Duane Morris Class Action Review - 2023 - Report - Page 192
fees, or that they inappropriately invested in retail shares when cheaper institutional
shares were available.
Plaintiffs who raise such claims face a conundrum. One the one hand, courts have
consistently held that, to survive a Rule 12(b)(6) motion, it is not enough to merely point
out that a plan has underperformed relative to the market or to rely on unadorned cost
comparisons. Rather, because breach of the duty of prudence claims focus on the
existence of a deficient process and not just the end result, the plaintiffs must point to
some defect in the process by which the defendants selected or managed investments
or plan service providers. On the other hand, without the benefit of discovery, plaintiffs
rarely have access to information about that decision-making process. Courts have
struggled to develop and apply a clear pleading standard for such cases and,
consequently, their rulings are all over the map.
There was widespread anticipation that the U.S. Supreme Court would offer a measure
of clarity in Hughes, et al. v. Northwestern University, 142 S. Ct. 737 (2022). Although
the Supreme Court returned a rare 8-0 decision (Justice Barrett did not participate), the
opinion failed to clarify any of the issues surrounding the pleading standard in these
cases. Rather, the Supreme Court issued a narrow ruling that offered only nominal
guidance to lower courts.
Hughes centered on allegations from a group of university employees that their
retirement plan had offered needlessly expensive options and charged excessive
recordkeeping fees. Affirming the district court’s dismissal of the claims, the Seventh
Circuit held that plaintiffs’ allegations were insufficient as a matter of law. In part, the
Seventh Circuit reasoned that because defendants offered a number of low-cost
investment options, its inclusion of other, more expensive, options did not constitute a
breach of the duty of prudence. While this was only one component of the Seventh
Circuit’s decision, the Supreme Court framed it as an inappropriate “categorial rule” that
“is inconsistent with the context-specific inquiry that ERISA requires and fails to take
into account respondents’ duty to monitor all plan investments and remove any
imprudent ones,” vacating the decision in its entirety. Hughes, 142 S. Ct. at 740. While
the Supreme Court acknowledged that “the circumstances facing an ERISA fiduciary
will implicate difficult tradeoffs” and that “courts must give due regard to the range of
reasonable judgments a fiduciary may make based on her experience and expertise,” it
failed to clarify more broadly a clear pleading standard for breach of fiduciary duty
claims. Id. at 742.
A number of putative class actions were stayed in anticipation of the Supreme Court’s
January 2022 ruling in Hughes, but, in most, the decision had little impact. In many
respects, the landscape has not shifted post-Hughes. A duty of prudence claim will
generally be dismissed if the plaintiff merely argues that a plan has underperformed the
market, and the plaintiffs instead must point to specific bad decisions and/or provide
detailed comparators to establish a defect in the challenged fiduciary processes.
However, the precise threshold for plausibility remains unclear.
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Duane Morris Class Action Review – 2023
