Category: SCOTUS

SCOTUS to Employers: ERISA Doesn’t Let You Sit On Your Hands While Your 401(K) Participants Get Price-Gouged

The United States Supreme Court’s first ERISA ruling since 2020 was a unanimous win for employees. In Hughes, et al. v. Northwestern University, the Court held that ERISA gives employees the right to sue their employer for overcharges on investments in the company’s retirement plan. This ruling means employers who offer their employees overpriced retirement plan investment options may violate their duties to their employees under ERISA. It is also a fascinating peek at how ordinary investors can get price-gouged with the assistance of the very fiduciaries who are supposed to be protecting them.

The plaintiffs worked for Northwestern University. Like many Americans, they had the option to invest pre-tax wages into a retirement account maintained by their employer (e.g., a 401(k)). Northwestern chose which funds the employees could invest in, but the employees were free to choose whichever investments they preferred from this “menu” prepared by Northwestern.

The plaintiffs sued Northwestern alleging some of these investment options were needlessly overpriced. In investment parlance, the funds had an unnecessarily high “expense ratio” because Northwestern offered the employees “retail” shares rather than the cheaper “institutional” shares.

This particular allegation is a big deal. Large employers like Northwestern have the leverage to offer their employees funds that are extra cheap. This is because you can get a better deal from a fund if you’re buying on behalf of a thousand investors rather than just yourself. Many mutual funds or ETFs are available to retail investors in the regular “retail” class with the typical expense ratio, but also available in the special “institutional” class with a much cheaper fee.

For a huge employer like Northwestern to say “hey Mr. Mutual Fund, we know we could get our employees the cheap funds because we’re a big bad university with lots of leverage, but go ahead and charge our employees extra” would be egregious. It’s like buying a thousand cars at the sticker price rather than negotiating a volume discount.

The lower courts had dismissed the case. Northwestern’s “menu” of investments included reasonably priced funds in addition to the overpriced funds. On the basis that the employees were free to choose not to be price-gouged on their investments (assuming they could figure out they were being overcharged), the lower courts reasoned that this amounted to “no harm, no foul”.

The Supreme Court disagreed. It criticized the lower courts for failing to consider Northwestern’s duty under ERISA to “monitor all plan investments and remove any imprudent ones.” ERISA requires that employers managing retirement plans act with “care, skill, prudence, and diligence” when handling their employees’ benefits. This basically means employers should treat their workers’ money with the same degree of care the employer would treat their own money.

Obviously, no prudent person would pay the retail price over the volume discount–unless they were paying with somebody else’s money.

The Hughes case is a good reminder that ERISA doesn’t let employers off the hook for price-gouging their workers’ retirement savings merely because the workers might have figured out that they were being price-gouged and chosen the cheaper investments.

ERISA at the Supreme Court: How Will Amy Coney Barrett’s Confirmation Shape the Legacy Left By Justice Ginsburg’s Seminal ERISA Opinions?

Amy Coney Barrett was recently confirmed to replace Ruth Bader Ginsburg on the U.S. Supreme Court. Justice Ginsburg is remembered as a champion of civil rights and gender justice. But Ginsburg is also responsible for some of the Court’s most important ERISA decisions. This invites us to look back on some of Justice Ginsburg’s most important ERISA decisions and speculate about how Justice Barrett might decide future ERISA cases.

Justice Ginsburg wrote the seminal opinion in Black & Decker Disability Plan v. Nord, 538 U.S. 822 (2003), the decision that set the standard for how ERISA Plans and ERISA-governed insurance companies must weigh the opinions of the claimant’s treating doctors. Nord rejected the rule that ERISA plans must defer to the claimant’s doctor’s opinions about the claimant’s medical condition in a disability insurance claim. But Ginsburg emphasized, and the other justices agreed, that ERISA Plans must give fair weight to claimants’ doctors’ opinions. Her opinions emphasizes: “Plan administrators, of course, may not arbitrarily refuse to credit a claimant’s reliable evidence, including the opinions of a treating physician.” Nord protects ERISA claimants’ right to rely on their treating doctors in claiming benefits–a right that is particularly critical since claimants can rarely afford to hire a consulting physician for the purposes of an insurance claim.

A more technical but still important decision by Justice Ginsburg was UNUM Life Insurance v. Ward, 526 U.S. 358 (1999). Ward concerns the extent to which ERISA preempts (i.e., overrules) state laws that regulate insurance policies. Justice Ginsburg wrote the Court’s unanimous opinion finding that ERISA does not stop states from regulating insurance policies that are issued under employee benefit plans. This means that important state-law consumer protections for insurance policies still apply when the insurance policy is sponsored by an employer.

