Over the last two years, we’ve been writing about how the Supreme Court’s decision in Hughes v. Northwestern University has created an atmosphere where more plan participants have sued plan sponsors. A set of new cases filed in August of 2022 against Blackrock follow in this trend. We will continue to cover these cases for plan sponsors and any developments. However, none of our current (or future) articles should stand in for advice from your compliance team or legal counsel. Instead, we hope that covering these topics helps keep plan sponsors prepared for future developments and ready to mitigate risk.
We’ve covered this topic multiple times since we noted the petition for certiorari before the U.S. Supreme Court. One of those articles neatly summarized the case and its impact this way: “At issue in Hughes is whether a defined-contribution plan charged its participants fees higher than would have been charged in alternative investment products. The Hughes case had some unusual facts, which included not only “investment options with fees much higher than the investors should have or could have tolerated, but also, importantly, the sheer number of investment options that the plan” offered….” We also noted there that it was the Supreme Court’s approach to the plaintiff’s claims that have sparked the increase in plaintiff suits. “[T]his case may have raised hopes among plaintiffs’ counsel. The Court’s ruling in Hughes eschewing a categorical rule may be what plaintiffs are focusing on, rather than on the odd facts of the Hughes case.” In August of 2022, we noted that one specific takeaway from the increase in cases was clear. “Hughes may indicate that offering investment options that may be niche or suited for a limited number of employees could be troublesome.” Since then, we’ve seen a set of cases filed against plan sponsors for choosing a specific set of funds.
The class action suits all involve the same target date funds, those run by BlackRock, but differ in the plan sponsor. “Participants in Microsoft Corp., Capital One Financial Corp., and Marsh & McLennan Cos. Inc. plans, among others, claim their current or former employers chased low fees by offering BlackRock investments that underperformed compared to similar target-date options.” To summarize it another way, participants are suing sponsors for choosing expense over excellence. If you are scratching your head at this, it’s because it may seem like the direct opposite of the plaintiffs in the Hughes case. There, the high fees for certain funds were at issue, along with the just staggering number of choices.
This increase in plaintiff’s cases against plans shows that the Court’s analysis in Hughes was problematic. It may be helpful to think of the impact of the case as like opening pandora’s box. Whatever she found inside the box isn’t at issue, it’s the very act of opening it that unleashed all of the sickness and worry. In fact, Pandora’s box wasn’t a box at all, but a jar, but we digress. The simple fact of using an open-ended analysis has now allowed for plaintiff suits of all kinds against plan sponsors. The Blackrock funds are, but objective standards, not problematic. “The BlackRock target-date index suite is made up of passively managed index funds that charge lower fees than many market competitors. It was the only index suite to earn a gold-star rating from Morningstar Inc. this year for a highly rated investment management team and above-average strategy.”
Other suits filed since Hughes do follow the facts of that case more closely. Specifically, in September of 2022, a participant in asset manager Janus Henderson’s retirement plan sued based on the fund mix offered to participants. “The lawsuit acknowledges that merely including proprietary funds in a plan’s investment menu is not a breach of fiduciary duty. However, it says that ‘based on defendants’ retention of proprietary funds over less expensive, superior nonproprietary funds, it is reasonable to infer that defendants’ process for selecting and monitoring the Janus Henderson funds was disloyal and imprudent.’” Allegations concerning asset choice, and specifically, the total number of funds offered, tracks closely to Hughes. The suit against Janus Henderson is at an early stage (Defendant has until November 18, 2022, to answer or otherwise move to dismiss). We will continue to monitor it and any other cases related to Hughes.
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
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