Yesterday, the U.S. Supreme Court decided Hughes v. Nw. Univ., No. 19-1401, __S.Ct.__, 2022 WL 199351 (U.S. Jan. 24, 2022), with the opinion for the unanimous Court delivered by Justice Sotomayor (Justice Barrett took no part in the decision). This decision will have a huge impact in litigation involving the management of defined-contribution retirement plans.
Petitioners are participants in defined-contribution retirement plans offered by Northwestern University. They sued Respondents (collectively, “Northwestern”) under the Employee Retirement Income Security Act of 1974 (ERISA), 88 Stat. 829, as amended, 29 U.S.C. § 1001 et seq. for violating their duty of prudence in the selection and management of investment options and paying excessive recordkeeping fees. They alleged that Northwestern offered many mutual funds and annuities in the form of “retail” share classes that carried high fees than those charged by otherwise identical “institutional” share classes of the same investments which were available to Northwestern as a large investor. By offering too many investment options (over 400 total), Petitioners alleged that this caused participant confusion and poor investment decisions. The District Court and the Seventh Circuit Court of Appeals decided in favor of Northwestern, “relying on the participants’ ultimate choice over their investments to excuse allegedly imprudent decisions.” The Supreme Court found this to be an error. The Seventh Circuit focused too much on investor choice and not on Northwestern’s duty to remove imprudent investments from the plan within a reasonable time.
In Tibble v. Edison Int’l, 575 U.S. 523, 135 S. Ct. 1823, 191 L. Ed. 2d 795 (2015), another case involving allegations of imprudence with respect to defined-contribution plans, the Court explained that a fiduciary breaches the duty of prudence by failing to properly monitor investments and remove imprudent ones. Tibble’s guidance applies here. “[E]ven in a defined-contribution plan where participants choose their investments, plan fiduciaries are required to conduct their own independent evaluation to determine which investments may be prudently included in the plan’s menu of options.” The Court vacated the judgment with instructions that the Seventh Circuit should consider whether Petitioners plausibly alleged a violation of the duty of prudence.
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