Justice Ginsburg also wrote the opinion in Raymond B. Yates, M.D., P.C. Profit Sharing Plan v. Hendon, 541 U.S. 1 (2004) which confirmed ERISA can apply to a small business owner who participates in their own company’s benefit plan. Many small business owners are familiar with the frustrations of falling into a grey area where they lack the protections of status as an employee but also lack the advantages of being a large business. For ERISA benefits at least, this “worst of both worlds” scenario is less of a concern. The Yates decision held that the owner of a small business can participate in the business’ ERISA plan and thereby obtain the protections and favorable tax treatment that ERISA affords to plan participants.

These decisions reflect a legacy of implementing Congress’ intention in enacting ERISA of providing real protections to people who earn insurance and other benefits through their employment.

Justice Barrett’s record suggests she is likely to continue that legacy. Justice Barrett decided one important ERISA case during her tenure on the Seventh Circuit Court of Appeals (the federal court that hears appeals from Illinois and other midwestern states). In Fessenden v. Reliance Standard Life Ins. Co., 927 F.3d 998, 999 (7th Cir. 2019), then-Circuit Judge Barrett determined that ERISA plans, and ERISA-governed insurance companies, must strictly comply with ERISA’s rules requiring full, fair, and prompt review of insurance claims.

In that case, Donald Fessenden made a claim for disability insurance benefits through an insurance policy issued by Reliance through his employer’s benefit plan. Reliance denied his claim and Fessenden appealed the denial using the Plan’s internal administrative procedures. Reliance failed to decide the appeal within the deadline imposed by ERISA. That violation of ERISA had consequences that made it easier for Fessenden to pursue his benefits claim.

Reliance asked the Seventh Circuit to let it off the hook. Reliance argued its violation was “relatively minor” and the court should excuse the violation “because it was only a little bit late.” It characterized the ERISA deadline as a “technical rule.”

Then-Circuit Judge Barrett declined. Her ruling emphasized that ERISA deadlines matter to plan participants:

After all, the administrator’s interests are not the only ones at stake; delaying payment of a claim imposes financial pressure on the claimant. That pressure is particularly acute for a disability claimant, who applies for disability benefits because she is unable to work and therefore unable to generate income. Given the seriousness of that burden, the new regulations single out disability claims for quicker review than other kinds of claims.

Her decision also emphasizes that courts have repeatedly required strict compliance with deadlines by claimants, often at the urging of insurance companies. In requiring the same level of exactitude by ERISA plans and insurers, she observed: “What’s good for the goose is good for the gander.”

State Laws Automatically Revoking Spousal Life Insurance Benefits Upon Divorce Upheld By U.S. Supreme Court

An important dispute when a person dies is often who gets the life insurance policy death benefit.  The life insurance policy may have been purchased decades ago and name the insured’s former spouse, from whom the insured was divorced long ago.  The insured’s children or other alternate beneficiaries often argue the insured really intended the death benefit go to them, not to the spouse they divorced decades before their death.

To avoid this uncertainty, Washington State, like many states, has a law providing that life insurance beneficiary designations to spouses are automatically void upon divorce.  Thus, if a married person buys a life insurance policy providing the insurer pays her husband upon her death, and subsequently divorces her husband, the husband is automatically removed as the beneficiary upon the divorce.  This avoids a potential probate court fight when the insured dies.

On June 11, 2018, the U.S. Supreme Court decided Sveen v. Melin, upholding a similar law in Minnesota.  The Supreme Court confirmed states like Washington may provide that life insurance beneficiary designations to spouses automatically terminate upon divorce.

In Sveen, Mark Sveen was married to Kaye Melin in 1997.  Sveen purchased a life insurance policy naming Melin as the primary beneficiary and his two children from a prior marriage as contingent beneficiaries.  Sveen and Melin divorced in 2007, but their divorce failed to address the life insurance policy.  Sven never amended the policy’s beneficiary designation.  After Sveen died, his children and Melin made competing claims for the life insurance policy death benefit.

Under Minnesota law, the divorce automatically revoked Sveen’s designation of Melin as his primary beneficiary, resulting in Sveen’s children receiving the life insurance policy death benefit.    Melin argued the law violated the U.S. Constitution’s “contracts clause” because the law was enacted after the policy was purchased.

The court upheld the law.  Reviewing the long history of state laws presuming “that the average Joe does not want his ex inheriting what he leaves behind,” the court observed these laws have utility in simplifying probate litigation by giving certainty about decades-old life insurance policy benefits.  The court noted Minnesota’s law allowed Sveen to re-designate Melin as his beneficiary after the divorce if he desired, so it imposed only a minimal burden on existing contracts.

The court’s decision to uphold Minnesota’s law provides additional certainty to Washington insureds and their heirs and beneficiaries regarding the treatment of life insurance death benefit proceeds.