On January 24, 2022, the U.S. Supreme Court decided Hughes v. Northwestern University, No. 1401, holding that an ERISA fiduciary that offers some prudent investment options in a retirement plan is not thereby categorically protected against a claim that other options are imprudent.
Under the Employee Retirement Income Security Act of 1974 (ERISA), fiduciaries who manage defined-contribution retirement plans, also known as 401(k) plans, have a continuing duty of prudence that requires them to monitor investment options and remove imprudent ones.
Abigail Hughes, on behalf of a class of current and former employees of Northwestern University, sued Northwestern in 2016 for allegedly violating this duty of prudence. Hughes alleged that Northwestern “failed to monitor and control” certain fund recordkeeping fees; listed mutual funds that “carried higher fees” than otherwise identical mutual funds; and offered “too many investment options,” thereby causing “participant confusion.”
The district court dismissed the claim, and the Seventh Circuit affirmed. The Seventh Circuit reasoned that Hughes’ claim failed as a matter of law because Northwestern’s plans contained numerous investment options that Hughes conceded were prudent, so Hughes “could not complain about the flaws in other options.”
In a unanimous opinion, the Supreme Court reversed. The Court held that offering some prudent investment options does not categorically bar a claim alleging that other options are imprudent or that the selection of options as a whole is imprudent. Rather, the Court clarified, ERISA’s duty of prudence is a “context-specific inquiry,” which requires plan administrators to “monitor” all its fund offerings and “remove” the “imprudent ones.”
Although the Court reversed, it did not hold that Hughes had stated a claim. Instead, it remanded the case for the Seventh Circuit to reconsider Hughes’ complaint under the proper legal standard and cautioned that, “[a]t 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.”
Justice Sotomayor authored the opinion for a unanimous Court. Justice Barrett took no part in the consideration or decision of the case.
Download Opinion of the Court.