The Supreme Court recently delivered a unanimous decision in Hughes v. Northwestern University (U.S. No. 19-1401) , finding that plan fiduciaries of participant-directed defined contribution retirement plans have a continuing duty to monitor all of the investment options available under the plans and remove any imprudent ones within a reasonable period of time.
In Hughes, participants in two retirement plans alleged that the plan fiduciaries violated the Employee Retirement Income Security Act’s (ERISA) duty of prudence required of all plan fiduciaries by:
- Failing to monitor and control recordkeeping fees, resulting in unreasonably high costs to plan participants
- Offering mutual funds and annuities in the form of “retail” share classes that carry higher fees than those charged by otherwise identical share classes of the same investments
- Offering over 400 investment options that were likely to confuse investors
The lower court in Hughes—the Seventh Circuit Court of Appeals—rejected the participants’ allegations based on one component of an ERISA fiduciary’s duty of prudence: the obligation to assemble a diverse menu of options. The Seventh Circuit determined that the plan fiduciaries had provided an adequate array of choices, including the types of funds the participants wanted—low-cost index funds.
The Supreme Court subsequently concluded that the Seventh Circuit erred in relying on the participants’ ultimate choice over their investments to excuse allegedly imprudent decisions by the plan fiduciaries. The court also concluded that the Seventh Circuit should have applied the guidance provided in another 2015 Supreme Court case: Tibble v. Edison, 575 U.S. 523.
In Tibble, the Supreme Court explained that, “even in a defined-contribution plan where participants choose their investments, plan fiduciaries are required to conduct their own independent evaluation to determine which investments may be prudently included in the plan’s menu of options.” Consequently, the court in Tibble held that if the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their fiduciary duty.
Because the Seventh Circuit did not apply the guidance provided in Tibble, the Supreme Court in Hughes vacated the Seventh Circuit’s rejection of the participants’ allegations and remanded the case back to the court to reconsider the matter using the Tibble guidance.
Plan fiduciaries should take note of the Supreme Court’s decision in Hughes and ensure appropriate review of pertinent participants’ investments.
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