The Employee Retirement Income Security Act of 1974 (ERISA)  governs both retirement and welfare benefits  (i.e., health, life, and disability benefits) provided by employers to their employees. The only employee benefit programs exempted from ERISA’s reach are governmental  and church plans,  along with workers’ compensation plans and plains maintained outside the United States to primarily benefit non-resident aliens.  In the preamble to the statute, Congress expressed the guiding policy behind ERISA – “to protect … the interests of participants in employee benefit plans … by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and by providing for appropriate remedies, sanctions, and ready access to the federal courts.”  The Supreme Court underscored that paternalistic goal in Firestone Tire & Rubber Co. v. Bruch,  by pronouncing: “ERISA abounds with the language and terminology of trust law.”  Hence, a core aspect of ERISA is the imposition of strict fiduciary obligations upon those who manage employee benefits fund. The statute explicitly describes those duties:
(a) Prudent man standard of care
(1) Subject to sections 1103(c) and (d), 1342, and 1344 of this title, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and —
(A) for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries; and
(ii) defraying reasonable expenses of administering the plan;
(B) 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;
(C) by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and
(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter and subchapter III.
ERISA Claims for Breach of Fiduciary Duty Involving Excessive Fees Charged to 401(k) and 403(b) Plan Participants
Breaches of fiduciary duty may be challenged by participants  in and beneficiaries  of employee benefit plans in civil actions brought to redress such violations.  In recent years, a wave, if not a tsunami of litigation, has been brought to curb excessive fees charged to participants in defined contribution retirement plans known as 401(k)  or 403(b)  plans. The theme of those cases is that various fees charged to participants by such plans are excessive and therefore harm participants by eroding their retirement savings. Some of those cases have reached the Supreme Court;  and following the Supreme Court’s most recent ruling issued in Hughes v. Northwestern University, which overturned a prior dismissal of an excessive fee brought by participants in Northwestern’s defined contribution retirement plans, on March 23, 2023, the U.S. Court of Appeals for the Seventh Circuit issued a hugely significant ruling in the Hughes litigation  that clarifies pleading standards in such cases and sets the tone for future fee litigation.
The Hughes v. Northwestern University Litigation
Hughes was brought by a class of participants in two ERISA-governed defined contribution plans sponsored by Northwestern University – the Northwestern University Retirement Plan and the Northwestern University Voluntary Savings Plan. Because Northwestern is a § 501(c)(3)  not-for-profit organization, pursuant to § 403(b), the plans were set up to provide tax-deferred retirement savings for faculty and employees of the university. Participants could direct their investments to various programs such as annuities, index funds, and target day funds selected by Northwestern, the plans’ administrator and fiduciary, from a menu of investment options offered by the Teachers Insurance and Annuity Association of America – College Retirement Equities Fund (TIAA) and by Fidelity Management Trust Company. Prior to 2016, the plans offered over 400 investment options from the two providers. However, in October 2016, Northwestern announced that it had “streamlined” its plans by offering only 32 investment options consisting of target date mutual funds, index funds, actively managed funds, and a self-directed brokerage window. Northwestern’s stated purpose in reducing the number of offerings was to “enable simpler decision making,” “[r]educe[ ] administration fees,” “increase[ ] participant returns,” and provide “[a]ccess to lower-cost share classes when available.”
The plaintiffs’ complaint alleged a variety of ERISA fiduciary breach violations. The primary claim asserted that Northwestern University committed a fiduciary breach by incurring excess recordkeeping charges. Plaintiffs maintained that the plans permitted TIAA and Fidelity to charge uncapped “revenue sharing” charges to participants, which represented a percentage of each participant’s accrued investments. Plaintiffs maintained there should have been only one recordkeeper, and that the volume of money in the plans would have enabled Northwestern to solicit competitive bids and negotiate lower rates. Another count of the complaint alleged that Northwestern failed to monitor the investment options and to remove non-performing and more expensive funds from the menu of choices offered to participants. In addition, Plaintiffs claimed that the size of the funds should have permitted Northwestern to “replace retail-class shares of funds with cheaper but otherwise identical institutional-class shares of the same funds.”
