The U.S. Supreme Court heard oral arguments on Jan. 22 in a case where Cornell University employees sought to revive their class action lawsuit, alleging that their retirement plan charged exorbitant fees and was mismanaged.
The employees sued the respondents—the university and two investment providers, Fidelity and TIAA—in a federal district court in New York in 2017.
The respondents opted for a model of collecting recordkeeping fees based on revenue sharing, as opposed to a flat fee, which tends to be less expensive.
The district court dismissed the lawsuit, finding the employees failed to produce sufficient evidence demonstrating that the fees were not reasonable.
The U.S. Court of Appeals for the Second Circuit affirmed in November 2023, holding the employees’ allegation about the fees being unreasonable was not proven.
Much of Wednesday’s hearing focused on ERISA, a federal law regulating private retirement and health plans. ERISA stands for the Employee Retirement Income Security Act, which establishes minimum standards for plans.
A fiduciary, a person or entity that exercises authority over the assets or administration of a plan, is required to act in the best interests of participants and beneficiaries of the plan.
“Fiduciaries are prohibited from engaging in self-dealing and must avoid conflicts of interest that could harm the plan,” the summary said.
The employees’ attorney, Xiao Wang, said during the oral argument that his clients were harmed because the investment providers went beyond providing recordkeeping services.
Fidelity and TIAA “bundled” the recordkeeping services “with investment products, and those investment products, in turn, had operating expenses, and those operating expenses were then shared via revenue sharing to the plan to pay for recordkeeping.”
“Now that bundling resulted in Fidelity and TIAA pushing ... its own products, its own actively managed products, leading to higher expense ratios and, therefore, greater recordkeeping fees.”
Justice Brett Kavanaugh said, “Your theory means … that it’s a prohibited transaction just to have recordkeeping services ... And that seems nuts, right?”
Some industry groups say letting plaintiffs argue that a prohibited transaction has taken place could boost costs for employers and spur frivolous litigation, the justice said.
“This expanded litigation threat would be near limitless because every college and university relies on third-party service providers,” he said.
Wang said that wouldn’t happen because “there are other guardrails that we point to, things like fee shifting and standing and the enormous expense of even bringing a case that would deter this.”
Standing refers to the right of someone to sue in court. The parties must show a strong enough connection to the claim to justify their participation in a lawsuit or the lawsuit can be thrown out before the merits are argued.
Justice Samuel Alito asked Wang which “guardrails ... are in play” in this specific case.
Repeating some of what he said minutes before, Wang said one guardrail “is simply the expense of litigating ... and bringing one of these cases.”
“Some more formal guardrails include fee shifting, standing, sanctions,” he said.
Cornell University’s attorney, Nicole Saharsky, said the guardrails Wang referenced aren’t deterring litigation in the lower courts.
Two dozen lawsuits “have been filed against university plans” and not one plaintiff has prevailed in court, she said.
“This has been like millions of dollars that these universities have spent on discovery and individuals who have been named personally and had to live under a cloud for years and years.”
The Second Circuit “got it right and this court should affirm,” Saharsky said.
The Supreme Court is expected to issue a ruling in the case by the end of June.
