Detailed Analysis of the Supreme Court’s Northwestern University Ruling

Expert attorneys say the new ruling can be interpreted as ‘modestly expanding’ the precedents set by the Supreme Court in Tibble v. Edison, but its ultimate impact may be limited.

On Monday, the U.S. Supreme Court issued a highly anticipated ruling in an Employee Retirement Income Security Act (ERISA) lawsuit known as Hughes v. Northwestern University.

In the ruling, the Supreme Court explains that the act of determining whether petitioners state plausible claims against retirement plan fiduciaries for violations of ERISA’s duty of prudence requires “a context-specific inquiry of the fiduciaries’ continuing duty to monitor investments and to remove imprudent ones, as articulated in Tibble v. Edison International.”

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The Tibble case, which the Supreme Court ruled on in 2015, similarly involved allegations that plan fiduciaries had offered higher priced retail-class mutual funds as plan investments when materially identical but lower priced institutional-class mutual funds were available.

As summarized in the new ruling, the Tibble order concluded that the plaintiffs in that instance had identified a potential violation with respect to certain funds because “a fiduciary is required to conduct a regular review of its investments.” The new ruling states that Tibble’s discussion of the continuing duty to monitor plan investments applies in the Northwestern case, such that the 7th U.S. Circuit Court of Appeals erred in concluding that the defendants’ provision of a broad choice of investment options was enough, in itself, to insulate them from fiduciary liability claims related to individual investment options.

Now, the case has been remanded to the 7th Circuit, which could in turn either remand the case again to the district court or choose to rule another time without further input from the trial court. Settlement is also a possible outcome.

Commenting on the implications of the new Supreme Court ruling, Nancy Ross, a Chicago-based partner in and co-chair of Mayer Brown’s ERISA litigation practice, says it is not what she would call a groundbreaking or major ruling.

“Despite some of the early headlines that have already been written suggesting this case is a really big deal, in fact, I view this as a limited ruling,” Ross says. “What I mean is that the Supreme Court did not reach any specific or detailed conclusions that any of the investments offered by the defendants in this case are actually inappropriate, nor did the justices come down and say a fiduciary can never offer retail shares of funds within their institutional retirement plans. Instead, what they said, in a nutshell, is that the 7th Circuit simply did not give enough consideration of the duty-to-monitor precedents set by Tibble.”

One arguably new—but, again, not groundbreaking—affirmation given by the Supreme Court, Ross says, is that a retirement plan fiduciary cannot simply put a large number of investments on its menu, some of which may or may not be prudent, and assume that the large set of choices somehow insulates the plan sponsor from the duty to monitor and remove bad investments. In other words, having a large investment menu does not itself protect a plan sponsor who permits an imprudent investment to persist, and sponsors similarly cannot hide behind the fact that participants ultimately choose in which funds to invest their money.

“This is not really even a new position for the Supreme Court to take,” Ross says. “Thanks to Tibble and other cases, we already knew that fiduciaries cannot be asleep at the switch and say they are just going to offer every investment option under the sun and assume everything will be fine from a fiduciary perspective.”

Ross says the ball is now firmly in the 7th Circuit’s court, and she does not expect the judges on the circuit to suddenly change their point of view about the merits of this case. They could, for example, revisit the factual record and conclude, after a more thorough review that expressly incorporates Tibble precedents, that the defendants in fact behaved prudently.

“I think we all have to keep in mind that the 7th Circuit has consistently taken the position that a retirement plan fiduciary does not have a duty to be overly paternalistic,” Ross says. “In its view, if you offer a range of good choices and then let your participants set their own allocations or rely on your choice of a prudent default, then you have done your job as a fiduciary. Of course, you can’t put in clearly horrible investment option, but good fiduciaries already know this.”

Ross says the new ruling can be interpreted as “modestly expanding Tibble.” She says the Hughes v. Northwestern University case has reaffirmed that fiduciaries have an obligation to continuously monitor all the investments on their menu, regardless of the menu’s size, and to remove any that become imprudent.

