The U.S. Supreme Court recently heard arguments in Hughes v. Northwestern University, in which the Seventh Circuit Court of Appeals had rejected claims that the fiduciaries of two defined contribution retirement plans at Northwestern University had breached their fiduciary duty under ERISA by wasting plan assets in offering many options at retail rather than identical investments at the cheaper institutional cost, by overpaying for multiple recordkeepers, and by offering a confusing number of investment options to plan participants who invest their own plan accounts.
The Supreme Court unanimously concluded that the Seventh Circuit could not excuse Northwestern fiduciaries from imprudent decisions under ERISA because plan participants made investment choices for their own 403(b) accounts, from an array of options that included prudent and imprudent investments. Rather, the actions of the Northwestern fiduciaries must be reviewed under Tibble v. Edison International, 575 U.S. 523. that requires fiduciaries to monitor investment options and remove imprudent choices.
Having some prudent investment options in the plan menu does not erase the fiduciary’s error of allowing a plan to maintain imprudent investment options. Rather, ERISA prudence dictates that the decisions of a fiduciary be prudent under the circumstances when made and that the fiduciary continually monitor investment choices for all their features, including cost, recognizing that there are trade-offs that a fiduciary must also consider. Prudence is reviewed in the context at the time of a fiduciary’s action and prevailing circumstances.
The three allegations that may give rise to a breach of ERISA fiduciary duty in this case are:
- The fiduciaries failed to monitor record-keeping fees resulting in extraordinarily high fees to participants that could have been avoided.
- The fiduciaries offered retail funds to participants when they could have offered the same funds at lower institutional rates.
- By offering 400 investment options, the fiduciaries confused plan participants, resulting in their poor investment choices.
The Takeaway:
The fiduciary standard of prudence under ERISA requires constant monitoring, considers the circumstances at the time of a fiduciary’s decision, and may take into account various trade-offs. The demands of ERISA prudence do not necessarily reflect modern portfolio management, which seeks to manage risk by examining the portfolio as a whole. Rather, ERISA investment choices deemed imprudent are not rehabilitated by looking at all the investment options available to participants as a whole.
The tension between choosing prudent investments and constantly monitoring fiduciary decisions against changing circumstances, trade-offs, and priorities, offers a significant challenge to plan fiduciaries’ decision-making. Documenting the reasons for decisions, monitoring them, and adjusting course to maintain prudence are keys to meeting the high standard of the law.
