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Dozens of 401(k) Suits See Trickle-Down Effects From SCOTUS Case

Feb. 9, 2022, 11:00 AM

The U.S. Supreme Court’s closely watched decision on retirement plan fees has given new ammunition to workers and employers in dozens of pending lawsuits, but recent court filings suggest most litigants don’t see the ruling as a game-changer.

Narrow,” “limited,” “short,” “case-specific,” and “leaves open more questions than it answers” are some of the ways that companies defending their retirement plans have described the justices’ Jan. 24 opinion in Hughes v. Northwestern University.

Employees claiming their plans are mismanaged have cited Hughes more enthusiastically, with some saying it “strongly” supports their allegations and others saying it “deals a fatal blow” to any effort to dismiss their case. But at least two group of employees—those suing MITRE Corp. and the University of Maryland Medical System—opted not to amend their complaints following Hughes, suggesting they don’t see the case as a major shift in the legal landscape.

In Hughes, the Supreme Court addressed the recent wave of more than 150 Employee Retirement Income Security Act lawsuits by employees who say their retirement plans charge excessive fees. The court ruled in an eight-page, unanimous opinion that workers’ ultimate choice over their retirement investments doesn’t excuse a plan that offers bad funds. The justices rejected a “categorical rule” that would excuse bad funds if good ones are offered, but they resisted announcing other rules to guide judges in considering whether these cases are viable.

Federal judges have now cited Hughes in declining to dismiss retirement plan fee challenges against Duke Energy Corp., Froedtert Health Inc., Quad/Graphics Inc., and Columbus Regional Healthcare System. No judge has relied on Hughes to dismiss a fee lawsuit.

Both employees and plan sponsors are finding ways to cite Hughes to their advantage, according to court filings in more than two dozen active cases.

Employee Arguments

Many employees latched on to the Hughes court’s endorsement of a “context-specific inquiry” to guide ERISA cases. Under this standard, the presence of low-cost investments in a given plan “does not undermine allegations that a plan’s recordkeeping expenses are too high,” employees suing Northwell Health Inc. argued.

Others have cited Hughes for its recognition that plan fiduciaries have a “duty to monitor all plan investments and remove any imprudent ones.” This requirement, “bluntly stated” in Hughes, now has been “affirmed multiple times” by the Supreme Court, employees suing New York Life Insurance Co. said.

Some employees argued that Hughes at least partially wipes out longstanding case law that employers have used to defend their plans. Portions of two employer-friendly Seventh Circuit decisions—Hecker v. Deere & Co. and Loomis v. Exelon Corp.—"have now been explicitly rejected by Hughes, as have by extension district court decisions that substantially relied on this reasoning,” employees suing Matthews International Corp. said.

Other employees cited Hughes in making a broader point about the plaintiff-friendly state of retirement plan fee litigation: “With Hughes, every decision dismissing the same recordkeeping and share class claims asserted here that has been evaluated on appeal has been reversed,” Wesco Distribution Inc. employees said, citing appellate opinions in cases against New York University, Washington University in Saint Louis, the University of Pennsylvania, and Edison International.

A contrary decision favoring Chevron Corp. is “non-published” and “not precedent,” they said.

Employers Respond

Other lines from Hughes have gotten more attention from employers.

Many defendants emphasize the opinion’s final lines, which say the circumstances facing plan fiduciaries “will implicate difficult tradeoffs.” The Supreme Court instructed lower courts to “give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.”

Yale University cited this line in support of a summary judgment motion, saying, “Requiring Yale to stand trial simply because Plaintiffs disagree with Yale’s judgments would be directly contrary to these principles.” And Trader Joe’s Co. said the case it faces is “premised on a fundamental rejection of this important principle,” because the plaintiffs “frame the fiduciary choices in black and white” while ignoring that fiduciary decision making “requires balancing of competing interests under conditions of uncertainty.”

Other employers focused on the Hughes court’s rejection of a “categorical rule” in the ERISA context by arguing that plaintiffs’ allegations are based on categorical rules themselves. Matthews International urged a federal judge to reject a blanket focus on investment cost, just as the Supreme Court rejected an appeals court’s blanket focus on participant choice.

“If the Seventh Circuit may have been overzealous in its focus on choice as a guiding principle in the plausibility analysis, then surely Plaintiffs’ arguments focusing exclusively on cost are equally myopic and flawed,” the company said.

Prevea Clinic made a similar argument with respect to plan participants’ critique of actively managed funds.

The plaintiffs’ “categorical rule that actively managed funds are always imprudent” fails to consider relevant context and is “precisely what Hughes precludes,” it said.

Northwell Health Inc. took this idea even further, saying the Hughes court specifically acknowledged the “key distinction” between actively managed and passive funds, which frustrates any attempt to mount an ERISA case by comparing the two.

More than 150 proposed class actions challenging retirement plan fees have been filed over the past two years. The majority remain active, with about 20 cases put on pause while the Supreme Court deliberated Hughes.

To contact the reporter on this story: Jacklyn Wille in Washington at jwille@bloomberglaw.com

To contact the editors responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com; Steven Patrick at spatrick@bloomberglaw.com