The January 2022 Supreme Court ruling in the case involving Northwestern University and its retirement plan participants sends a message that the mere quantity of investment choices in an ERISA plan is no substitute for a fiduciary’s duty to monitor their quality.
On January 24, 2022, the Supreme Court of the United States (SCOTUS) issued a unanimous ruling on an ERISA case that could alarm retirement plan sponsors with lax oversight of investment lineups. Justice Sonia Sotomayor wrote the decision which states, in a nutshell, that an extensive menu of investment options in a defined contribution plan is no substitute for the prudent management of those options. In the case of Hughes v. Northwestern University, the SCOTUS decision suggests that the quantity of investment choices is no defense for failing to monitor the quality of those choices and removing imprudent ones.
It Only Took Three
The lawsuit, brought by Hughes and two other Northwestern University employees, was filed against the University in 2016 alleging that plan administrators had violated their ERISA duty by offering poor-performing and needlessly expensive investment options and by paying excessive recordkeeping fees. The SCOTUS ruling itself reiterated Hughes’ assertion that Northwestern had offered “too many investment options—over 400 in total for much of the relevant period—and thereby caused participant confusion and poor investment decisions.” These three brought suit against the University itself and also its fiduciaries which include its Retirement Investment Committee, and the individual officials who administer the two retirement plans in question.
The original case was dismissed by a lower court, and that dismissal was upheld by the Seventh Circuit Court of Appeals on the grounds that Northwestern had offered a variety of funds and not exclusively more costly retail share classes, or under-performing options as the plaintiffs alleged. The court concluded that plans could offer a wide array of investment options and with varying fees without breaching fiduciary duties. In the court’s judgment, the ultimate outcome of an investment, including poor performance, is not itself proof of imprudence.
Unsatisfied, in June 2020, Hughes took the case to the Supreme Court. The Supreme Court took exception to the lower court’s logic and its failure to recognize an earlier case (2015 Tibble v. Edison) which, Justice Sotomayor wrote, “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,” even though plan participants select their own investments. With this decision, the case is now returned to the Seventh Circuit Court for further proceedings.
With Hundreds More to Follow
The Seventh Circuit Court may yet rule in favor of Northwestern, but this case is just one of many ERISA class action suits still to be decided. The legal news service “Law 360” reported that in 2020 “the U.S. Supreme Court issued four ERISA decisions, more than it has issued in a single year in the 45-year history of the statute.” The service also reported that in 2020 “… over 200 new ERISA class actions were filed, an all-time record that represents more than double the number filed in 2018.”
What’s a Plan Sponsor to Do?
The Supreme Court’s recent ruling underscores plan sponsors’ obligation to actively monitor investment lineups in an approach that is neither passive nor overly prescriptive. Too few investment choices deny participants the freedom to select funds or allocations that suit them. (And, note, for retirement plans that allow participants to direct their investments, Section 404(c) of ERISA stipulates the plan must offer a broad range of investments, including at least three options, each of which is diversified with materially different risk and return profiles.) But, as this case makes clear, the mere offering of many choices of varying costs is indefensible, and no protection from liability if the lineup is not monitored through a regular and rigorous process. There is no plug and play solution that satisfies a fiduciary’s duty. Instead, plan sponsors should be able to demonstrate that their retirement plans are:
- Created with reasonably diversified investment options;
- Monitored across the menu of investment option for returns and associated costs (including their share class and any revenue sharing);
- Evaluated in terms of vendor fees and expenses as compared to similar plans; and
- Managed in a thorough and well documented process so that prudence can be substantiated.
Highland Can Help
Hughes v. Northwestern should prompt plan sponsors to consider the care with which lineups are created and monitored, and how well-equipped plan fiduciaries are to discharge their duties. Highland is an acknowledged co-fiduciary for our clients. We stand beside them and their ERISA plans, so they can fulfill their fiduciary duty. We can help educate your investment committee members and, with them, evaluate your plan and its investment menu, not only to maintain ERISA compliance but, just as important, to help your employees achieve the comfortable retirement they’re saving for.
If you’d like an independent evaluation of your retirement plan, its structure and processes, we’d be happy to talk with you.
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