The Tide is High…Keep Holding On For More Retirement Plan Fee Litigation
by Brenda Berg
The U.S. Supreme Court’s ruling this week in Hughes v. Northwestern University will do nothing to stem the rising tide of retirement plan fee litigation. But the ruling doesn’t mean fiduciary breach claims are more likely to be successful either. Instead, the Court kept its ruling very narrow: a broad investment menu with some prudent funds will not automatically mean the fiduciaries are off the hook for offering imprudent funds.
The plaintiffs in Hughes were participants in two 403(b) retirement plans sponsored by Northwestern University. The participants brought claims for breach of fiduciary duty against the University, the retirement plan committee, and the individuals who administered the plans. The participants alleged the fiduciaries breached their duty of prudence by: (1) allowing recordkeeping fees that were too high; (2) allowing plan investments with excessive investment fees; and (3) providing participants too many investment options (over 400!) which resulted in participant confusion and poor investment decisions.
The District Court had dismissed the case. The Seventh Circuit affirmed, and in doing so articulated a rule that would have made it much harder for participants to bring these types of cases. The Seventh Circuit’s rule was that it is not a breach of fiduciary duty to offer flawed funds, provided there are other funds available that don’t have those problems. For example, it would not be a breach to offer some higher-fee funds provided that other low-fee investment funds were available to the participants.
The Supreme Court rejected the Seventh’s Circuit rule and held that the fact that participants could choose better investment options would not automatically excuse imprudent fiduciary decisions with respect to other investments. The Court referred to its 2015 ruling in Tibble v. Edison Int’l, 575 U.S. 523 (2015), which concluded that fiduciaries have a continuing duty to monitor investments and remove imprudent ones, and that the evaluation of a fiduciary’s decision must be “context-specific.” The Court sent Hughes back to the Seventh Circuit with instructions to consider whether the participants had stated a claim based on the Tibble standard and a context-specific inquiry.
The Court’s ruling did not address whether the plaintiffs had sufficiently alleged conduct that would be a breach of fiduciary duty. What we know from this ruling is simply that having some prudent options in the investment menu won’t automatically save you from the imprudent ones. It doesn’t mean that the fiduciaries actions were imprudent in this case, just that the lower court didn’t apply the appropriate standard.
What does the Court’s ruling mean for plan committees and other retirement plan fiduciaries? It means you need to keep doing what you are hopefully already doing: have, follow, and document a prudent process to regularly review all investment options and recordkeeping fees on an ongoing basis, and remove the options that you determine are imprudent. The tide of retirement plan fee litigation isn’t going to ease up any time soon, at least not based on this ruling.