Supreme Court Stresses Importance of Ongoing Monitoring of All ERISA Plan Investment Options
- The U.S. Supreme Court reversed and remanded a Seventh Circuit Court of Appeals decision dismissing claims of Employee Retirement Income Security Act of 1974 (ERISA) violations and stressed its previous guidance regarding the requirements of the duty of prudence on ERISA plan fiduciaries in the context of plan investment options.
- The Supreme Court made clear that a plan fiduciary has a duty to not only assemble a diverse menu of investment options for eligible employees, but to also continually monitor investments and remove imprudent ones.
- The Supreme Court rejected the position that a fiduciary could be excused from offering an imprudent investment option as long as there were other prudent options available. The Supreme Court held that the determination of whether a fiduciary has fulfilled its duty of prudence is context-specific and must be made based on "the circumstances prevailing" at the time of the acts; this standard will likely make it easier for plaintiffs to survive a motion to dismiss.
In Hughes v. Northwestern University, current and former participants in Northwestern University's defined-contribution retirement plans filed litigation on behalf of the plans' participants asserting that the University, its retirement investment committee and the individual officers who administer the plans violated ERISA through their improper administration of the University's retirement plans. In particular, the plaintiffs alleged that the defendants: 1) failed to monitor and control recordkeeping fees, resulting in unreasonably high costs to the plans' participants; 2) offered mutual funds and annuities in the form of "retail" share classes that charged higher fees than those charged by other share classes of the same investments; and 3) offered a wide range of investment options that were likely to confuse investors.
The U.S. District Court for the Northern District of Illinois granted the defendants' motion to dismiss the plaintiffs' complaint, and the dismissal was affirmed by the Seventh Circuit Court of Appeals. The lower courts' opinions relied on the fact that the plans' participants were offered hundreds of investment options. Essentially, the Seventh Circuit reasoned that if the defendants provided a large quantity of investment options, at least some of which were prudent investment options, the plaintiffs' allegations that some of the options were too expensive or underperforming were insufficient to support a claim of imprudence. Accordingly, it held the plaintiffs failed to plausibly allege that the defendants breached any duty owed under ERISA.
The U.S. Supreme Court, in a rare unanimous decision, vacated the decision and remanded the case to the Seventh Circuit for further proceedings.
Importance of Prudence
As expected, the Supreme Court focused on the duty of prudence and highlighted that ERISA requires that plan fiduciaries discharge their duties "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." 29 U.S.C. § 1104(a)(1)(B). In line with the Court's prior ruling in Tibble v. Edison International, 575 U.S. 523, 530 (2015), the duty of prudence includes a continuing duty to monitor all plan investments and remove any imprudent ones.
The Supreme Court found that the Seventh Circuit did not properly apply the guidance of Tibble in rejecting the plaintiffs' allegations. Rather, the Seventh Circuit emphasized the employees' ultimate choice in the wide range of available investment options. In doing so, the Supreme Court found that the Seventh Circuit ignored a crucial aspect of the duty of prudence, i.e., an ongoing obligation to monitor investments and evaluate whether they can prudently be included in the menu of options. The Supreme Court explained that the Seventh Circuit erred through this neglect to adhere to its precedent and through summarily rejecting the plaintiffs' numerous allegations of potentially imprudent administration of their retirement plans. The case was remanded for further evaluation of whether the plaintiffs plausibly stated a claim for violation of ERISA against the defendants by the claimed provision of imprudent investment options.
Notably, the Supreme Court passed on the opportunity to elaborate on what the applicable pleading standard should be for bringing a claim of ERISA fiduciary imprudence in connection with the management of a defined-contribution plan, nor did it provide meaningful guidance on what constitutes a reasonable time for fiduciaries to remove imprudent investment options from the menu. However, the Supreme Court did acknowledge some deference should be given to the work of fiduciaries by adding that decisions regarding the maintenance of certain investment options must also "give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise." On the other hand, by reiterating that these inquiries must be decided in the context of the circumstances prevailing at the time of the fiduciary acts, the Supreme Court undoubtedly gave the plaintiffs' bar additional arguments to avoid dismissal on a motion to dismiss. See, e.g., Turpin v. Duke Energy Corp., Case No. 3:20-CV-00528, 2022 WL 287548 (W.D.N.C. Jan. 31, 2022); Goodman v. Columbus Reg'l Healthcare Sys., Inc., Case No. 4:21-CV-15, 2022 WL 228764 (M.D. Ga. Jan. 25, 2022).
Although Hughes involves 403(b) plans, its holding have implications for 401(k) plans as well, since they are also subject to ERISA's duty of prudence. The Supreme Court's decision emphasizes the crucial need for a plan fiduciary to continually evaluate, monitor and modify the investment options provided to eligible employees for their retirement plans. Any investments determined to be imprudent should be removed from the plan within a reasonable time period, regardless of the other options available to plan participants. While the decision does not preclude the offering of a diverse array of investments options, practically speaking, some fiduciaries may reduce the number of options they offer to lessen the burden of continual monitoring and exposure to similar litigation. Fiduciaries should examine the bases underlying administrative decisions for their retirement plans and be careful to document the same, to bolster a showing of their experience and expertise relied upon in making decisions for the retirement plans.
For more information or questions regarding the court's decision or ERISA, contact the authors or another member of Holland & Knight's ERISA Litigation Team or Executive Compensation and Benefits Team.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.