On January 24, 2022, in Hughes v. Northwestern University, No. 19-1401, the U.S. Supreme Court unanimously held that court decisions on whether to dismiss a claim that a defined contribution retirement plan offers imprudent investment options must be based on a context-specific analysis, and offering inexpensive investment options does not automatically shield plan fiduciaries from allegations that other investment options are imprudently high cost. Fiduciaries may now face a higher burden when attempting to have these cases dismissed.
Under the Employee Retirement Income Security Act (ERISA), plan fiduciaries have a duty to act reasonably, prudently and in the best interests of employees when choosing investment options. In Hughes, the participants claimed the plan sponsor had violated its fiduciary duties by, among other things, offering needlessly expensive investment options. The Seventh Circuit Court of Appeals dismissed the lawsuit, in part based on the fact that the plan offered other low-cost options.
The Supreme Court sent the case back to the Seventh Circuit for reconsideration, ruling that even though a plan offers a broad mix of investment options, plan fiduciaries have a duty to monitor those options and remove those deemed to be imprudent.
The Supreme Court further stated that when courts perform the necessary context-specific analysis, they must consider that fiduciaries may make a range of reasonable judgments depending on circumstances and individual experience. The Supreme Court left the determination of detailed fiduciary duties to the lower courts. This “leave it to the lower courts” action is very consistent with what the Supreme Court did the last time it considered the duties to minimize investment fees, in the 2015 case of Tibble v. Edison International. In Tibble, the Supreme Court held that fiduciaries have ongoing duties for investment monitoring, and not just a duty to make a good selection of investments. There, too, the Supreme Court declined to articulate bright-line criteria for determining how and when fiduciary duties are met. Since 2015, we have seen an explosion in lawsuits over recordkeeper and investment plan fees, with most filings leading to settlements, with the Hughes case being one of the very few going to trial.
In light of this latest Supreme Court decision, fiduciaries should actively monitor their plan offerings and take responsive action when necessary to ensure investment and recordkeeping fees are reasonable compared with market pricing. Conducting ongoing market comparisons and resultant negotiations is also consistent with the equitable relief often agreed to in many of the settlements. While settlements almost always involve some monetary award for affected participants, they typically also include an agreement within a specified period of time for the fiduciaries to retain an independent third party to support an investment structure review or review of specific plan investments and/or to conduct a request-for-proposal-based search to consider their recordkeeping needs and fees.
| Title | File Type | File Size |
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| Insider February 2022 | .1 MB |
