Employees of Northwestern University brought suit against the Retirement Plan and Voluntary Savings Plan administrators, alleging that they: (i) failed to monitor and control the fees they paid for recordkeeping, resulting in unreasonably high costs to plan participants; (ii) offered a number of mutual funds and annuities in the form of “retail” share classes that carried higher fees than those charged by otherwise identical “institutional” share classes of the same investments; and (iii) offered too many investment options – over 400 in total for much of the relevant period – and thereby caused participant confusion and poor investment decisions. The District Court granted the defendants’ motion to dismiss, and the Court of Appeal affirmed. The U.S. Supreme Court, however, granted cert and reversed.
“A fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones.” In this case, the Court found, the Seventh Circuit focused on the fiduciary’s obligation to assemble a diverse menu of options. The Court of Appeal determined that “respondents had provided an adequate array of choices, including the types of funds plaintiffs wanted (low-cost index funds). In the court’s view, these offerings eliminated any claim that plan participants were forced to stomach an unappetizing menu.” However, the Seventh Circuit erred in relying on the participants’ ultimate choice over their investments to excuse allegedly imprudent decisions. “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. If the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their duty….
“Given the Seventh Circuit’s repeated reliance on this reasoning, we vacate the judgment below so that the court may reevaluate the allegations as a whole. On remand, the Seventh Circuit should consider whether petitioners have plausibly alleged a violation of the duty of prudence as articulated in Tibble, applying the pleading standard discussed in Iqbal and Twombly. Because the content of the duty of prudence turns on the circumstances prevailing at the time the fiduciary acts, the appropriate inquiry will necessarily be context specific. At times, the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.”
Hughes v. Northwesten University, No.19-1401, 2022 WL 199351 (Jan. 24, 2022).