ERISA imposes a duty of prudence on fiduciaries. Specifically, administrators of defined contribution plans are subject to the fiduciary duties set forth in ERISA.
On January 24, 2022, the Supreme Court of the United States unanimously held in Hughes v. Northwestern University that offering inexpensive investment options in a defined contribution retirement plan, together with allegedly high-cost options, does not preclude a claim for breach of fiduciary duty of prudence under the Employee Retirement Income Security Act of 1974 (ERISA). Prior to the Hughes decision, the lower courts were split on the viability of a fiduciary claim when a defined contribution plan offered both prudent and imprudent investment options.
ERISA imposes a duty of prudence on fiduciaries. Specifically, administrators of defined contribution plans are subject to the fiduciary duties set forth in ERISA. In Hughes, former and current employees of Northwestern University alleged that Northwestern violated its duty of prudence by providing employees with investment options that caused employees to incur excessive fees, both because too many options were offered and because of the high fees associated with a number of the available options.
The Seventh Circuit Court of Appeals affirmed the dismissal of the plaintiffs’ claims for failure to plausibly allege a breach of fiduciary duty. The Seventh Circuit held that Northwestern had complied with its duty of prudence by offering a variety of investment options that included the employees’ preferred type of low-cost investments, as well as other higher-cost options.
The Court had to decide whether participants in defined contribution retirement plans may state a claim under ERISA for breach of the fiduciary duty of prudence on the theory that investment options offered in the plan were too numerous and that many of the options were too costly, notwithstanding the fact that the plan’s fiduciaries also offered low-cost investment options.
The Court held that the Seventh Circuit erred in dismissing the claims without making a “context-specific inquiry” that “takes into account a fiduciary’s duty to monitor all plan investments and remove any imprudent ones.”
Hughes, which was just a six-page opinion from the Court, does not address whether plaintiffs stated a viable claim and does not address what allegations would be sufficient to plead a viable claim going forward. However, Hughes settles once and for all that the mere availability of adequate investment options does not categorically prevent ERISA plaintiffs from stating a plausible claim for breach of the duty of prudence.
The Court’s opinion concludes with an acknowledgement of the difficulties that ERISA fiduciaries face in the context of offering investment options under a defined contribution retirement plan:
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.
Therefore, while Hughes may ultimately serve to allow more plaintiffs’ claims to survive through the motion to dismiss stage, the Court has instructed the lower federal courts to give due regard to the numerous reasonable judgments that a fiduciary may make. Employers will hope that the lower courts take this language to heart when deciding the many fee litigation cases that have been filed in recent years.
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