The Supreme Court recently issued a unanimous decision reinstating an ERISA class action against fiduciaries of Northwestern University's 403(b) retirement plans. In Hughes v. Northwestern University, the petitioners alleged that plan fiduciaries violated their duty of prudence in a number of respects, based on certain investment options made available to participants. The Seventh Circuit Court of Appeals affirmed the District Court's dismissal of the case because the plans offered participants a range of higher-cost and lower-cost investment funds and permitted participants to select among available funds.
Duty of Prudence for Investment Menu Oversight
Under ERISA's duty of prudence, plan fiduciaries have a continuing duty to monitor plan investments and fees, remove imprudent investment funds, and control fees. In Hughes, the petitioners alleged that plan fiduciaries (1) failed to monitor and control recordkeeping fees, (2) offered retail fund share classes rather than institutional fund share classes, and (3) offered too many investment options, thereby causing participant confusion and poor investment decisions.
The District Court, affirmed by the Seventh Circuit Court of Appeals, held that the claims of imprudence failed as a matter of law, because the plans offered a range of lower-cost investment funds (low-cost index funds). Therefore, participants who were concerned about fees, or confused by the large number of investment offerings, could have limited themselves to the low- cost index funds.
In its unanimous decision, the Supreme Court held that the Seventh Circuit applied the wrong standard by focusing on the investment options available to participants rather than the fiduciaries' obligation to monitor investment funds. The Court held that fiduciaries must act prudently with respect to each fund offered by a plan. The Court sent the case back to the Seventh Circuit for further consideration using this standard.
- Fiduciaries must perform routine evaluations of all plan investment menu options, even if the menu includes an array of low-cost mutual funds.
- Providing participants with prudent investment options does not excuse fiduciaries who also provide imprudent investment options.
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If you have questions regarding this client alert, please contact the authors, any member of Venable's Employee Benefits and Executive Compensation Group, or your regular Venable lawyer.