The U.S. Supreme Court has ruled three retirees should be allowed to resume their lawsuit accusing Northwestern University of mishandling their retirement accounts, a determination that established lower courts incorrectly dismissed the lawsuit.
Justice Sonia Sotomayor wrote the 6-0 opinion, issued Jan. 24. Justice Amy Coney Barrett took no part in the discussion or decision. Barrett had been a judge serving on the U.S. Seventh Circuit Court of Appeals when it affirmed a federal district court judge’s dismissal of the complaint.
At issue are Northwestern’s defined-contribution plans, which fall under the 1974 Employee Retirement Income Security Act. The plaintiffs’ 2016 lawsuit alleged the university and its Retirement Investment Committee didn’t monitor or control certain fees, leading to unreasonably high costs to participants. They also said the plan offered annuities and mutual funds under the “retail” share classification, which carried larger fees than those associated with otherwise identical share classes of the same investments. The workers also accused Northwestern of offering options likely to confuse investors.
In affirming the May 2018 dismissal, according to Sotomayor, the Seventh Circuit panel incorrectly relied on the fact plan participants “had ultimate choice over their investments to excuse allegedly imprudent decisions” by Northwestern. In order to stave off dismissal, the lower courts needed only to determine the retirees’ allegations plausibly included ERISA violations, which “requires a context-specific inquiry of the fiduciaries’ continuing duty to monitor investments and to remove imprudent ones as articulated in Tibble v. Edison International,” a 2015 opinion.
According to court documents, Northwestern offers both a retirement and a voluntary savings plan, each a defined-contribution option subject to ERISA regulations. The plaintiffs belonged to both plans. Individual can choose how to invest their funds, but only by selecting from the plan administrator’s list of options. The retirees challenged the recordkeeping fees, which are distinct from investment management fees.
“In rejecting petitioners’ allegations, the Seventh Circuit did not apply Tibble’s guidance,” Sotomayor wrote. “Instead, the Seventh Circuit focused on another component of the duty of prudence: a fiduciary’s obligation to assemble a diverse menu of options. The court determined that respondents had provided an adequate array of choices, including ‘the types of funds plaintiffs wanted (low-cost index funds).’ ”
However, Sotomayor continued, Tibble established that even when employees participate in a defined-contribution plan and have choices, the fiduciaries still must independently evaluate which options should be included in the slate of choices.
“If the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their duty,” Sotomayor wrote.
While allowing that the Seventh Circuit was correct in determining plan administrators made the retirees’ preferred options available, the justices said the panel was wrong to use the same grounds to dismiss allegations of the plan options being too numerous, expensive or underperforming.
“The same was true for recordkeeping fees,” Sotomayor wrote. “The court noted that ‘plan participants had options to keep the expense ratios (and, therefore, recordkeeping expenses) low.’ ”
Since the Seventh Circuit repeatedly relied on what the Supreme Court ruled was improper reasoning, the top court vacated the judgment and remanded so the panel can reevaluate the allegations on the whole in light of guidance from Tibble.
The plaintiffs were represented in the case by attorneys David C. Frederick, Jeremy S.B. Newman, of the firm of Kellogg, Hansen, Todd, Figel & Frederick, of Washington, D.C., and Jerome J. Schlichter, Andrew D. Schlichter, Sean E. Soyars and Michael A. Wolff, of the firm of Schlichter Bogard & Denton, of St. Louis.
Northwestern was represented by attorneys Craig C. Martin, Amanda S. Amert, Brienne M. Lettourneau, Larue L. Robinson, Mark T. Stancil and John L. Brennan, of the firm of Robinson Willkie Farr & Gallagher, of Chicago, New York and Washington, D.C.