“Again, based upon Tibble, you cannot simply line up your plan with a lot of choices and think that you have done your job,” Ross reiterates. “That’s the key takeaway here. Participant choice is not going to eliminate, alleviate or insulate fiduciaries from their duty of prudence.”

While she expects the plaintiffs’ bar to interpret this ruling as a victory for their cause, Ross does not see it that way, nor does Emily Costin, a partner in the ERISA litigation practice team at Alston & Bird in Washington, D.C.

“My viewpoint is that this new opinion does not move the needle so much in terms of the actual law,” Costin says. “The Supreme Court sent the case back down to the 7th Circuit to reconsider. It did not say the plaintiffs are right and that this matter is settled. It ordered the lower court to reconsider whether the plaintiffs have plausibly alleged their allegations, and that remains to be seen.”

Costin says she has homed in on a few key passages in the Supreme Court’s short ruling, including a section on page five which speaks to the concept of fiduciaries’ duty to remove imprudent investments within a reasonable time frame.

“From a practical standpoint, I already get a lot of questions along this line, regarding, for example, how long an investment should be kept on a watch list before removing it,” Costin observes. “Is a reasonable time frame one quarter of poor performance? Is it two, or three or more? Of course, as practitioners, we know the answer is always going to be fact specific, but I think this may be a point of difficultly in interpreting this opinion. Fiduciaries want to move in a timely manner to address any problems that arise, but, on the other hand, they don’t want to just be constantly churning their investment menu, because that is not healthy either.”

Costin says she can imagine this opinion inspiring some plan fiduciaries to shrink their investment menus, with the idea of making their duty to monitor each investment option that much easier to meet, but she does not expect that will be a widespread course of action.

“Plan fiduciaries should remember that there are already well-established fiduciary best practices upon which they can confidently rely,” Costin says. “One of these best practices is that committees meet quarterly for their investment and plan reviews, for example. This time frame isn’t defined by the law, but rather by the context in which fiduciaries operate. When there is not a clear definition or requirement under the law or legal precedents, fiduciaries should look at the reasonable best practices that have been established in the marketplace.”

Like Ross, Costin says the Supreme Court’s ruling can also be seen as comforting to plan fiduciaries, as it recognizes the challenging position they are put in. That line goes as follows: “Because the content of the duty of prudence turns on the circumstances prevailing at the time the fiduciary acts, appropriate inquiry will necessarily be context specific. At times, the circumstances facing an ERISA fiduciary will implicate difficult trade-offs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.”

Andrew Oringer, a partner in Dechert’s ERISA and executive compensation group in New York City, agrees wholeheartedly about the importance of this final line.

“It is important to acknowledge and understand that this is a narrow decision,” Oringer says. “The Supreme Court justices took a look at the 7th Circuit’s decision and basically said the only thing they can tell us in this matter is that a broad investment menu is not automatically a prudent menu under the precedents set by Tibble. So, it is not groundbreaking.”

He says that the Supreme Court, in this unanimous decision, did not take the opportunity to act as traffic cop in giving the rules of the road for the establishment of investment menus under 401(k) plans. A future Supreme Court ruling very well could do so, he expects, but this ruling has not.

Oringer says that, taking a step back, the new ruling calls to mind another precedent-setting case, Fifth Third v. Dudenhoeffer. This is because the early interpretation of that ruling seemed to suggest it would cause more “stock drop” cases to be filed and to succeed in court—basically because it did away with a longstanding “presumption of prudence” that had previously been applied to the provision of employer stock within DC retirement plans. But, in reality, because of other passages in Dudenhoeffer, the opposite has happened, and successful stock drop cases have become exceedingly rare.

“Going back to Dudenhoeffer, so many people thought that case would cause an explosion of stock drop lawsuits,” Oringer recalls. “In reality, the situation was so much more nuanced, and the pleading standards that ultimately emerged in the wake of that case are very difficult for plaintiffs to get over. I actually think a similar thing could ultimately happen here.”

