Lindabury, McCormick, Estabrook & Cooper, P.C. Firm News & Events
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.
The U.S. Supreme Court vacated the lower court’s decision and remanded the case back to the Seventh Circuit to re-evaluate the plaintiffs’ allegations. In doing so, the Court held that even while the plans offered a mix of investment options, that diversity did not relieve the fiduciaries of their ongoing duty to monitor investment choices and to conduct their own independent investigation to determine which investments may be prudently included in the plan’s investment choices. According to the Court, “if the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their duty.”
The Impact on Defined Contributions Plans.
The holding in Hughes is a good reminder to plan fiduciaries to actively monitor their plan’s investment options and to remove an investment that is not delivering fair returns at a reasonable cost to its participants. When conducting this investigation, it is critical that plan fiduciaries document their steps so that they can provide support for those investment decisions that may come into question down the road. In the interim, our office will continue to monitor the Seventh Circuit’s decision on remand and communicate any additional guidance issued as to what constitutes a “prudent” investment as well as what is deemed a reasonable time period during which the plan should remove an “imprudent” investment.