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SCOTUS sides with
ERISA participants
claiming fiduciary duty breach
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Hughes v. Northwestern University
(US Supreme Ct 01/24/2022)
http://case.lawmemo.com/us/hughes.pdf
Sent to Custom
Alerts™ subscribers on 01/24/2022
Current and former
employees sued claiming ERISA plan fiduciaries violated their duty
of prudence by, among other things, offering needlessly expensive
investment options and paying excessive recordkeeping fees.
The 7th Circuit held that these allegations fail as a matter
of law, in part based on the court's determination that employees'
preferred type of low-cost investments were available as plan
options. In the 7th Circuit's view, this eliminated any concerns
that other plan options were imprudent.
The US Supreme
Court vacated and remanded.
The fiduciaries administer
retirement plans on behalf of current and former Northwestern
University employees. The plans are defined-contribution plans
governed by the Employee Retirement Income Security Act of 1974
(ERISA), under which each participant chooses an individual
investment mix from a menu of options selected by the plan
administrators.
The employees claimed that the fiduciaries
violated ERISA’s duty of prudence required of all plan fiduciaries
by: (1) failing to monitor and control recordkeeping fees,
resulting in unreasonably high costs to plan participants; (2)
offering mutual funds and annuities in the form of “retail” share
classes that carried higher fees than those charged by otherwise
identical share classes of the same investments; and (3) offering
options that were likely to confuse investors.
HOLDING: The 7th
Circuit erred in relying on the participants’ ultimate choice over
their investments to excuse allegedly imprudent decisions by
the fiduciaries.
Determining whether the employees state
plausible claims against plan fiduciaries for violations of
ERISA’s duty of prudence requires a context-specific inquiry of
the fiduciaries’ continuing duty to monitor investments and to
remove imprudent ones as articulated in Tibble v. Edison Int’l,
575 U. S. 523.
Tibble concerned allegations that
plan fiduciaries had offered “higher priced retail-class mutual
funds as Plan investments when materially identical lower priced
institutional-class mutual funds were available.” The Tibble
Court concluded that the plaintiffs had identified a potential
violation with respect to certain funds because “a fiduciary is
required to conduct a regular review of its investment.”
Tibble’s discussion of the continuing duty to monitor
plan investments applies here. The employees allege that the
fiduciaries' failure to monitor investments prudently—by retaining
recordkeepers that charged excessive fees, offering options likely
to confuse investors, and neglecting to provide cheaper and
otherwise-identical alternative investments—resulted in the
fiduciaries failing to remove imprudent investments from the menu
of investment offerings. In rejecting the employees' allegations,
the 7th Circuit did not apply Tibble’s guidance but
instead erroneously focused on another component of the duty of
prudence: a fiduciary’s obligation to assemble a diverse menu of
options.
But the fiduciaries' provision of an adequate
array of investment choices, including the lower cost investments
plaintiffs wanted, does not excuse their allegedly imprudent
decisions. Even in a defined-contribution plan where participants
choose their investments, Tibble instructs that plan
fiduciaries must conduct their own independent evaluation to
determine which investments may be prudently included in the
plan’s menu of options. If the fiduciaries fail to remove an
imprudent investment from the plan within a reasonable time, they
breach their duty.
The 7th Circuit’s exclusive focus on
investor choice elided this aspect of the duty of prudence. The
court maintained the same mistaken focus in rejecting the
employees’ claims with respect to recordkeeping fees on the
grounds that plan participants could have chosen investment
options with lower expenses.
The US Supreme Court vacated
the judgment below so that the 7th Circuit may reevaluate the
allegations as a whole, considering whether the employees have
plausibly alleged a violation of the duty of prudence as
articulated in Tibble under applicable pleading
standards. The content of the duty of prudence turns on “the
circumstances . . . prevailing” at the time the fiduciary acts, 29
U. S. C. §1104(a)(1)(B), so the appropriate inquiry will be
context specific.
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