This Report summarizes an opinion issued on January 24, 2022 (Part I); and cases granted review on January 21 and 24, 2022 (Part II).
Opinion: Hughes v. Northwestern University, 19-1401
Hughes v. Northwestern University, 19-1401. In an 8–0 decision, the Court held—in a case under the Employee Retirement Income Security Act of 1974 (ERISA)—that a plan fiduciary’s fulfillment of its obligation to provide a diverse array of investment options does not shield it from liability for failing to remove imprudent investment options from the menu of options. ERISA imposes a duty of prudence on the administrators of certain retirement plans. 29 U.S.C. §1104(a)(1)(B). In Tibble v. Edison International, 575 U.S. 523 (2015), the Court held that this duty of prudence imposes on a plan fiduciary a “continuing” obligation “to monitor investments and remove imprudent ones.” Moreover, the duty of prudence also obligates a plan fiduciary “to assemble a diverse menu of options” from which participants may choose. This case concerned respondents’ management of defined-contribution retirement and savings plans for petitioners, who are three current or former employees of Northwestern University. Under a defined-contribution plan, “employees maintain individual investment accounts, which are funded by pretax contributions from the employees’ salaries and, where applicable, matching contributions from the employer.” Employees choose “how to invest [their] funds subject to an important limitation: [An employee] may choose only from the menu of options selected by the plan administrators.” Petitioners alleged that respondents breached their duty of prudence by failing to monitor and control recordkeeping fees, by offering investments “in the form of ‘retail’ share classes that carried higher fees than those charged by otherwise identical ‘institutional’ share classes,” and by offering “too many investment options” and thus “caus[ing] participant confusion and poor investment decisions.” The Seventh Circuit affirmed dismissal of petitioners’ complaint on the ground “that respondents had provided an adequate array of choices, including ‘the types of funds plaintiffs wanted (low-cost index funds).’” The court believed that the availability of “petitioners’ preferred type of low-cost investments . . . eliminated any concerns that other plan options were imprudent.” Through an opinion by Justice Sotomayor, the Court vacated and remanded.
The Court concluded that the Seventh Circuit had “erred in relying on the participants’ ultimate choice over their investments to excuse allegedly imprudent decisions by respondents.” By focusing exclusively “on investor choice,” the Court explained, the Seventh Circuit “did not apply Tibble’s guidance” and thus “elide[d]” the “aspect of the duty of prudence” that requires a plan fiduciary to monitor and remove imprudent investments. Observing that “the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs,” the Court remanded to the Seventh Circuit to determine “whether petitioners have plausibly alleged a violation of the duty of prudence as articulated in Tibble.” (Justice Barrett did not participate in the case.)
[Editor’s note: Some of the language in the background section of the summary above was taken from the petition for writ of certiorari and brief in opposition.]