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Court reaffirms duties of retirement-plan sponsors to monitor and update plan options

Monday’s decision in Hughes v. Northwestern University will be a strong contender for shortest decision of the term – Justice Sonia Sotomayor’s opinion for a unanimous court did not fill six pages, and included only six paragraphs of explanation following her summary of the dispute.

The case is one in a lengthening series, all involving class actions in which employees challenge the actions of corporate insiders managing defined-contribution plans governed by the Employee Retirement Income Security Act. That statute federalizes much of the law related to those plans; as relevant to this line of cases, the statute imposes fiduciary duties of prudence and care on those that administer them. The existing cases have reflected a tension, difficult for the lower courts to interpret, between a platitudinous insistence that ERISA creates a broad and general fiduciary duty and an abiding suspicion on the part of several justices that class actions are an inherently extortive device that improperly second-guess the well-intentioned business decisions of plan administrators.

Hughes is one of several cases alleging poor (and thus imprudent) management of university retirement plans. The plaintiffs here (April Hughes and other employees of Northwestern University) allege that Northwestern did not control the fees the plan paid for recordkeeping, contending that other universities with plans of similar size successfully negotiated for lower fees. They also allege that the options available for investment were imprudently designed. For one thing, Northwestern includes high-cost “retail” plans instead of otherwise identical low-cost “institutional” plans. More generally, Hughes claims, Northwestern simply includes far too many options, more than 400 when well-managed plans would offer less than 50.

The district court and the U.S. Court of Appeals for the 7th Circuit rejected those claims out of hand, generally reasoning that at least some of the options Northwestern offered were sufficiently well-designed to satisfy the university’s obligation of prudence and care. The unanimous agreement with Sotomayor’s opinion rejecting that line of reasoning suggests that she deftly manages to carry forward both branches of the earlier cases.

She starts by reaffirming the substance of the fiduciary duty laid out in the earlier cases, which includes a “continuing duty … to monitor investments and improve imprudent ones.” For Sotomayor, that general obligation was inconsistent with the 7th Circuit’s view that Northwestern could evade responsibility by offering “an adequate array of choices.” Because fiduciaries “are required to conduct their own independent evaluation to determine which investments may be prudently included in the plan’s menu of options,” the fiduciaries fall short if they “fail to remove an imprudent investment from the plan within a reasonable time.”

The most important part of the opinion probably will be its rejection of the 7th Circuit’s “exclusive focus on investor choice,” which reflects a decisive holding that it is not enough to insulate sponsors from liability to identify well-designed options that employees could have chosen. Rather, sponsors have an ongoing duty to protect employees from making poor investment choices by monitoring and removing those choices from the menu of the plan.

If you recall my recap of the argument, you should be wondering at this point how Sotomayor persuaded justices like Samuel Alito and Brett Kavanaugh to join this opinion. The answer comes in the last sentence of the last paragraph, which reassures the lower courts that the bare existence of the duty of prudence is not enough to compel a grant of relief:

At 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.

With that last comment, the justices returned the case to the 7th Circuit, for reassessment by the same panel that previously dismissed the complaint. It remains to be seen whether that concluding caveat will be enough to support a second decision dismissing the employees’ complaint.

Recommended Citation: Ronald Mann, Court reaffirms duties of retirement-plan sponsors to monitor and update plan options, SCOTUSblog (Jan. 24, 2022, 4:24 PM),