More is Not Always Better: Supreme Court Reexamines Fiduciary Duty of Prudence
In what may be one of the shortest decisions this term, the Supreme Court handed down a unanimous six-page opinion on January 24, 2022 in Hughes v. Northwestern University. Vacating the Seventh Circuit’s decision, the Court further defined an ERISA plan fiduciary’s duty of prudence with respect to its control and management of retirement plan investment options. This case was one in a wave of cases brought against college and university retirement plans on the same day in 2016.
Petitioners in the case are current and former employees of Northwestern University who participated in Northwestern’s defined contribution retirement plans (the “Plans”). Under the Plans, plan fiduciaries offered participants over 400 investment options. Petitioners generally alleged the University failed to properly monitor the Plans’ investment options, thereby leading to a breach of their fiduciary duty of prudence owed to plan participants. Specifically, Petitioners alleged that the Plans offered “needlessly expensive investment options,” forced participants to pay “excessive recordkeeping fees,” and caused unnecessary participant confusion by offering over 400 investment options.
The district court dismissed the petitioners’ breach of ERISA fiduciary duty case and the Seventh Circuit upheld the dismissal holding that some of the University’s investment options had low costs and fees. Since Plan participants had the option to choose these low cost, low fee options, the petitioners’ allegations could not survive a motion to dismiss. The Supreme Court granted certiorari to decide whether the petitioners sufficiently alleged a breach of the fiduciary duty under ERISA.
ERISA requires that administrators of certain employee benefits plans, including retirement plans, 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.” In 2015, the Supreme Court interpreted this duty of prudence in Tibble v. Edison Int’l and held that “a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones.”
On Monday, the Supreme Court issued a short and precise ruling—ERISA retirement plan fiduciaries cannot satisfy their ERISA duties by simply providing hundreds of investment options to participants. Instead, fiduciaries have an obligation to “conduct their own independent evaluation [of investment options] to determine which investments may be prudently included in the plan’s menu of options.”
The Court remanded the case back to the Seventh Circuit to determine whether the fiduciaries breached their fiduciary duties to monitor plan investments and to remove investments with excessive fees and poor performance based on the standard set out in Tibble v. Edison Int’l.
The case makes it clear that having good investments in a plan will not absolve fiduciaries from liability for bad investment options. Beyond that, the case leaves plan fiduciaries with a number of questions since the Court did not define a plan fiduciary’s duty of prudence in the context of selecting and monitoring ERISA plan investments.