January 26, 2022Client Alert

Supreme Court Rules in Favor of Participants in Retirement Plan Excessive Fees Case

On January 24, 2022, the Supreme Court issued a decision in Hughes v. Northwestern University and held that an ERISA fiduciary may breach its duty of prudence by failing to remove imprudent investment options from a retirement plan, even if other prudent options are available. This decision highlights the importance of a rigorous investment review process that actively monitors and acts upon the performance and appropriateness of each investment within a plan’s investment lineup.

The plaintiffs in Hughes were participants in Northwestern University’s defined contribution retirement plans that alleged that the plan fiduciaries breached their duty of prudence under the Employee Retirement Income Security Act of 1974 (ERISA) by “offering needlessly expensive investment options and paying excessive recordkeeping fees.” The Supreme Court’s ruling reiterates that ERISA imposes a continuing duty of prudence on retirement plan fiduciaries that require them to, among other things, monitor plan investment options and remove imprudent ones.

The procedural background of Hughes informs the impact and scope of this decision. Initially, the District Court dismissed the case and, on appeal, the Seventh Circuit (a court inextricably linked to the “law and economics” doctrine) affirmed. In reaching its decision, the Seventh Circuit explained that the fiduciaries “provided an adequate array of choices” that included some low-cost options plaintiffs “wanted,” and therefore, the availability of plaintiffs’ preferred options “eliminated any claim that plan participants were forced to stomach an unappetizing menu” of investment options.

In a concise opinion authored by Justice Sonia Sotomayor, the Supreme Court unanimously reversed, calling the Seventh Circuit’s reasoning flawed. The Supreme Court held that when plan fiduciaries “fail to remove imprudent investments within a reasonable time, they breach their duty” of prudence, even if other prudent investments were available. The Supreme Court reasoned that the Seventh Circuit’s “exclusive focus on investor choice” failed to fully consider ERISA’s fiduciary duty of prudence that requires a “context-specific inquiry” as to whether the plan fiduciaries continued to “monitor all plan investments and remove any imprudent ones.”

The Supreme Court remanded the case back to the Seventh Circuit to consider whether the plaintiffs plausibly alleged a breach of fiduciary duty of
prudence claim, applying the appropriate analysis under this decision and the Supreme Court’s prior decision in Tibble v. Edison International. Interestingly, the Supreme Court did not address what a plaintiff must plead to state a claim nor did it provide any actual analysis of when a fiduciary has acted imprudently. The Supreme Court did, however, make clear that a plaintiff must do more than simply point to an underperforming investment option stating, “[a]t times, the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.” 

Thus, the Supreme Court is expressly leaving for the lower courts to determine what must be pled and what must be proven to succeed on such a claim. 

The Hughes decision is a reminder that ERISA 404(c) protections do not apply in developing an investment lineup, that ERISA remains an area where there is no single manner in which to satisfy the duty of prudence, and that satisfaction of that duty turns on the facts and circumstances prevailing at the time the fiduciary acts (or fails to act).

The takeaway from all of this is that plan fiduciaries should consult with their advisors and counsel to make sure they have appropriate processes in place to fulfill their fiduciary responsibilities with regard to investments and plan expenses. 

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