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On March 23, 2023, on remand from the Supreme Court’s decision last year in Hughes v. Northwestern, 142 S.Ct. 737 (2022),[1] the Seventh Circuit reexamined plaintiffs’ allegations that the defendant plan fiduciary breached its duty of prudence under ERISA. Hughes v. Northwestern, 63 F.4th 615 (7th Cir. 2023) (Brennan, J.). Under the Supreme Court’s decision in Hughes, to plead a breach of the duty of prudence under ERISA, a plaintiff must plausibly allege fiduciary decisions outside a range of reasonableness. The plan fiduciary argued that plaintiffs must plead that a prudent alternative action was “actually available.” Rejecting this, the Seventh Circuit held that “[a]t the pleadings stage, a plaintiff must provide enough facts to show that a prudent alternative action was plausibly available, rather than actually available.”

The Seventh Circuit observed that Hughes “offers some guidance but stops short of pronouncing a concrete standard” for a breach of the duty of prudence under ERISA. The court noted that Hughes directed it “to reevaluate plaintiffs’ allegations based on the duty of prudence articulated in Tibble v. Edison International, 575 U.S. 523 (2015), applying the pleading standard discussed in Ashcroft v. Iqbal, 556 U.S. 662 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007).” Iqbal and Twombly establish that an obvious alternative explanation for a defendant’s conduct that precludes liability can undermine the claim’s plausibility. The court stated that “[o]nly obvious alternative explanations must be overcome at the pleadings stage, and only by a plausible showing that such alternative explanations may not account for the defendant’s conduct.” The court then concluded that “whether a claim survives dismissal necessarily depends on the strength or obviousness of the alternative explanation that the defendant provides.”

Rejecting the plan fiduciary’s standard, the court found that it would go beyond the plausibility standard of Iqbal and Twombly. The court explained that “[t]o the extent that the prudent course of action was unavailable, that will foreclose the claim. But if a course of action was only possibly unavailable, further factual development on the pleadings will be necessary to resolve the claim on that explanation.”

In applying this standard, the Seventh Circuit concluded that plaintiffs plausibly alleged that the plan fiduciary violated its duty of prudence by incurring unreasonable recordkeeping fees. The court noted that plaintiffs alleged that recordkeeping services are fungible, that the market for such services is highly competitive and that the fees were excessive relative to the recordkeeping services rendered.

The Seventh Circuit also denied dismissal of plaintiffs’ second claim that the plan fiduciary failed to swap out retail shares for identical, lower-cost institutional shares of the same funds. The court noted plaintiffs’ allegations that the plan fiduciary retained more expensive retail-class shares of 129 mutual funds, when less expensive but otherwise identical institutional-class shares were available to the plans.

In their third claim, plaintiffs alleged that the plan fiduciary’s retention of multiple duplicative funds had led to investor confusion. The court affirmed dismissal of this aspect of the third claim because plaintiffs failed to identify how plaintiffs were confused and personally injured by the multiplicity of funds. The court stated that “[u]nspecific allegations that a fiduciary provided too many funds, without more, do not state a claim for breach of the duty of prudence.” However, the court remanded this claim to the extent that it concerned plaintiffs’ theory that if the plan fiduciary had consolidated the funds into a single investment option, it would have led to lower-cost investments, noting that plaintiffs’ allegations suggested that a 2016 restructuring had accomplished that.