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Potential for Increased Participant Litigation Looms After Appellate Court Decision on Excess Recordkeeping and Investment Fee Claims


· 5 minute read


· 5 minute read

Hughes v. Northwestern University, 63 F.4th 615, 2023 WL 2607921 (7th Cir. 2023)

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On remand from the U.S. Supreme Court (see our Checkpoint article), the Seventh Circuit Court of Appeals reexamined defined contribution plan participants’ allegations that the plan’s fiduciaries had breached ERISA’s duty of prudence by (1) failing to monitor and incurring excessive recordkeeping fees (in part due to revenue sharing arrangements), (2) failing to exchange retail shares for cheaper but otherwise identical institutional shares, and (3) retaining duplicative funds that were confusing to participants making investment decisions. As background, after the Seventh Circuit upheld the trial court’s dismissal of the participants’ claims, the Supreme Court held that the availability of prudent investment options does not excuse fiduciaries’ failure to remove imprudent ones and directed the Seventh Circuit to reconsider the duty of prudence in light of the continuing duty to monitor articulated in the Court’s Tibble decision (see our Checkpoint article).

Regarding the excessive fees claim, the Seventh Circuit held on remand that, although use of revenue sharing for plan expenses is not an automatic fiduciary breach under ERISA, this does not foreclose the possibility of a fiduciary duty violation by failing to monitor and to incur only reasonable expenses. Fiduciaries have a continuing duty to monitor expenses to make sure that they are not excessive with respect to the services received. Because participants plausibly alleged that the fiduciaries’ failure to obtain comparable recordkeeping services at a substantially lesser rate was outside the range of reasonable actions that they could take as fiduciaries, this claim was allowed to proceed.

The court also considered the claim that fiduciaries had “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” (the “share-class” claim). Applying the “continuing duty to monitor” standard again and noting that no prudent fiduciary would purposefully invest in higher cost retail shares, the court concluded that the participants’ share-class claim should survive dismissal. But it upheld the trial court’s dismissal of the duplicative funds claim because the participants failed to identify how they were confused by the magnitude of funds available under the plan.

EBIA Comment: This decision holds that a participant pleading a breach of ERISA’s fiduciary duty of prudence need only plausibly allege fiduciary decisions outside a range of reasonableness, with a context-specific inquiry into that range. This standard may open the door to increased litigation by participants, who would not have to show that a prudent alternative action was actually available to survive a motion to dismiss (plausible availability would be enough). For more information, see EBIA’s 401(k) Plans manual at Sections XXIV.G (“Fiduciary Duty #2: Procedural Prudence”), XXV.F (“Investment Fees and Expenses”), and XXVI (“ERISA Fiduciary Rules: Participant-Directed Investments”). See also EBIA’s ERISA Compliance manual at Section XXVIII.I.8 (“Litigating a Breach of Fiduciary Duty Claim”).

Contributing Editors: EBIA Staff.

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