Supreme Court to hear Northwestern 403(b) fee case: Why it's important to all plan sponsors

The U.S. Supreme Court will hear oral arguments on Dec. 6 in a lawsuit that contends that Northwestern University violated its duty under ERISA by allowing two 403(b) retirement plans to charge participants excessive investment and recordkeeping fees.

The case could have broad implications since dozens of similar lawsuits have been filed across the country.

“The courts are handling these cases wildly differently,” said Andrew Oringer, a partner in Dechert’s ERISA and executive compensation group. He added, “There is a ton of money at stake in these cases.”

The plaintiffs in the suit are current or former employees of the university who participated in one or both of the retirement plans offered by Northwestern. They contend that the fees charged by the plans were about four to five times a reasonable fee. The plans paid between $3.96 million and $5 million in fees, according to the plaintiff’s petition to have the high court hear the case. They contend that a reasonable fee would have been $1.05 million.

They said if the court ruled in favor of Northwestern, it would be virtually impossible for plan participants to present an imprudence argument based on excessive fees.

In response to the request for the high court to hear the case, Northwestern said that “ERISA demands prudence not perfection.” They said the plaintiffs had additional choices in selecting a retirement plan.

The U.S. District Court for the Northern District of Illinois dismissed the suit, saying that the plaintiffs had not demonstrated a breach of fiduciary responsibility. The U.S. Court of Appeals for the Seventh Circuit affirmed the dismissal.

In October, the Supreme Court invited the Trump Administration to weigh in on the suit. Meanwhile, President Biden took office and in May, the Department of Labor and Acting Solicitor General Elizabeth Prelogar filed a brief siding with the plaintiffs.

If the facts in the case are correct, the plaintiffs “have shown that respondents caused the Plans’ participants to pay excess investment-management and administrative fees when respondents could have obtained the same investment opportunities or services at a lower cost,” the Biden Administration said.

Given the significance of the case, various interested parties also have filed briefs with the Supreme Court.

The U.S. Chamber of Commerce said the case is hugely important because ERISA class action lawsuits are among the fastest growing types of litigation. The Chamber said that retirement plan sponsors are supposed to have certain powers.

“Congress designed ERISA to provide plan sponsors and fiduciaries with wide discretion and flexibility,” the Chamber said. “That way, plans could be designed based on the unique circumstances of each plan and the unique needs and preferences of each plan’s participants.”

In also siding with Northwestern, the American Council on Education, an umbrella group for higher education organizations said that since 2015, nearly two dozen universities have been sued over plan administration fees, causing unique problems for colleges and universities. “In the university context, fiduciary committees typically are comprised of faculty and staff volunteers who perform this role to provide an important service to their schools,” ACE said.

However, AARP said that in this case, more than 200 investment options were offered, making it impossible for employees to monitor all options.

Oringer said that in this case, the legal standards are unclear, adding that when it comes to ERISA cases, the Supreme Court tends to avoid the substance of the case, leaving the court to decide suits on procedural issues.

That leaves the issues unclear for retirement plan sponsors, who say, “Tell me what to do and I’ll do it. At least I’ll try to do it.”