The U.S. Supreme Court Clarifies ERISA’s Fiduciary Duties to Monitor All Plan Investment Options

A unanimous U.S. Supreme Court (8-0, Justice Barrett recused) overturned a decision by the U.S. Court of Appeals for the Seventh Circuit which had dismissed a case brought by plan participants involving the fiduciary obligations of an ERISA plan sponsor in the selection of funds in its 403(b) plans. The case is remanded and will now proceed under the standards outlined by the Court. Hughes v. Northwestern University.

Hughes was one of several cases targeting large universities over their fiduciary roles in selecting the menu of investments available to participants under their 403(b) plans. These cases followed years of similar suits involving private sector 401(k) plans. The claims in this case were that the plans had so many investment choices that they were likely to confuse and overwhelm participants, some of the funds had excessive management fees, and the plans had high recordkeeping fees. The participants alleged that Northwestern, its investment committee and individual plan officials violated ERISA’s duty of prudence by failing to monitor and control recordkeeping fees; offering mutual funds and annuities in the form of ‘retail’ share classes that carried higher fees than identical share classes of the same investments; and offering options that were likely to confuse participants, with over 400 investment choices between the two plans.

The Supreme Court cited its 2015 decision in Tibble v. Edison Int’l which had stated that “a fiduciary normally has a continuing duty of some kind to monitor investments and remove imprudent ones.” The Supreme Court stated that the Seventh Circuit did not apply Tibble’s guidance and instead focused primarily on a fiduciary’s separate obligation to assemble a diverse menu of investment options. The Seventh Circuit noted that the types of funds participants wanted, low-cost index funds, were included in the array of choices. In other words, because the array of funds included some low-cost options, it did not matter that some of the funds were high-cost options, and therefore the plans’ participants could not have a valid ERISA claim against the plans’ fiduciaries.

The Supreme Court unanimously disagreed, stating that fiduciaries must conduct their own independent evaluation to determine which investments may be prudently included. For 403(b) and 401(k) sponsors, this means they must continually monitor all plan investment options, including both their performance and associated fees, and remove any investments that may become imprudent to offer within a reasonable period of time.

As for this case, whether the participant claims can survive a motion to dismiss will now be evaluated by the Seventh Circuit in light of the standards set forth in Tibble. Stay tuned.