Published
January 27, 2022
The Hughes decision didn’t rock the ERISA plan administration world, but it may put a few stones in the path of the plaintiffs’ bar. Read on to see how.
For those of us in the industry, we know how much work goes into establishing and maintaining a retirement plan. There isn’t a plan administration fairy that comes down at night, and poof, you have a perfectly compliant ERISA retirement plan. Instead, numerous administrative and fiduciary decisions need to be made when setting up and maintaining a plan. For a participant directed defined contribution plan, two important decisions are selecting the investment lineup and the service providers. Once a designated investment alternative or a service provider is selected, there is a fiduciary obligation to monitor the overall lineup, each investment, and all service providers. So, the Supreme Court’s decision that a broad array of investments does not insulate fiduciaries from the duty to monitor each investment was neither ground-breaking nor a surprise.
Where does Hughes leave us? Although it leaves plan administration exactly where it was before, it is a good reminder of the importance of having a prudent process in place not only for selecting investment options and service providers, but also for monitoring them. And now would be a good time for fiduciaries to review these processes.
Although plan administration really won’t change, how lower courts deal with the avalanche of ERISA class action excessive fee cases might because the Supreme Court provided some guidance to lower courts. Hang in there, this is a bit weedy, but it matters (and for a more technical explanation, see our Litigation Center’s writeup).
ERISA requires fiduciaries to engage in a prudent decision-making process, but it doesn’t dictate a particular result. It also doesn’t create liability for imperfect results if the fiduciaries’ decision-making process was sound. But in ERISA breach of fiduciary cases, plaintiffs may not know the process the fiduciaries went through in making their determination. So, they typically can’t directly allege that the fiduciaries’ decision-making process was improper or inadequate. Instead, they need to ask the court to infer a breach based on the results that they disagree with. For example, plaintiffs commonly claim that because the investment option the fiduciaries selected performed worse or had higher fees than a different investment option, the fiduciary’s decision-making process must have been inadequate.
The Supreme Court has applied a plausibility standard to inferenced-based claims which requires the inferred wrongdoing to be plausible, not just conceivable. According to the Supreme Court, this means that when the alleged facts are “just as much in line with” lawful behavior and when there is an “obvious alternative explanation” to the inference of wrongdoing that the plaintiffs seek, the “plausibility” standard isn’t met, and the case must be dismissed. Most courts apply this standard to ERISA breach of fiduciary duty claims, but the Second (CT, NY, and VT) and Third (DE, NJ, PA, and VI) Circuits expressed reluctance to apply this standard in ERISA cases, instead suggesting that this “heightened” standard only applies to antitrust cases.
As we argued in our amicus brief, ERISA inference-based claims should be treated no differently than other inferenced-based claims, common in antitrust cases, discrimination cases, and civil conspiracy cases. And in Hughes, the Supreme Court agreed. Although it vacated the Seventh Circuit’s decision, it offered two key principles to guide lower courts in considering ERISA cases. First, it instructed lower courts to apply the plausibility standards to ERISA cases the same as they would any other inference-based claim and to evaluate circumstantial allegations in a “context specific way.”
Second, the Court acknowledged there is no right decision that fiduciaries must make, instead the Court noted that there is a “range of reasonable judgments” available to a fiduciary in any given situation. That acknowledgment is critical because in many of these excessive fee cases, plaintiffs try to paint a black and white picture of what the right decision must be. For example, many of these cases pick an arbitrary fee amount for plan administration, say $35, and then claim that anything above that, no matter what services may be involved, is per se a breach of fiduciary duty. But in the last sentence of its opinion, the Court didn’t accept this view, stating that “[a]t times, the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgment a fiduciary may make based on her experience and expertise.” In our amicus brief we explained these tradeoffs and the latitude ERISA gives fiduciaries when making them. It was welcome to see the Court not only acknowledge this but to instruct lower courts to do the same.
About the authors
Chantel Sheaks
Chantel Sheaks develops, promotes, and publicizes the Chamber’s policy on retirement plans, nonqualified deferred compensation, and Social Security.