Health Benefits Budgeting Can Be a Challenge

The COVID-19 roller coaster makes it hard to predict what costs will be, but some strategies can help sponsors get to a close approximation and mitigate costs.

In 2020, the delay in medical care created by the COVID-19 pandemic decreased health care costs for employers that use plans provided by carriers (i.e., that are fully insured), as well as employers that self-insure health care for employees.

According to the Business Group on Health’s “2022 Large Employers’ Health Care Strategy and Plan Design Survey,” in 2020, the overall health care cost trend was 0%, though some employers experienced a negative trend.

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Employers expected a rebound in 2021, anticipating that employees would return to normal care.

“When budgeting for health care benefit costs in 2021, employers anticipated their costs would go back to normal, but the spread of the Delta variant impacted working populations,” notes Arthur Hall, senior vice president and employee benefits national practice leader at USI Insurance Services. “Both fully insured and self-funded plan sponsors paid a little more than budgeted.”

Hall says the changing developments with the virus are creating a challenge for health benefits budgeting.

“Employers that have set their budgets for 2022 now don’t know what the Omicron variant will do,” he says. “If there’s a high incidence of infection but low severity, the budgets may be fine. It also depends on how many employees in an employer’s workforce are vaccinated.”

Julie Stone, managing director, health and benefits, Willis Towers Watson, says the volatility of the virus and return to care make budgeting for health benefits a challenge.

“Employees deferred elective procedures and preventive care, then they came back and now there’s a risk they will defer these things again. It’s the roller coaster we’ve seen,” she says. Stone adds that this is exacerbated by health care systems’ capacity and workforce issues—which could contribute to more deferred care as well.

Willis Towers Watson saw employer health care benefit costs go down in 2020 and increase 5% in 2021, Stone says. It expects costs to increase a little more than that in 2022.

Budgeting Tips

If preventive care didn’t rebound, employees with chronic conditions might see more serious diagnoses, says Hall. Employers should look at the incidences of preventive care over the past 12 months to see how any deferred care might drive high-cost claims over the next two years.

According to USI’s “2022 Employee Benefits Market Outlook” report, group health plan data shows that for many employers, 5% of plan members incur 60% of claims, largely due to undiagnosed conditions or mismanaged chronic disease care. USI’s claims data also shows that 70% to 80% of adult plan members do not engage in annual primary care visits, while 50% to 60% of plan members do not receive recommended cancer screenings. “Without regular check-ins and recommended screenings, conditions go unmanaged until serious medical intervention—such as hospitalization or high-cost treatment—is needed,” the report says.

When considering their budgets, employers should also look at how many out-of-network claims they had. Hall says the No Surprises Act—which established new federal protections against most unexpected out-of-network medical bills when a patient receives out-of-network services during an emergency visit or from a provider at an in-network hospital without advance notice—will have some impact on costs. However, it’s unknown whether that change will be significant or not.

“If only 5% of the population historically has had out-of-network emergency claims, the impact will likely not be significant. If 12% or more have, the impact will be more significant,” Hall says. “It all depends on the claims arbitrator whether the legislation will save employees and employers significant money.”

He says health plans today pay a relatively paltry amount for out-of-network care; the health care service provider will either write off the cost or pursue payment from an individual. The No Surprises Act provides a forum for hospitals to contest these deals with insurance providers or self-funded employers, he says, so he thinks there will be much more arbitration for those groups.

To get their health care benefits budgets right—unless they plan to make mid-year benefit changes—employers need to reassess claims activity and consider what is happening with the COVID-19 pandemic in March, Hall says.

Stone says self-insured employers need to look at monthly health care costs, not just yearly totals, to figure out what the drivers of cost are. How much are employees seeking preventive services, elective procedures, cancer screening and mental health services? She says the goal is to see employee use of these things going up to minimalize complex hospitalizations and keep costs down.