The district court initially ruled that the plaintiffs’ claims were not plausible, and the Seventh Circuit upheld the complaint’s dismissal18 relying on prior precedent that had upheld dismissal of similar lawsuits.  The plaintiffs successfully petitioned for certiorari on their excess fee and failure to monitor claims; and the Supreme Court reversed the lower court rulings, rejecting the Seventh Circuit’s prior “categorical rule” that offering participants some lower-cost investment options obviated a claim of
imprudence.  The Court directed the Seventh Circuit on remand to reevaluate the allegations made in plaintiffs’ complaint in light of Tibble v. Edison, Intl. , which established that plan administrators had a duty to monitor the cost and performance of investments they were offering to retirement plan participants, as well as recent Supreme Court rulings on heightened pleading standards.  Specifically, the issues on remand related to whether the plaintiffs adequately pled claims that Northwestern failed to adequately monitor the funds offered to participants and whether participants were charged excessive fees. Other claims initially pled by plaintiffs were abandoned.
The Seventh Circuit’s Ruling in Hughes Following Remand From the Supreme Court
The Seventh Circuit acknowledged that the Supreme Court had overruled its reasoning in earlier cases that upheld dismissal of similar claims, but left intact a more recent precedent which the court summarized as follows: “ERISA does not allow the soundness of investments A, B, and C to excuse the unsoundness of investments D, E, and F.”  In other words, ERISA requires as part of the duty of prudence imposed on plan administrators, an obligation to “assess the prudence of each investment both individually and relative to the entire plan.”  However, the Supreme Court’s Hughes decision did not abrogate some principles the Seventh Circuit had espoused in prior rulings on similar issues. First, left undisturbed was the Seventh Circuit’s prior determinations that revenue sharing is not a per se breach of fiduciary duty, although Tibble requires that plan fiduciaries monitor expenses to insure they are not excessive in relation to the services provided.  Second, ERISA does not require plan administrators to “scour the market to find and offer the cheapest possible fund.”  However, fund selection should take into consideration whether there are comparable funds that have similar performance and lower expenses. Third, offering a wide range of investment choices to plan participants is not a fiduciary breach. 
New Pleading Standards for Excessive Fee Claims
Because the matter had not progressed beyond the granting of the motion to dismiss, the Seventh Circuit then addressed the requisites of pleading a plausible claim for breach of the ERISA-mandated duty of prudence. Beginning with the Supreme Court’s Tibble ruling, which formed the basis for the Court’s ruling in this matter, the Seventh Circuit reiterated that plan fiduciaries are subject to a duty of prudence, both in selecting appropriate funds and in consistently monitoring the appropriateness of the investment choices offered to plan participants.  Those principles are derived from the law of trusts, which specifies that “[w]hen the trust estate includes assets that are inappropriate as trust investments, the trustee ordinarily has a duty to dispose of them within a reasonable time.”  Under the law of trusts, and now ERISA law as well, “the duty of prudence requires a plan fiduciary to incur only costs that are reasonable in amount and appropriate to the investment responsibilities of the trusteeship.” 
Since, as noted above, excessively high fees diminish the value of a retirement account, the court observed, “cost-conscious management is fundamental to prudence in the investment function.” and should be applied “not only in making investments but also in monitoring and reviewing investments.”  However, following another Supreme Court decision, Fifth Third Bancorp v. Dudenhoeffer,  a case involving a fiduciary breach claim brought against an employee stock ownership plan, the Seventh Circuit reiterated, “the content of the duty of prudence is ‘context specific.’” 
