Expect the Breach of Fiduciary Duty Cases to Keep on Coming

In a closely watched case, the United States Supreme Court unanimously ruled on January 24, 2022, to reverse and remand for reconsideration the Seventh Circuit’s decision Hughes v. Northwestern University, which had dismissed a class action lawsuit against Northwestern University challenging the fees and investment options under the University’s retirement plans. The question at issue was whether the plan participants stated a plausible claim for relief against the plan fiduciaries for breach of the fiduciary duty of prudence in failing to monitor and control recordkeeping fees, offering retail shares rather than identical lower cost shares, and offering too many investment options, all of which the participants alleged resulted in unreasonably high costs to participants. The Seventh Circuit had affirmed the lower court’s dismissal of the case against Northwestern on the grounds that the retirement plans offered a diverse array of prudent investment options along with the allegedly imprudent options. In rejecting this analysis, the Supreme Court’s ruling makes clear that it is not sufficient to simply offer a diverse array of investment options to participants, but that each of those investment options also must be prudently selected and monitored.  
 

Background

A growing number of retirement plan sponsors have found themselves the subject of lawsuits alleging fiduciary imprudence with respect to plan fees and in the selection and retention of investment options. While the lawsuits have historically targeted 401(k) plans, beginning in 2016, they began to target 403(b) plans, primarily of large private universities. These lawsuits have had varying degrees of success in surviving the pleadings stage. Due to the significant cost in litigating these cases, lawsuits that survive a motion to dismiss are frequently settled, often for large dollar amounts. Accordingly, the question of what allegations are sufficient to survive a motion to dismiss is very important to both plaintiffs and defendants.

While these lawsuits have alleged breaches of fiduciary duty under ERISA, because ERISA derives from the common law of trusts, the courts often look to ERISA in considering breach of fiduciary duty disputes involving governmental and church employers that are exempt from ERISA. Additionally, state statutes often adopt fiduciary standards that parallel those under ERISA. Accordingly, the outcome of these lawsuits can have important implications for governmental and church plan employers as well.

In one of these cases, several participants in the Northwestern University retirement plans sued the University, its Retirement Investment Committee, and its human resource personnel, alleging that the parties violated ERISA's duty of prudence by, among other things, (i) failing to monitor and control recordkeeping fees; (ii) offering retail share classes instead of institutional share classes; and (iii) offering too many investments, which was likely to confuse participants.   

In affirming the lower court's dismissal of the participants' complaint, the Seventh Circuit held that the plan fiduciaries were not liable under ERISA for offering the allegedly poor investment options under the plan, based in part because the plan also offered inexpensive prudent investment options and, therefore, the participants had the opportunity to select the funds they wanted under the plan. The Seventh Circuit’s decision created a split in the circuit courts, as the Second and Eighth Circuit courts had, on similar facts, denied the plaintiffs’ motions to dismiss.
 

Supreme Court Decision

On January 24, 2022, the Supreme Court issued its ruling in Hughes v. Northwestern University, holding that the Seventh Circuit erroneously focused on a component of the duty of prudence that requires a fiduciary to offer a diverse menu of options, when it should have applied the standard articulated in the Supreme Court's 2015 decision in Tibble v. Edison International. The Supreme Court explained that determining whether plaintiffs state a plausible claim for breach of ERISA's fiduciary duty of prudence requires a context-specific inquiry of the plan fiduciary's continuing duty to monitor investments and to remove imprudent investments as articulated in Tibble. The Supreme Court stated that the plaintiffs in the Northwestern case alleged that the plan fiduciaries’ actions—retaining recordkeepers with imprudent fees, offering too many options, and offering higher expense options—resulted in the failure of the fiduciaries to remove imprudent investment options from the plan’s menu and that these allegations must be analyzed under Tibble. Specifically, the Supreme Court held that:
 

(emphasis added). Importantly, however, the Supreme Court also noted that:

The decision did not answer the question as to what pleading standards must be met for these types of complaints to survive a motion to dismiss, including whether the plaintiffs in the Hughes v. Northwestern University case adequately stated a claim. Rather, the Supreme Court sent the case back to the Seventh Circuit to reconsider the allegations under the duty of prudence standard articulated in Tibble. At the same time, however, the Supreme Court reinforced that the pleading standards set forth in Ashcroft v. Iqbal, 556 U.S. 662 (2009) and Bell Atlantic Corp. v. Twombly, 550 U.S 544 (2007) continue to apply and that, as articulated in Fifth Third Bancorp v. Dudenhoffer, 573 U.S. 409 (2014), a court’s review of whether a complaint sufficiently states a claim will necessarily be context-specific.   

Conclusion

The Supreme Court’s decision in the Northwestern case makes clear that offering a large investment menu under a retirement plan will not protect a plan sponsor from a breach of fiduciary claim if some options offered under the plan are imprudent and not timely removed from the menu.    

Plan fiduciaries that have adopted fiduciary best practices should be able to rely on those processes to satisfy the duty of prudence standard articulated under Tibble. For example, plan fiduciaries should enlist the services of an independent investment advisor to periodically review the investment option selections offered to plan participants. As a best practice, investment option reviews should be conducted on a quarterly basis and should be governed by a written investment policy statement. Additionally, if there are reasons for maintaining an investment option that is underperforming as compared to its benchmark peers, the plan fiduciaries should ensure that the meeting minutes document the reasons why such investment options are being retained in the retirement plan. These best practices can minimize the risk of potential litigation. Plan fiduciaries that have not adopted prudent practices and processes should do so now to best position themselves against a potential breach of fiduciary claim.  

For more information about fiduciary best practices, please contact Audra Ferguson-Allen, Gary Blachman, Rob Gauss, Lisa Harrison, Lindsay Knowles, Melissa Proffitt, Tara Sciscoe, Kathleen Sheil Scheidt, Chris Sears, or the Ice Miller Workplace Solutions attorney with whom you regularly work.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.