What claims were made in Hughes v. Northwestern University?
Before we explore the Court’s findings and key takeaways, let’s review the claims being made against the plan fiduciaries and how the case landed before the Court.
The plaintiffs in the Northwestern University lawsuit sued the defendants for allegedly breaching ERISA’s duty of prudence based on the following three claims:
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 by otherwise identical share classes of the same investments
3 Offering options that were likely to confuse investors
The original complaint was brought in 2016 by participants in Northwestern’s two ERISA 403(b) plans. The district court dismissed the complaint, finding that as a matter of law the participants failed to adequately allege a breach of fiduciary duty. The U.S. Court of Appeals for the Seventh Circuit affirmed the lower court’s decision, primarily because the less-expensive options the plaintiffs preferred were offered by the plan and that participants had the choice to select these options from the plan’s investment menu.
The plaintiffs appealed the decision to the Court. In July 2021, at the request of the acting Solicitor General of the United States, the Court announced that it would review the Seventh Circuit’s decision.
What were the findings of the Court?
The Court disagreed with the lower courts, and in a unanimous ruling, vacated the appellate court’s decision. The justices offered the following in their written opinion:
- It isn’t enough for plan fiduciaries to create a plan investment menu that contains less-expensive options that participants might want to invest in.
- As provided in their decision in Tibble v. Edison, plan fiduciaries have a fiduciary duty to monitor every investment option in a plan, and an imprudent option isn’t rendered prudent by including it in a menu that also contains less-expensive options. Note: The Tibble case, which the Court ruled on in 2015, similarly involved allegations that plan fiduciaries had offered higher-priced, retail class mutual funds as plan investments when materially identical but lower-priced, institutional class mutual funds were available.
- Although offering a wide array of investment options is a factor in determining whether a fiduciary acted prudently, lower courts can’t dismiss claims solely on the basis that a menu contained less-expensive options that participants could have selected.
The Court directed the Seventh Circuit to reconsider the plausibility of the plaintiff’s complaint, but without relying solely on the principle that fiduciaries meet their ERISA obligations by offering a diverse menu; alternatively, each option must be prudent and in the context of the plan’s overall menu of options. Plan fiduciaries must also conduct their own independent evaluation to determine which investments may be prudently included in the plan’s menu. For similar fiduciary breach claims, the Court opined that a court should consider a “range of reasonable judgments” a fiduciary may make based on experience and expertise.
What are the key takeaways for plan fiduciaries?
The Court’s decision in Hughes v. Northwestern University reaffirms the existing law set forth in Tibble v. Edison, which is that plan fiduciaries must monitor every fund in the plan and remove those that are imprudent. The new ruling also concludes that if plan fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they indeed breach their fiduciary duty.
However, the ruling is not a sweeping victory for the plaintiffs; for example, it doesn’t decide whether the plaintiffs stated a viable claim. It also doesn’t address what allegations would be sufficient to plead a viable claim. Many in the industry were hoping that the Court would use the Northwestern case to address pleading standards, due to the inconsistencies that currently exist.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.
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