On Monday, Jan. 24, 2022, in the case Hughes vs. Northwestern, the U.S. Supreme Court ruled that a fiduciary’s duty to monitor investments in defined contribution retirement plans means the plan cannot include non-prudent investments. In reaching this conclusion, the Court recognized that fiduciaries have an ongoing obligation to monitor plan investments. Simply offering participants a diverse menu of investment options is not sufficient to insulate fiduciaries from potential liability.
The Holding in Hughes v. Northwestern.
In Hughes, employees of Northwestern University participated in two defined contribution 401(k) plans offered by the University. The employees alleged that the trustees of the plans breached their fiduciary duty to the participants 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 for otherwise identical share classes (institutional share class) of the same investments; and (3) offering investment options that were likely to confuse investors.” Both the trial court and the Seventh Circuit Court of Appeals accepted Northwestern’s argument that even if some options were not prudent, there was no violation of ERISA’s prudence standard because the plans offered a diverse menu of investment options that the plaintiffs agreed were prudent.