Supreme Court Wades Into Battle Over Fee Litigation
The Supreme Court will decide the fate of “excessive fee” litigation against defined contribution plans, as it has agreed to hear the case of Hughes v. Northwestern University.
This form of litigation has been a scourge of corporate America over the past years. Legions of plaintiff’s lawyers have filed suits alleging that plan sponsors have breached their fiduciary duties by causing plans to pay fees that substantially exceed fees for alternative, available investment products or services. There is a thriving and complex cottage industry that supports this litigation deluge. Other than the plaintiff’s lawyers, no one likes this litigation, least of all corporate officers and directors.
ERISA is quite clear: fees paid by plans must be reasonable and plan fiduciaries must act as prudent experts in their decision-making processes with respect to the retirement plans that they oversee.
In order to protect the $35.4 trillion held by U.S. retirement plans (ICI, June 16, 2021), ERISA imposes the highest standard of care on plan fiduciaries. Absent these high standards, retirement plans would quickly devolve into an unlimited feeding trough for a wide range of financial service providers. In effect, the fiduciary standards protect America’s pool of retirement assets.
ERISA does not dictate specific behaviors or actions on behalf of plan sponsors. Instead, they are given a wide berth in how they meet the standards of prudence and reasonableness. ERISA reflects a free market, capitalist spirit in that it allows plan sponsors the agency and creativity for meeting these standards. But, meet the standards, they must.
In our American system, the courts are uniquely capable of determining whether the standards are met: whether actions are prudent or reasonable.
As much as they may protest, plan sponsors are not helplessly left to the vagaries of litigation. Instead, there are scores of lawyers, consultants and independent fiduciaries who possess expertise in guiding plan sponsors with respect to best practices. Since plaintiff’s lawyers must invest their own time and resources in their litigation, once they catch wind that a plan sponsor has adopted its own rigorous fiduciary processes, they will likely lose interest in a particular defendant and move on to one who has been less diligent. Plan sponsors are not unwitting victims here.
Of course, litigation is an unpleasant nuisance to corporate America. However, this type of fee litigation effectively helps preserve the assets accumulated by hard-working Americans. After all, every dollar paid to service providers, is one less dollar funding someone’s retirement.