By: Robert J. D’Anniballe, Jr.
On Monday, January 24, 2022 the United States Supreme Court issued its much-anticipated opinion in the Hughes, et al. v. Northwestern University, et al. case. Before the Court was the issue of whether Northwestern University violated its fiduciary duty to a class of employee-investors under ERISA by allegedly including unnecessarily expensive investment options and paying excessive fees although they simultaneously offered low cost options. In short, is it a violation of Northwestern’s fiduciary duty to offer both reasonable and unreasonable investment options if they ultimately allow the employee investor to choose which plan to invest in? The District Court ruled the university satisfied their fiduciary duty and dismissed the case. The Seventh Circuit agreed affirming the lower court. The Supreme Court ultimately disagreed and reinstated the class action finding that employee choice does not cure the universities’ potentially imprudent offerings.
The basis for the Supreme Court’s reversal and remand is that the lower courts’ rationale was inconsistent with the explanation of the duties owed by a fiduciary explained in Tibble v. Edison Int’l, including the duty to monitor and oversee all plan investment options and remove any deemed imprudent. 575 U. S. 523, 530 (2015). While the Seventh Circuit also based its opinion on guidance provided in Tibble, namely the duty to offer a diverse menu of plan options, it ignored the duty to remove imprudent offerings. The Court briefly touched on the Petitioners’ allegation including: 1. Northwestern failed to monitor record keeping and investment management fees; 2. Northwestern offered plan options including “retail” share classes while identical and cheaper “institutional” share classes were available; and 3. Northwestern created confusion by offering over 400 investment options. By focusing solely on the university diversifying their plan options and providing participant choice, the Seventh Circuit and District Court ignored other equally important aspects of the duty of prudence owed by a fiduciary.
This opinion will likely continue to stoke the flames of fiduciary liability class actions throughout the United States. While the prior decision upholding the dismissal of the Northwestern lawsuit may have temporarily given peace of mind to fiduciaries who believed they could hide behind sheer volume of plan options and participant choice, it is apparent that this is no longer a viable strategy. As prior cases have held, the duty to diversify offerings is merely a portion of a fiduciary’s responsibilities. They must also seek to keep fees reasonable and only offer prudent investment choices to their employee-investors.
If you would like to learn the best way to protect you and your organization from private class actions and prepare for the increasing regularity of government audits concerning your company’s retirement plan, please contact Robert D’Anniballe, partner at Pietragallo Gordon Alfano Bosick & Raspanti, LLP.