Feds ask appeals court to reverse Northwestern University retirement plan ruling

The Department of Labor has asked a federal appeals court in Chicago to reverse its ruling in a major case involving retirement savings plans at Northwestern University and abide by a recent Supreme Court decision.

On Jan. 24, the Supreme Court unanimously voted against the 7th Circuit Court of Appeals regarding claims of violations of the federal Employee Retirement Income Security Act at two Northwestern University 403(b) plans.

The appeals court and a U.S. District Court judge in Chicago both ruled for the university in dismissing claims by current and former participants who alleged, among other things, that the plans charged excessive fees and kept some investments in the plans’ lineup that were more expensive, worse-performing than similar or identical options in the marketplace, or both.

The District Court judge dismissed the case in May 2018. The appeals court supported the ruling in March 2020.

In reversing and remanding the case, the Supreme Court told the appeals court to reconsider its findings. The Supreme Court criticized the appeals court for “flawed” reasoning, saying it failed to follow ERISA’s guidelines for fiduciaries to monitor all investments in a defined contribution plan lineup.

“In light of the Supreme Court’s opinion clarifying the legal standard,” the appeals court should “reverse the district court’s judgment of dismissal and remand the case for further proceedings,” said the March 18 letter from Department of Labor Solicitor Seema Nanda.

“If plaintiffs here succeed in proving that Northwestern had the opportunity to offer materially identical investments and services at a lower cost, then there is no apparent justification for Northwestern’s failure to do so,” Ms. Nanda wrote.

The DOL letter focused on the District Court’s ruling — and the appeals court’s concurrence — that a plan fiduciary didn’t have to monitor all investments in the menu as long as some met ERISA’s prudence standards.

“ERISA fiduciaries cannot avoid liability for offering imprudent investments with unreasonably high fees by also offering prudent investments with reasonable fees,” the DOL letter said.

Separately, the plaintiffs’ law firm, Schlichter Bogard & Denton LLP, St. Louis, filed a brief on March 18 asking the appeals court to reverse the U.S. District Court’s original decision and order it to review the case given the Supreme Court’s guidelines.

The case is Hughes, et al., vs. Northwestern University, et al.

Robert Steyer writes for Crain’s sister publication Pensions & Investments.

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