Taking those principles into consideration, the Seventh Circuit concluded that to withstand a motion to dismiss, “plaintiffs must have alleged enough facts to show that a prudent fiduciary would have taken steps to reduce fees and remove some imprudent investments.”  Moreover, if some of the inferences drawn from the allegations made in a complaint would show a fiduciary breach while others would demonstrate prudence, under the Iqbal and Twombly pleading standards, plaintiffs must allege “something more” to survive dismissal.  The Seventh Circuit concluded that at the pleading stage, the “something more” requirement meant that only obvious inferences need to be accounted for, not every possible inference, no matter how implausible.  So long as the plaintiffs meet that requirement, “[w]here alternative inferences are in equipoise — that is, where they are all reasonable based on the facts—the plaintiff is to prevail on a motion to dismiss.”  However, if an explanation for the fiduciary’s conduct is “”patently more reasonable and better supported by the facts than any theory of fiduciary duty violation pleaded by a plaintiff,” dismissal is proper.  Thus, in order to survive a motion to dismiss, “a plaintiff must plausibly allege fiduciary decisions outside a range of reasonableness.”  Plaintiffs must also allege sufficient facts to establish that “a prudent alternative action was plausibly available, rather than actually available.” 
Plaintiffs Found to Have Adequately Pled Their Claims
Applying those principles to the plaintiffs’ complaint, the court found that plaintiffs adequately pled their claim that the fees charged to plan participants was imprudent. The plaintiffs specifically alleged that the plan incurred annual fees of between $4-$5 million, while a flat fee of $35 per participant would have lowered the total fees to approximately one million dollars. While that allegation alone would not have been sufficient, the plaintiffs identified comparable plans where recordkeepers charged significantly lower negotiated rates than what Northwestern had been paying. Plaintiffs also alleged that Northwestern breached its fiduciary duty by failing to conduct competitive bidding for recordkeeping fees and by failing to negotiate lower rates given the bargaining power the university possessed due to the size of the fund. The court thus concluded: “At the pleadings stage, plaintiffs were required to plausibly allege that Northwestern’s failure to obtain comparable recordkeeping services at a substantially lesser rate was outside the range of reasonable actions that the university could take as plan fiduciary. They have done so.” 
The court also sustained the plaintiffs’ claim that Northwestern failed to monitor the investment options and had retained funds with high expenses and poor performance in comparison to similar investment options that were readily available and could have been selected as investment options. In addition, the court sustained the plaintiffs’ “share-class claim” that maintained Northwestern provided retail investments while the size of the fund would have permitted it to offer institutional-class shares that had lower expenses. Although Northwestern offered reasonable explanations for its actions, the Seventh Circuit found that “based on the facts pleaded, these alternative inferences are not strong enough to overcome the equally, if not more, reasonable inference that Northwestern failed to use its size to bargain for cheaper institutional shares.”  The court also observed that five other circuits had upheld similar claims.  However, the court of appeals upheld the dismissal of another claim made by plaintiffs that offering duplicative funds with the same investment objectives created investor confusion because the complaint failed to specify how participants were confused or suffered injury.
The Future of Excessive Fee Litigation
The Seventh Circuit has long been skeptical of ERISA excessive fee cases, but that no longer appears to be the case. Historically, the Seventh Circuit has taken the position that so long as employers offer employees a variety of investment options, they have adequately met their fiduciary obligations. The court also seemed to imply that employees should expect to pay higher fees when they invest in funds that are intended to produce higher returns, and that employees are themselves responsible for modifying their investment choices if the funds they invested in were not meeting their expectations.
