Benefits and Compensation

Retirement Plan Fiduciaries Must Wisely Consider All Investment Options

Retirement plan fiduciaries have a duty to monitor investment options continuously and remove all imprudent ones, a unanimous U.S. Supreme Court (SCOTUS) recently ruled in a much-anticipated decision. In the opinion, the Court made it clear the fiduciaries can’t ignore imprudent investment options in 401(k)s or other retirement plans even if other, prudent choices are available.

SCOTUS Rejects Participant-Choice Rationale

Northwestern University offers two defined contribution retirement plans for eligible employees. As with many other similar set-ups, the plans’ fiduciaries select the investment options from which participating employees can choose to invest their retirement plan savings. The litigants alleged the fiduciaries breached their duty of prudence under the Employee Retirement Income Security Act of 1974 (ERISA) by:

  • Failing to monitor and control the record keeping fees paid by the plans, resulting in unreasonably high costs to the participants;
  • Offering a number of mutual funds and annuities in the form of “retail” share classes that carried higher fees than those charged by identical “institutional” share classes; and
  • Offering too many investment options (more than 400) and thereby causing participants to be confused and make poor investment decisions.

The lower court, the U.S. 7th Circuit Court of Appeals, had dismissed the litigants’ allegations because it determined the Northwestern University fiduciaries had provided an adequate array of choices, including the types of low-cost funds the participants wanted. In the lower court’s view, the fact they could have chosen lower-cost funds destroyed any claim that the fiduciaries had breached their duty by leaving imprudent options in the plans.

In effect, the 7th Circuit determined it didn’t matter that there were “bad” options in the plans’ investment menu. After all, there were also “good” ones the participants could have chosen during the relevant time.

The Supreme Court rejected the participant-choice rationale and made it crystal clear that ERISA requires fiduciaries to monitor all plan investments continuously and remove any imprudent ones. Hughes v. Northwestern University, No. 19-1401, Supreme Court of the United States.

Key Unanswered Question Remains

While the Hughes decision is important, the Court didn’t address the arguably more critical issue that many in the employee benefits community had been hoping the justices would tackle: What do individuals in an ERISA excessive-fee case have to plead in their complaint to survive a request for dismissal?

Ever since the ruling was issued, commentators have been all over the place guessing what the Court’s decision means for that important question. Some observers believe the ruling will make it more difficult for participants to file such lawsuits. Others think the opposite. For now, unfortunately, the opportunity has passed for the high court to resolve the question, and lower courts will continue to struggle with it.

Brandon Long is an ERISA/employee benefits attorney in the Oklahoma City, Oklahoma, office of McAfee & Taft. You can reach him at brandon.long@mcafeetaft.com.

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