U.S. Supreme Court Reinforces ERISA Fiduciary Duty to Monitor Investment Options

February 1, 2022

On Jan. 24, 2022, the U.S. Supreme Court vacated the U.S. Court of Appeals for the Seventh Circuit’s ruling in Hughes v. Northwestern University, and remanded the case for further consideration, bringing new life to current and former employees’ claims that Northwestern had violated the duty of prudence required of all plan fiduciaries under the Employee Retirement Income Security Act of 1974 (ERISA).

In vacating the Seventh Circuit’s ruling, the Supreme Court reiterated its holding in Tibble v. Edison Int’l, 575 U.S. 523 (2015), and its emphasis of context-specific inquiries as the cornerstone of ERISA’s fiduciary duty of prudence when selecting investment menus for a plan with participant-directed investment accounts.

Hughes v. Northwestern University

Under ERISA, plan fiduciaries are required to discharge their duties “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” ERISA §404(a)(1)(B). This generally requires a plan fiduciary to follow a prudent, well-reasoned review and decision-making process, including when making decisions and selections of investment options offered as part of a defined contribution plan.

The plaintiffs consisted of current and former Northwestern employees participating in two different retirement plans governed by Section 403(b) of the Internal Revenue Code. They claimed that Northwestern and the Northwestern Retirement Investment Committee breached their fiduciary duty by: (1) failing to monitor and control fees they paid for recordkeeping — ultimately resulting in higher costs for plan participants; (2) offering mutual funds and annuities “in the form of ‘retail’ share classes” that carried higher fees than those of identical institutional share classes of the same investments; and (3) presenting a large number of investment options, which caused participant confusion and poor investment decisions.

The Seventh Circuit rejected these claims, focusing on the broad array of investment options offered under the plans and the fiduciary duty to diversify. In affirming the district court’s dismissal of the plaintiffs’ claims, the Seventh Circuit viewed this diverse offering as eliminating the plaintiffs’ concerns that certain plan options were imprudent. Specifically, because the low-cost investments that the plaintiffs were seeking were in fact available to them under the plans, the Seventh Circuit reasoned that they could not complain about the inclusion of other allegedly imprudent, higher-cost investment options.

The Supreme Court found this reasoning lacking, noting that a plan fiduciary is responsible for “monitor[ing] all plan investments and remov[ing] any imprudent ones,” relying on its holding in Tibble (for details and background, see McGuireWoods Feb. 26 and May 19, 2015, legal alerts). The Supreme Court explained that, where fiduciaries fail to remove imprudent investments from a plan within a reasonable time, they breach their fiduciary duty. Accordingly, the Supreme Court directed the court of appeals on remand to conduct review of whether an investment is “imprudent,” as determining whether a fiduciary breached his or her obligations under a plan involves a context-specific analysis. Additionally, and importantly for all plan fiduciaries, the Supreme Court noted that such an analysis involves reviewing the circumstances prevailing at the time and the “range of reasonable judgements” the fiduciary could make based on “experience and expertise.”

The Importance of Fiduciary Oversight

The Supreme Court’s unanimous holding is an important reminder to plan fiduciaries that simply offering a vast menu of investment options does not alleviate the responsibility to independently evaluate and continually monitor each investment option. This obligation extends to recordkeeping fees.

While the Hughes case was one of several similar cases brought by the plaintiffs’ bar against prominent colleges and universities, employers and plan fiduciaries across all industries have been subject to plan fee and investment related litigation in recent years. These types of suits are expected to receive additional attention following the Supreme Court’s ruling. Consequently, plan fiduciaries should take heed, and to the extent not already engaged in regular monitoring activities, fiduciaries should consider establishing routine reviews of investment options and plan fees in coordination with investment advisers and legal counsel.

For further information, please contact any of the authors of this article or any other member of the McGuireWoods employee benefits team.