The earlier Seventh Circuit rulings seemed to disregard the vast difference between defined benefit retirement programs where employers are responsible for making up any losses or shortfalls, and defined contribution programs such as 401(k) and 403(b) plans where risk of loss is borne by employees. Before the late 1970’s, there were no 401(k) and 403(b) plans. An article published by CNBC offers a succinct history of 401(k) plans, which first came into being in 1978.  Before the creation of 401(k) plans in the late 1970’s, employers offered defined benefit plans to their employees, which provided them with a lifetime annuity for themselves and their spouses when they retired, thus eliminating the worry many have of running out of money before death. Defined benefit plans are expensive to maintain, though. They require the use of actuaries and investment advisors to manage the plans, and employers have a powerful incentive to minimize costs because the risk of default is on the employer. In other words, offering a defined benefit plan is a promise to employees that they will receive a certain benefit at retirement.  If that promise is underfunded, the employer is responsible for making up the difference. With defined contribution plans, though, the employee faces the risk of underfunding. Employees invest in their 401(k) or 403(b) plans by deferring some of their salary into a tax-deferred retirement plan; and employers often match all or a part of the employee’s contributions. However, once the money goes into the plan, the employee is usually responsible for choosing how the money is invested; and an employee’s imprudent choices can have devastating consequences at retirement. If employers are allowed to permit excessive fees or fail to monitor investments without responsibility, employees are left with less retirement savings through no fault of their own, although as the Enron crisis in the 1990’s showed, encouraging employees to invest their 401(k) monies in employer stock was disastrous.  Moreover, Enron was found to have breached its fiduciary duty to its employees by encouraging them to invest in company stock through misleading representations. 
The significance of the Hughes case lies in its recognition that with defined contribution plans, employers lack the same incentives to keep expenses low as they would for a defined benefit plans, since most expenses are passed on to the employees and features such as revenue-sharing reduce the recordkeeping expenses that employers would otherwise incur. Thus, Hughes imposed a powerful incentive on employers to exercise far greater scrutiny than they had previously applied to monitor both the investment options that are offered and the fees paid by employees.
In both Tibble and Hughes, the Supreme Court rejected the mostly laissez faire approach that had previously been taken by the Seventh Circuit. Focusing on the consequences of imprudent investments, the Court recognized that workers, who are often unsophisticated investors, were being taken advantage of in various ways that diminished their retirement security. While adhering to the principle that the duty of prudence is context specific, the Supreme Court nevertheless has imposed an obligation on employers to monitor the retirement investment choices offered to employees both as to their performance and as to their cost. On remand from the Supreme Court, the Seventh Circuit laid out the contours of what must be pled in order to sustain an excess fee claim – plaintiffs must do more than make barebones allegations, but need to plead with greater specificity in order to identify specifically what they maintain the plan fiduciaries had done wrong and to identify plausible ways in which imprudence could have been avoided.
The most recent Hughes ruling from the Seventh Circuit marks a significant change from the way in which that court has approached excessive fee claims but does not place a target on the backs of every employer in America. Instead, it offers them a roadmap on how they should choose investment options, monitor their plans, use their bargaining power to lower costs, and take steps to ensure that the plans are not incurring unnecessary fees. Now that the message sent in Hughes has been conveyed, employers that take heed of the court’s ruling and fulfill their fiduciary responsibilities should have no fear of facing liability.
This article appeared in Bender’s Labor & Employment Bulletin (June 2023)
Mark DeBofsky is a shareholder at DeBofsky Law Ltd.
 29 U.S.C. § 1001 et seq.
 See, 29 U.S.C. §§ 1002(1) – (3); 29 U.S.C. §1003(a).
 29 U.S.C. § 1002(32).
 29 U.S.C. § 1002(33); see Advocate Health Care network v. Stapleton, 137 S.Ct. 1652 (2017) (finding religiously affiliated healthcare providers fall within ERISA’s “church plan” definition).
 29 U.S.C. § 1003(b).
 29 U.S.C. § 1001(b).
 Firestone Tire & Rubber Co v. Bruch, 489 U.S. 101 (1989).
 489 U.S. at 110.
 29 U.S.C. § 1104.
 29 U.S.C. § 1002(7).
 29 U.S.C. § 1002(8).
 29 U.S.C. § 1132(a)(3).
 26 U.S.C. § 401(k).
 26 U.S.C. § 403(b) (applicable to employees of non-profit organizations).
 See, e.g., Hughes v. Northwestern University, 142S.Ct. 737 (2022).
 Hughes v. Northwestern University, 63 F.4th 615 (7th Cir. 2023).
