Beneficial for whom?! When employee retirement benefits go wrong!

In July, the Supreme Court of the United States agreed to hear oral arguments in the matter of Hughes v. Northwestern University. Arguments are set to take place in December. Depending on its outcome, this case may provide important guidance to employers regarding the kinds of retirement benefits that can be offered to employees without running afoul of the law. Specifically, the question that the Court will likely address is whether ERISA’s “duty of prudence” bars employers (in their capacity as retirement plan fiduciaries) from charging “investment management or other administrative fees higher than those available for other materially identical investment products or services.”

ERISA or the “Employee Retirement Income Security Act of 1974” requires fiduciaries of an employee benefit plan to perform their duties “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” 29 U.S.C. 1104(a)(1)(B). What type of care does this duty require in the curation of retirement savings options?

Because of compound interest, even a one percent disparity in fees can make a significant difference. Over a 35 year career, a “1 percent difference in fees and expenses would reduce [an employee’s] account balance at retirement by 28 percent”.  There are two main types fees that the Court will likely consider: Recordkeeping fees are assessed to track the individual accounts of retirement plan participants. There are also management fees that are charged by the brokerage house that offers the menu of investment options.

Plaintiffs in this case are a group of Northwestern University employees who participate in employer offered retirement benefit plans. The employees’ main arguments in the pending lawsuit are that the management fees charged are excessive and the choice of investment options are lacking.

The employees argue that the recordkeeping fees are excessive due to redundancies in the benefit plan system. Northwestern utilizes two brokerage houses (Fidelity and TIAA). This system results in extra costs to the employees. Northwestern pays the brokerages through a revenue based fee model as opposed to a flat per-participant fee, which the employees also allege increases costs. Employees further argue that Northwestern fails to research whether the plans fees are competitive or reasonable in the field for which the services are offered.

Northwestern University contends that ERISA requires “prudence not perfection.” It further dismisses the employees’ suit by claiming that the employees’ main complaint is that the retirement plan offerings are not, by the employees’ standards, ideal. Northwestern also points to the fact that that the employees are “not required to choose investment options including any of the objected-to aspects” and that they are free to choose from a variety of “low-cost options”.

Should the employees prevail, the case will be green lit to return to the District Court, where litigation will continue. Depending upon the scope of the Supreme Court’s opinion, it may give employers cause to revisit their retirement plan offerings. What options are made available for employees? Are the selected options competitive compared to alternative investment vehicles? Are there lower cost options that can be implemented? Oral arguments in December may shed some light on which direction the Court is headed. A final decision will not be released until late Spring or early Summer 2022. Stay tuned!