A Light in the Dark: Seventh Circuit Helps Clarify New Pleading Standards for 401(K) Fee Cases
A recent US Court of Appeals for the Seventh Circuit case supplies answers to many questions left open in 401(k) fee litigation cases after the US Supreme Court’s ruling earlier this year in Hughes v. Northwestern University. Specifically, to survive a motion to dismiss in the Seventh Circuit, the recent ruling in Albert v. Oshkosh Corp. reiterated that plaintiffs must allege both high fees and substandard services or performance in comparison to other similar 401(k) plans.
On August 29, 2022, the US Court of Appeals for the Seventh Circuit issued its ruling in Albert v. Oshkosh Corp., this court’s first 401(k) fee decision since the US Supreme Court vacated a prior 401(k) fee ruling earlier this year in Hughes v. Northwestern University. In Albert, the plaintiff was a former Oshkosh Corp. employee and a participant in its 401(k) plan. The plaintiff and other plan participants alleged fiduciary breaches under the Oshkosh 401(k) plan, including excess recordkeeping and administration fees, overpriced investment options and imprudent investment consulting fees.
On appeal, a three-judge panel on the Seventh Circuit affirmed the US District Court for the Eastern District of Wisconsin’s dismissal of all claims against the Oshkosh 401(k) plan. The panel held that:
Plaintiffs failed to state a claim of breach of duty for excess recordkeeping and administrative fees. s simply did not establish that the fees were excessive relative to the services rendered. Plaintiffs pointed to cheaper recordkeeping options but did not provide information about the quality or type of services in comparable plans.
Plaintiffs failed to state a claim of breach of duty for high investment management fees. Although Oshkosh’s actively managed investment funds may have had higher fees than other passive investment options, the panel found that the Employee Retirement Income Security Act of 1974 (ERISA) does not require a 401(k) plan simply to implement the lowest cost investment fund without more analysis. Thus, a complaint must provide detailed allegations on less expensive investment alternatives with a sound basis for that comparison.
Plaintiffs failed to state a claim of breach of duty for imprudent investment consulting and advisory fees. Again, the Court noted that a complaint must allege more than that the fiduciaries failed to conduct a vendor search and must show some demonstration that investment consulting and advisory fees were unreasonable.
At least in the Seventh Circuit, Albert answers many of the questions Hughes left open. In Hughes, the Supreme Court vacated the Seventh Circuit’s judgment, affirming the dismissal of an ERISA claim against Northwestern University. The high court held that a plan fiduciary cannot dismiss a breach of duty lawsuit simply because the plan offers a variety of available lower-cost investment options.
However, according to the plaintiffs’ bar, the Supreme Court’s Hughes opinion left open the pleading standard for lower courts to define in ERISA fee cases. Albert fills this void, reiterating existing law that an ERISA plaintiff must allege both high plan fees and substandard services or performance in comparison to other plans to survive dismissal. The Court emphasized that the cheapest investment fund is not necessarily the prudent one. Rather, the Court’s scrutiny at the motion to dismiss phase will be “context-sensitive” and investment quality is a critical contextual element in addition to investment price.
Regarding the scope of the Hughes ruling, Albert confirms that the Seventh Circuit intends to read the Supreme Court’s decision narrowly. The panel noted that Hughes merely rejected the assumption that the availability of a mix of high-cost and low-cost investment options in a plan insulates fiduciaries from liability. Hughes did not hold that fiduciaries must solicit bids from service providers, and it did not overturn other ERISA precedents. In fact, at least one other circuit court has also adopted a narrow view of the Supreme Court’s recent ERISA ruling. In a recent case, a post-Hughes US Court of Appeals for the Sixth Circuit case dismissed a claim for failure to allege that fees were excessive relative to the services rendered (Smith v. CommonSpirit Health).
Albert will likely have an important impact on the ERISA 401(k) fee litigation landscape following Hughes. At the very least, Albert establishes that much of the underlying ERISA case law survived Hughes. Plaintiffs still bear a high factual burden in pleading 401(k) fee claims, and plan fiduciaries do not need to search merely for the lowest fee investment to be prudent. The question remains whether more circuit courts will follow this path.