The U.S. Supreme Court’s decision on Friday to hear oral arguments in a lawsuit brought by two participants in Northwestern University’s 403(b) plans over excessive fees and breach of fiduciary duty, could have far-reaching implications for broker-dealers, registered investment advisors and the wealth management industry at large, an attorney and fiduciary expert told Financial Advisor magazine.
Northwestern’s case challenges the 403 (b) plans’ use of retail share classes of mutual funds rather than lower-cost institutional versions of the same investments.The plaintiffs in the Northwestern case also claim the university’s retirement plans cause participants to pay excessive investment management or administrative fees.
“Plan sponsors, auditors, broker-dealer CCOs, here is your wake up call. The 401K landscape is about to experience a dramatic shift when it comes to excessive fees,” James Watkins, CEO and Managing Member of Investsense.comn told Financial Advisor magazine.
The case also provides insight into how pro-fiduciary and investor friendly the Biden Administration is determined to be. The Administration’s acting solicitor general Elizabeth B. Prelogar filed a brief supporting the plaintiffs in which she argued that the plan fiduciaries "caused the plans' participants to pay excess investment-management and administrative fees when [fiduciaries] could have obtained the same investment opportunities or services at a lower cost.”
The participants claimed plan fiduciaries "selected retail-class investment funds for inclusion in the plans even though identical institutional-class investment funds with lower management fees were available to the plans based on their size,” she noted.
Prelogar also suggested that the Supreme Court should use this case to offer more clarity on how courts should interpret ERISA.
"The question of what ERISA requires of plan fiduciaries to control expenses is important to millions of employees throughout the nation whose retirement assets are invested in ERISA-governed plans," she wrote. "And that question frequently recurs."
The question before the high court is whether participants in Northwestern’s plan, which is protected under the Employee Retirement Income Security Act (ERISA), can seek relief against plan fiduciaries for breach of the duty of prudence.
“The question as to who has the burden of proof regarding causation of damages from excessive fees is critical,” said Watkins, who leads his firm’s fiduciary oversight and forensic investment analysis. “Studies have consistently shown that most actively-managed mutual funds are cost inefficient relative to comparable index funds, thus imprudent under fiduciary law.”
The plaintiffs’ previously lost in lower courts and on appeal. U.S. District Court Judge Jorge L. Alonso wrote in his decision dismissing their case that: "Any plan participant could avoid what plaintiffs consider to be the problems with those products ... simply by choosing other options.”