 26 U.S.C. § 501(c)(3).
 Divane v. Northwestern University, 953 F.3d 980 (7th Cir. 2020) (April Hughes was later substituted as lead plaintiff when Laura Divane withdrew from the lawsuit).
 Loomis v. Exelon Corp., 658 F.3d 667, 673–74 (7th Cir. 2011), and Hecker v. Deere & Co., 556 F.3d 575, 586 (7th Cir. 2009) (holding that no fiduciary breach exists so long as a wide range of investments is offered).
 142 S.Ct. at 740.
 Tibble v. Edison International, 575 U.S. 523, 135 S.Ct. 1823, 191 L.Ed.2d 795 (2015).
 Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).
 Albert v. Oshkosh Corp., 47 F.4th 570, 575 (7th Cir. 2022); see also Dean v. Nat’l Prod. Workers Union Severance Tr. Plan, 46 F.4th 535, 548–49 n.4 (7th Cir. 2022).
 63 F.4th at 624.
 63 F.4th at 624.
 Hecker, 556 F.3d at 586; Loomis, 658 F.3d at 670.
 Hughes, 142 S. Ct. at 742 (citing Tibble, 575 U.S. at 529–30, 135 S.Ct. 1823).
 63 F.4th at 627 (citing Scott on Trusts § 19.3.1; see also Bogert’s Law of Trusts § 685; Tibble, 575 U.S. at 529–30, 135 S.Ct. 1823).
 Id. (citing Tibble, 843 F.3d at 1197 (quoting Restatement (Third) of Trusts § 90(c)(3)) (internal quotations omitted)).
 Id. (citing Restatement (Third) Of Trusts § 90, cmt. B; see also id. § 88, cmt. A (“Implicit in a trustee’s fiduciary duties is a duty to be cost-conscious.”). “Wasting beneficiaries’ money is imprudent.” Unif. Prudent Investor Act § 7, cmt. (Unif. L. Comm’n 1995)).
 Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (2014).
 Hughes, 142 S. Ct. at 742 (citing Dudenhoeffer, 573 U.S. at 425).
 142 S. Ct. at 628.
 142 S. Ct. at 628, citing Hughes, 142 S. Ct. at 742.
 142 S. Ct. at 628.
 142 S. Ct. at 628 (citations omitted).
 142 S. Ct. at 628.
 142 S. Ct. at 628 (citing Hughes, 142 S. Ct. at 742).
 142 S. Ct. at 628.
 142 S. Ct. at 633.
 142 S. Ct. at 636.
 Forman v. TriHealth, Inc., 40 F.4th 443, 452 (6th Cir. 2022); Kong v. Trader Joe’s Co., No. 20-56415, 2022 U.S. App. LEXIS 10323, at *2 (9th Cir. Apr. 15, 2022);cSacerdote v. N.Y. Univ., 9 F.4th 95, 108 (2d Cir. 2021); Davis v. Washington Univ. in St. Louis, 960 F.3d 478, 483 (8th Cir. 2020); Sweda v. Univ. of Pa., 923 F.3d 320, 328 (3d Cir. 2019).
 Elkins, “A brief history of the 401(k), which changed how Americans retire,” available at https://www.cnbc.com/2017/01/04/a-brief-history-of-the-401k-whichchanged-how-americans-retire.html.
 In Thole v. U.S. Bank, N.A., 140 S.Ct. 1615 (2020), the Supreme Court affirmed dismissal of a lawsuit brought by participants in a defined benefit plan who were alleging fiduciary breaches on the ground they lacked standing since they had had not suffered any losses. The Court reasoned that regardless of fiduciary breaches, the participants were still entitled to receive a fixed benefit at retirement that was unaffected by fiduciary breaches.
 Oppel, “Employees’ Retirement Plan is a Victim as Enron Tumbles,” New York Times November 22, 2001.
 “The Post-Enron 401(k),” Forbes October 20, 2003; “Enron: The Smartest Guys in the Room” (Documentary 2005).