Yes, says the United States Supreme Court in a recent decision. In Hughes v. Northwestern University, 142 S. Ct. 737 (2022), three current or former employees of Northwestern University sued it for breach of fiduciary duty with respect to its management of its retirement and savings plans. Among plaintiffs’ allegations were that the university offered too many investment options, over 400 in total, leading to “participant confusion and poor investment decisions.” The plaintiffs also complained that the University also offered a number of mutual funds and annuities in the form of “retail” share classes which carried higher fees than those charged by otherwise identical “institutional” share classes of the same investments offered by the retirement Plan. Finally, the plaintiffs alleged that the University failed adequately to monitor and control the fees paid by the Plan for record keeping, resulting in unreasonably high costs to participants.
The Seventh Circuit had affirmed dismissal of the complaint, finding that the Plan options included plaintiffs’ preferred type of low-cost index fund investments, even if they were not necessarily easy to locate among the more than 400 options.
Justice Sotomayor, writing for a unanimous Supreme Court, pointed out that under ERISA, Plan fiduciaries owe a duty of prudence to Plan participants to monitor all Plan investments and remove any imprudent ones. Thus, it was not a defense, as a matter of law, to point to the fact that the preferred investment options were among the Plan’s numerous choices. Offering a potpourri of diverse investment menu options did not necessarily discharge the fiduciary duties of prudence under ERISA. Therefore, the Supreme Court remanded the case to the Seventh Circuit to determine whether, under the circumstances, the duty of prudence was violated by not culling the potential investment options to eliminate more expensive choices.
The moral of the story is that providing a wide variety of investment choices does not necessarily insulate and discharge a fiduciary’s duty to monitor and offer prudent investment choices only. Of course, what is prudent for one Plan participant may not be prudent for another, Plan fiduciaries must walk a difficult tightrope between offering enough investment choices to satisfy the risk appetites of all its participants, while at the same time not offering too many choices on the investment menu, particularly more expensive ones.
Thomas J. McNamara is a member of the Law Firm of Certilman Balin Adler & Hyman, LLP.