The motion to dismiss is an important hurdle for all ERISA plaintiffs and defendants. Plan sponsors seek a dismissal because it saves time and the cost of preparing for trial. Plaintiffs want to get past the dismissal stage to allow the legal discovery process, gathering information to bolster their ERISA claims.
"The respondents acted imprudently," said Michael R. Huston, assistant to Solicitor General Elizabeth Prelogar, in his comments to the court referring to the university in Hughes et al. vs. Northwestern University et al.
"Fiduciaries have a duty to fix things," said Mr. Huston, representing the government in an amicus brief filed May 25 in support of the plaintiffs.
"The case presents an opportunity for this court to clarify that ERISA requires fiduciaries to work actively to limit a plan's expenses and remove imprudent investments, and that fiduciaries will not be excused from those responsibilities on the ground that they selected some (or even many) other prudent investments for a plan," the amicus brief said. Five other amicus briefs were filed supporting the plaintiffs, while seven pro-Northwestern amicus briefs were filed.
Mr. Huston and David C. Frederick, the attorney for the plaintiffs, told the justices that the university acted too slowly — well behind many of its 403(b) peers — to address certain issues of the plaintiffs' complaint such as reducing duplicative investments and cutting fees.
"In 2016, they consolidated (the investment lineups) and got rebates (from record keepers)," actions that confirm the plaintiffs' argument that "they could have acted sooner," Mr. Huston said.
Mr. Frederick said the university cut the total number of investment options to 32 from 242 in 2016. (Fidelity Investments and TIAA-CREF are the record keepers.)
He contended that the fiduciaries failed to exercise "procedural prudence" in plan management, such as failing to conduct a record-keeping RFP, maintaining record keepers' proprietary products in the fund lineups and charging allegedly high fees.
Northwestern was "asleep at the switch," said Mr. Frederick, a partner in law firm Kellogg, Hansen, Todd, Figel & Frederick.
The plaintiffs offer a "flawed" concept of prudence as defined by ERISA, Gregory G. Garre, the attorney for Northwestern, told the justices, adding the plaintiffs' arguments about fees lack proper context.
Their allegation that an alternative and cheaper option is available failed to take into account whether a plan actually qualifies for an alternative, said Mr. Garre, a partner in law firm Latham & Watkins.
For example, an institutional share price option may require a minimum investment that a plan cannot support, Mr. Garre said. Although a retail share option might cost more than an institutional share option, the retail share's cost may offset some plan expenses, he added. Another problem with consolidating investment options or even record keepers is the presence of annuities, he said. Getting rid of annuity option would cause "serious surrender charges," he said.
Accepting the plaintiffs' and government's arguments "would drive a hole through" the Supreme Court's precedent decisions regarding the pleading standards that determine whether a case should be dismissed or allowed to trial, Mr. Garre said.
The Supreme Court agreed to hear the Northwestern case because different appeals courts made different decisions on the trial-worthiness of alleged ERISA violations regarding excessive fees, poor-performing investment options, too many record keepers and/or ineffective management.
In the Northwestern case, participants sued in 2016, but a U.S. District Court judge dismissed the case in May 2018. The 7th U.S. Circuit Court of Appeals in Chicago upheld the decision in May 2020, saying there was "no error" in the judge's ruling.
The participants petitioned the Supreme Court in August 2020, saying the 7th Circuit's decision clashed with rulings by two other federal appellate courts, which allowed cases to proceed involving similar complaints against other universities' 403(b) plans.
The 7th Circuit ruled that fiduciaries can offer a range of investment options and that participants make choices rather than being forced to accept unattractive options.
The Northwestern University Retirement Plan had $3.7 billion in assets, and the Northwestern University Voluntary Savings Plan had $952 million in assets, both as of Dec. 31, 2020, according to the plans' most recent Form 5500 filings.
