Authored By Ben Josselsohn

The Supreme Court recently handed down its eagerly awaited decision in Hughes v. Northwestern University.  Plan sponsors and 401(k) and 403(b) plan administrators had hoped the decision would create clearer pleading standards to free them from the endless line of ERISA class actions alleging fiduciary malfeasance when selecting investment menus and plan service providers.  

It didn’t; and now those fiduciaries have some more thinking to do.

Hughes was only the most recent of cases alleging mismanagement of university retirement plans. Participants said Northwestern’s Retirement Investment Committee, which had discretionary authority to control and manage the investment menus of the two plans at issue, violated ERISA’s prudence rule by failing to adequately select and monitor the menu options because of the number of expensive and underperforming funds included. It didn’t matter those participants already had hundreds of other funds to choose from, including low cost, better performing options. Even though acceptable investment funds might have been available, just allowing the poor funds to remain without monitoring and making an effort to cull them from the menu violated the Committee’s fiduciary duties.  Participants argued that Northwestern breached its duties with the same flaws as the Court decided in Tibble v. Edison International, 575 U.S. 523 (2015), where the fiduciary duty to monitor investments on an ongoing basis was set out by the Court.  

To boot, participants also said the plan administrators violated their fiduciary prudence obligation by selecting a program with excessive recordkeeping fees even though the participants had several ways to control those costs as well.

                Despite this, and in remanding the case back to the Seventh Circuit, the Court refused to opine on the question of whether the Northwestern fiduciaries violated their obligation to act prudently. Although it said the Committee’s decisions should be reviewed under Tibble, it noted those decisions may also rightfully be the product of other considerations.  In remanding the case back to the Seventh Circuit, the Court said “at times, the circumstances facing an ERISA fiduciary will implicate difficult tradeoff, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.” This means that there is not only one right way to invest.

               So how do plan committees and other ERISA fiduciaries protect themselves from second guessing when reviewing the investment menu?

               By going back to ERISA’s procedural basics.


  • Be sure the plan committee operates under a charter or other clear governing rules. An investment policy statement should establish guardrails for the committee’s decisions.  The committee should hold regularly scheduled meetings, with an agenda and materials distributed far enough in advance so members can be prepared when the meeting starts. And decisions should be recorded in minutes that are later approved by the committee.  The minutes will be the first place to tell the story of why the committee made the choices it did.


  •   Prepare meeting materials that include all the information necessary for the committee to properly compare investment alternatives, such as performance over periods of various lengths, fees and expenses, comparisons against appropriate benchmarks and comparable funds, as well as any other due diligence information that might be helpful for the fiduciary committee’s decision-making. This is key to support the committee’s informed decision-making.

And third,

  • Confirm that the governance program is supported by plan documents. If they aren’t properly coordinated, change something!  If the committee’s decisions are within discretion permitted by the investment policy statement, make sure the reasons are noted in the minutes. And amend the investment policy statement to provide flexibility if necessary. If the fiduciary decisions are not consistent with your plan documents, any deviation will just add additional claims against your fiduciaries in a fiduciary lawsuit.

The same procedures should fit the hiring and monitoring of service providers such as recordkeepers. Be sure to comparison shop for providers both on the initial hire and when reviewing existing services.  Review the tradeoffs when considering alternatives, such as the effect on participants. And make sure the issues are addressed in committee materials or the committee’s minutes.

Remember, ERISA’s fiduciary rules are very much about procedural compliance. A fiduciary’s investment selections don’t always have to wind up as the lowest cost or the absolute best investment when reviewing after the fact. But they do have to be made with procedural diligence. And if the fiduciary doesn’t have the expertise in the area, they’re responsible for getting advice from experts before making a decision.

 Of course, plan sponsors must also comply with ERISA’s reporting and disclosure regime to make sure participants know about the investment menu. But that’s a topic for other posts.