 135 S.Ct. 1823. Three of the higher priced investments, however, had been added to the plan outside of the 6-year statute of limitations. Id., at 526, 135 S.Ct. 1823. This Court addressed whether the plaintiffs nevertheless had identified a potential violation with respect to these funds. The Court concluded that they had because "a fiduciary is required to conduct a regular review of its investment." Id., at 528, 135 S.Ct. 1823. Thus, "[a] plaintiff may allege that a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones." Id., at 530, 135 S.Ct. 1823. This Court then remanded the case for the court below to consider whether the plaintiffs had plausibly alleged such a violation. Id., at 531, 135 S.Ct. 1823.
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