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Hughes v. Northwestern: ERISA’s and the Duty of Prudence

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INTRODUCTION

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that largely regulates pension, 401(k), and similar employer provided retirement benefit plans. The statute is intensive, it provides strict regulations pertaining to fiduciary duties by employers and similar sorts of requirements. While lawsuits arising from ERISA are often initiated by employees, there is also an enforcement mechanism from the Department of Labor. The Supreme Court’s decision in Hughes v. Northwestern considered whether the University breached its fiduciary duty of prudence by failing to remote certain low performing retirement options from its basket of options. The Seventh Circuit dismissed the case, siding with Northwestern. The Supreme Court granted certiorari.

OPINIONS BELOW AND HOLDING

In the recent Supreme Court case of Hughes v. Northwestern, the Court addressed the issue of whether respondents, who administered retirement plans on behalf of Northwestern University employees, violated the duty of prudence under the Employee Retirement Income Security Act of 1974 (ERISA). The Court held that the Seventh Circuit erred in relying on the participants’ ultimate choice over their investments to excuse allegedly imprudent decisions by the respondents.

In this case, the petitioners claimed that the respondents violated ERISA’s duty of prudence by: (1) failing to monitor and control recordkeeping fees, resulting in unreasonably high costs to plan participants; (2) offering mutual funds and annuities in the form of “retail” share classes that carried higher fees than those charged by otherwise identical share classes of the same investments; and (3) offering options that were likely to confuse investors.

The District Court granted the respondents’ motion to dismiss, and the Seventh Circuit affirmed, concluding that the petitioners’ allegations fail as a matter of law. The Supreme Court, however, vacated the judgment, holding that the Seventh Circuit erred in relying on the participants’ ultimate choice over their investments to excuse the respondents’ allegedly imprudent decisions.

REASONING

The Supreme Court primarily relied on the case of Tibble v. Edison Int’l, a 2013 case where the Supreme Court found that the employer had a continuing fiduciary duty of prudence, which included the duty to remove high priced mutual funds when identical mutual funds were available.

In Hughes v. Northwestern, the Supreme Court applied Tibble’s guidance. The Court held that even in a defined-contribution plan where participants choose their own investments, plan fiduciaries must conduct their own independent evaluation to determine which investments may be prudently included in the plan’s menu of options. If the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their duty.

The Supreme Court also emphasized that the content of the duty of prudence turns on a context-specific inquiry. In this case, the Supreme Court vacated the judgment, requesting the Seventh Circuit to consider whether the petitioners have plausibly alleged a violation of the duty of prudence as articulated under the Tibble standard.

KEY TAKEAWAY

This case provides important context regarding the extent of obligation employers offering a plan have to its employees. While the duty of president requires employees to have a diverse set of investment options, these options must also exclude “imprudent” options.

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