Supreme Court Issues 8–0 Warning to Employers

Retirement plans for employees are a tool for acquisition and retention of employees in many small businesses. The Supreme Court of the U.S. just ruled 8 – 0 in favor of employees in a suit about investment offerings in 401(k) retirement plans. The ruling would also impact administrators of 403(b) retirement plans.

ERISA, the Employee Retirement Income Security Act, requires that the administrators of these retirement plans act as fiduciaries for the employees and remove any imprudent investment offerings or options. The Act requires that the interests of the employees be protected when it comes to investment offerings with higher risks or fees that could negatively impact the returns on investment for those offeringsi.

The Case Regarding ERISA Fiduciary Duties

On January 24, 2022, the Supreme Court decided Hughes v. Northwestern University, No. 1401. The court held in favor of the employees that an ERISA fiduciary is not categorically protected against claims with mostly prudent offerings when some options offered in plans are found to be imprudent. The ruling requires plan administrators to “monitor” all its fund offerings and to remove the “imprudent” ones. Imprudent options include those with high management fees.

Filed in 2016 Hughes v. Northwestern University brought claims against two 403(b) retirement plans stating that fiduciaries failed in their duties of prudence in several ways including:

  • Failure to monitor and control management and recordkeeping fees that resulted in unreasonably high costs for plan participants. In this specific case, Northwestern University was shown to have used two separate recordkeeping services when one would have saved fees and been as efficient.
  • Confusing plan participants that contributed to poor investment decisions due to an excessive number of investment option offerings. At one point, between two plans there were more than 400 offerings, with a paring down later to 40.
  • Offering retail class investment options with higher fees than identical institutional class investment options.

Prior to acceptance by the U.S. Supreme Court, the Seventh Circuit Court of Appeals had upheld a lower court dismissal of the suit stating in essence that the offering of the types of plans the employees wanted and a wide variety of offerings eliminated claims of imprudence in offerings.

The Supreme Court Ruling

The ruling explained that it is not enough to satisfy fiduciary duty to offer a wide range of investment options. Not only must plan fiduciaries provide a diverse menu of options but must also on an ongoing basis monitor investments and remove those that are found to be imprudent. Even if deemed prudent at the time placed in a plan, investment options can become imprudent later and fiduciaries must constantly monitor and remove options that become “imprudent.”

5-Steps for Plan Administrators Going Forward

Suggested steps for the monitoring of plan offerings and actions to take in the future include:

  1. Include a reasonable number of diversified investment option choices.
  2. Regularly monitor investment options for both return and costs.
  3. Also monitor costs of offerings against peer plans of like sizes.
  4. Consider retaining independent experts in the offering selection and monitoring processes.
  5. Keep detailed records of committee meetings and investment option selections and monitoring.

While all the text speaks to “administrators” or “fiduciaries,” the term Employer in the title is relevant because the employer makes the selection of plan administrators. Note that the suit was against the employer, Northwestern University. Get advice from retirement plan experts when setting up these long term plans for employees.

i Supreme Court Revives ERISA Suit –


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