Seventh Circuit Revives ERISA Breach of Fiduciary Duty Claims Against Northwestern University for Alleged Mismanagement of Retirement Plans

On remand from the U.S. Supreme Court’s opinion in Hughes v. Nw. Univ., 211 L. Ed. 2d 558, 142 S. Ct. 737 (2022), the Seventh Circuit in Hughes v. Nw. Univ., No. 18-2569, __F.4th__, 2023 WL 2607921 (7th Cir. Mar. 23, 2023), reconsidered the Plaintiffs’ allegations that Northwestern University, as fiduciary of the Northwestern University Retirement Plan and the Northwestern University Voluntary Savings Plan (the “Plans”), breached its duty of prudence under ERISA. Specifically, the court reconsidered three claims that Northwestern: “(1) failed to monitor and incurred excessive recordkeeping fees, (2) failed to swap out retail shares for cheaper but otherwise identical institutional shares, and (3) retained duplicative funds. The court concluded that the first two claims were sufficiently pled to survive a motion to dismiss and may proceed; the third claim remains dismissed. For the other claims and issues not before the court, the court reinstated its prior judgment in Divane v. Northwestern University, 953 F.3d 980 (7th Cir. 2020).

On the first reconsidered claim, Count III of the First Amended Complaint, Plaintiffs alleged that Northwestern incurred unreasonable recordkeeping fees by failing to monitor and control those expenses. According to Plaintiffs, Northwestern should have solicited bids from competing providers, negotiated with existing recordkeepers, and consolidated to a single recordkeeper rather than having two (TIAA and Fidelity). The court previously affirmed the dismissal of Count III because it found that ERISA does not require a flat-fee structure, Northwestern explained that it retained TIAA as a separate recordkeeper in order to continue offering its product, and plan participants could select low-cost funds available in the Plans. The Supreme Court’s decision in Hughes forecloses the third reason. The Seventh Circuit reaffirmed that a fiduciary need not constantly solicit quotes for recordkeeping to comply with their duty of prudence but a fiduciary who fails to monitor the reasonableness of plan fees and fails to take action to mitigate excessive fees may violate the duty of prudence. Here, Plaintiffs allege that “recordkeeping services are fungible and that the market for them is highly competitive. Plaintiffs also contend that $35 per participant was a reasonable recordkeeping fee based on the services provided by existing recordkeepers and the Plans’ features.” Plaintiffs provide examples of other university plans that reduced recordkeeping by soliciting competitive bids, consolidating to a single recordkeeper, and negotiating rebates. Under the “context-specific” pleading standard applied to this claim, the court found that these factual averments are enough to plausibly allege that Northwestern violated its duty of prudence by incurring unreasonable recordkeeping fees.

On the second reconsidered claim, Count V of the First Amended Complaint, Plaintiffs alleged that Northwestern imprudently retained funds with high expenses and poor performance relative to other investments options that were available to the Plans. Specifically, Plaintiffs allege that Northwestern failed to replace retail-class shares of funds with cheaper and identical institutional-class shares. Plaintiffs further allege that Northwestern had “massive bargaining power” and could have obtained a waiver of the minimum investment thresholds in order to include institutional-class shares in the Plans. All Plaintiffs are required to show is that cheaper institutional shares were plausibly available, not that they were actually available to the Plans. The court found it plausible that Northwestern could have negotiated for institutional-class shares. This is supported by statements from industry experts that jumbo retirement plans like Northwestern’s have significant bargaining power. Though Northwestern had alternative explanations about the unavailability of the cheaper funds, the court found that they were not strong enough to overcome reasonable inference that Northwestern failed to use its size to bargain for cheaper institutional shares.

Lastly, on the duplicative funds claim in Count V, the court found that Plaintiffs’ unspecific allegations that a fiduciary provided too many funds, without more, do not state a claim for breach of the duty of prudence.