If a fiduciary were shopping for apples for a client, it’s obvious that they shouldn’t pay $1,000 — but do they have a duty to scour the store, or go to another, in search of the lowest possible price? If they were filling a car with gas, should they be expected to drive 10 miles out of the way to save a few cents?
Those were questions Supreme Court justices posed during oral arguments Monday in a case whose outcome could change the course of litigation against retirement plan sponsors.
The 2016 lawsuit, Hughes v. Northwestern University, isn’t much different from numerous others that have been brought in recent years against employers, particularly colleges and universities that sponsor 403(b) plans. Northwestern allegedly breached its fiduciary duty by failing to select or negotiate for lower administrative costs or cheaper share classes of the investments on the plan’s menu.
During the oral arguments, the Supreme Court justices hinted at different positions on whether the plan did a disservice to participants by having too many options — two record keepers and hundreds of possible investments. The extent to which a sponsor must seek out the best products and services was also a lingering question.
Justice Stephen Breyer made the analogy about a fiduciary shopping for apples, and Chief Justice John Roberts posed the example of going across the street from one gas station to another, where the prices are clearly marked.
“I don’t know if you’d expect him to drive another 10 miles and go to the Acme gas company,” Roberts said.
The justices also appeared to have slightly different thoughts on whether an abundance of choice is good or bad for retirement plan participants. Hundreds of investment options let people seek what they want, but not consolidating assets into a smaller set of choices means that the plan might not qualify for lower-cost share classes of those products.
Like other lawsuits, the class action case relies on the fact that lower-cost options were simply available. But appellate court decisions show that that alone might not been enough to bring claims for breach of fiduciary duty. The Court of Appeals for the Seventh Circuit ruled against the plaintiffs in that regard, but the Third and Eighth Circuit courts differed, allowing similar cases to go forward.
For litigators, that’s crucial. Prior to the lengthy process of discovery, there is often little to work with beyond the fact that better options were available to retirement plans. Evidence about whether plan sponsors followed a prudent process is generally not publicly available.
Plaintiffs’ law firms count on surviving motions to dismiss as a way to pressure plan sponsors to settle claims long before cases go to trial.
The industry is watching the case closely, and numerous groups have filed amicus briefs with the court, mostly in support of Northwestern.
The court will issue a decision next year, and if it grants the appeal, the case will be allowed to proceed at the district level.
The plaintiffs have cited the use of more than one record keeper by Northwestern as imprudent, but that argument didn’t seem to get much traction with the Supreme Court justices.
“I don’t know how you ever could allege that having one as opposed to two is imprudent, because I’m assuming that there is value to having two,” Justice Sonia Sotomayor said. The complaint had pegged a $35 per participant record-keeping fee as a fair amount, but Sotomayor didn’t appear to be convinced as to how that figure could reasonably be reached.
Justice Clarence Thomas asked the plaintiffs’ attorney how much of a difference in the returns of one investment versus another would be enough to bring claims against a fiduciary.
“At some point, how much difference would there have to be before it doesn’t matter?” Thomas said. “You could say there could be an egregious case in which they could have made a 20% return on investments, but you think … they make a 19% return.”
The limit for plaintiffs is “objective reasonableness, which is a band,” plaintiffs’ attorney David Frederick said.
“Here, because Northwestern never bid out its record-keeping services [or used] its bargaining leverage to try to lower fees, it included proprietary funds that were bundled to the record keeper, we allege that that led to a lower return, and that is a claim for procedural imprudence,” Frederick said.
Northwestern could have gotten better rates for investments and services if only it would have asked for them, Frederick said.
Justice Elena Kagan appeared open to the idea that a plan sponsor would be negligent in not asking for lower rates, but she questioned the benefit of winnowing down investment lineups.
“On the consolidation point, there is at some point a downside to having a non-diverse set of funds, right?” Kagan said. “What point is it like, nobody’s going to want that plan, it only has three funds in it?”
However, Kagan asked the defense why a plaintiff can’t bring a claim related to competitors having better rates for the same services.
That, in fact, would have been closer to stating a claim, defense attorney Gregory Garre said — but that is not what the plaintiffs did, as they did not provide examples to establish a benchmark.
Breyer was interested in a comparison of share classes provided by the plaintiff and questioned why a plan not using lower-cost versions of the same product is insufficient to state a claim.
However, the lawsuit did not clearly show that those options were available to the plan, given the minimum investments some share classes require, Garre said. Further, share classes that include revenue sharing help offset a plan’s administrative costs, he noted.
Some of the briefs submitted to the court point to fiduciary insurance policies dramatically rising in cost as a result of litigation that has grown out of control. The plaintiffs disputed that idea, however.
“I would urge you not to take seriously this idea about insurance premiums … because the reality is that the number of people who are taking advantage of defined-contribution plans has gone up from 75 million to 109 million,” Frederick said. “The number of plans has increased from 630,000 to almost 700,000 in the period since we filed this complaint.”
The defense urged the justices to affirm the appellate and district court decisions for the sake of retirement plans sponsors everywhere.
“Allowing the cookie-cutter claims in this court … to proceed not only would subject retirement plans to endless damages litigation but would thrust the federal courts into the role of micromanaging those plans,” Garre said.
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Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.