In addition, employers should monitor vaccine rates among their workforces to prevent COVID-19 from leading to more catastrophic costs, says Stone. “There’s so much for plan sponsors to monitor that will give indications of what’s happening in their workforce,” she says.

Stone adds that experts do not yet know what the Omicron variant will produce as far as long COVID-19, when people have symptoms that linger or return for weeks or months. Plan sponsors need to be thinking about whether Omicron will affect disability claims and not just medical care claims, she says. It’s part of the whole picture for plan sponsors.

Hall says health care budget numbers might be off for large employers that set their budget in July, but smaller employers that set their budget in September or October might be more on point. He suggests that self-funded employers set their budgets at the higher end of their estimates. If they have a high number of vaccinated employees, their budgets might be on point.

Thinking about the size of most fully insured plan sponsors, Stone says where a plan sponsor is located might have an effect on premiums. It’s a little early to project what premiums trends will look like for 2023, but she says her sense is, on a national aggregate, they won’t differ much from 2022.

Stone says most self-insured plan sponsors will set 2023 employee premium rates between April and July, but it will be hard to tell in March/April how the year will play out. She suggests plan sponsors look at a full six months of monthly details and consider cost-management opportunities. Stone notes that many plan sponsors deferred making changes to health benefits during the pandemic to avoid increasing employee stress. “Sponsors should think about other ways to manage health care costs,” she says.

Cost-Saving Strategies

Encouraging employees to seek preventive care is the single best thing employers can do to manage long-term costs, Hall says. “Employers need to spend more time focusing on disease management, preventive care and getting employees to use in-network providers to reduce costs for the long term,” he says.

“In case there is a rebound in health costs, plan sponsors should consider high performance networks and specific clinical case management opportunities depending on the needs of their employee populations,” Stone suggests. “Mental health is top of the list for sure. But anything that is a key driver of costs is important.”

Hall says pharmacy cost is the easiest to manage down and is the most impactful. According to USI’s “2022 Employee Benefits Market Outlook” report, specialty drugs generally represent about 2% of all drugs dispensed; however, with an average price tag of $84,442, they account for nearly 45% of all prescription costs paid by employer health plans.

“And it’s not just the prescription plan that is being impacted; employers are now facing a significant cost exposure for medical plans from certain other drug treatments,” the report says. “Infusions, cancer treatments and gene therapies, which are not processed through a pharmacy and are administered in a hospital or clinic setting, range in cost from tens of thousands to millions of dollars annually.”

Fully insured employers should have conversations about some type of alternative funding for pharmacy costs, Hall says. For example, pharmacy benefit managers (PBMs) have traditionally offered prior authorization (PA) to mitigate high-cost medications, a process by which specialty drugs need to go through clinical approval prior to being dispensed to a plan member, according to the USI report.

Some employers, particularly those with lower-wage employees, have begun using “foundation” programs, a type of manufacturer assistance program (MAP) provided by the pharmaceutical industry to help health plan members cover the costs of these expensive drugs. Hall says, for self-funded employers, reviewing pharmacy contracts could result in an 8% to 10% savings in premiums.

Using virtual and digital care is also helpful in keeping costs down, Stone says. Providers might charge more for in-office visits, so employers should encourage virtual care/telehealth visits. Given the increased use of virtual options during the pandemic, telehealth “has legs” to become more acceptable, she says.

For self-funded plan sponsors, Stone says it is worth thinking about a working spouse surcharge. She says Willis Towers Watson is seeing some plan sponsors impose a surcharge to cover spouses who have access to coverage elsewhere but decline it.

On a final note, Stone says many employers are thinking about equitable cost sharing when setting health care budgets.

“They are considering affordability for the lower-wage workforce,” she says. “For example, an employee earning $60,000 or less might pay less for the same coverage as someone making more. Making sure workers have equitable access to coverage ensures workforce continuity. And there’s no discrimination risk if benefits are not favoring higher-paid people.”

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