Put the Penn Down: 3rd Circuit Decision and its Effect on ERISA Class Action Claims

On May 2, a three-judge panel overturned a lower court’s decision in an Employee Retirement Income Security Act (ERISA) class action case in a 2-1 decision. The case, Sweda et al., v. University of Pennsylvania et al., centered on a group of University of Pennsylvania employees who felt that the school was not meeting its fiduciary burden when managing their retirement funds.

More specifically, the employees felt the University was mismanaging its plan by paying $4.5 to $5.5 million in record-keeping fees, whereas comparable plan administrators charged $700,000 to $750,000 for the same service. Furthermore, the original suit claimed that the University failed to oversee the plan’s management, and that the options offered to employees had high costs and poor returns on investment.

The case was initially dismissed in 2017 by U.S. District Judge Gene Pratter. Judge Pratter relied upon the 2011 3rd Circuit decision of Renfro v. Unisys Corp., which in turn was based on the 7th Circuit decision of Hecker v. Deere Co., as a basis to hold that because the University provided a diverse set of options for employees, it had met its fiduciary obligations under ERISA.  The case then went up on appeal.

While the majority in this case agreed that Penn did provide an appropriate range of options, per Renfro, they felt that those options were not good options. “Such a standard would allow a fiduciary to avoid liability by stocking a plan with hundreds of options, even if the majority were overpriced or underperforming,” the majority determined.

What can employers take away from this decision? First is that the hurdle to overcome a motion to dismiss is easier for employees now.  Judge Pratter in 2017 claimed that employees did not have sufficient information as to the University’s fiduciary decision-making process. The majority disagreed, saying that the Plaintiffs had “provided substantial circumstantial evidence,” that indicated a breach in the fiduciary duty.

Second, the majority opinion establishes that offering a range of plans is not enough—the plans must actually be managed prudently and performing well in comparison to the market.  This trend has been building in recent years. While Judge Pratter based his decision on the aforementioned Renfro, the precedent upon which Renfro was based—the 7th Circuit’s Hecker decision—was later walked back.

Courts are already seeing the effects of the recent Sweda decision play out. Employees at Northwestern University are attempting to revive a similar ERISA case before the 7th Circuit. Northwestern disagreed with the employees’ attempt to reopen the case, claiming that they still had a right to defend their range of retirement options. They said that while a plan of theirs was underperforming, their administrator required that they offer it in order to have another, more popular plan, available as well.

Further ripples are sure to come from this decision, and it remains to be seen how it will shape the landscape for ERISA class action cases going forward.