Originally filed in August 2016, Hughes v. Northwestern is a case involving employees who accuse Northwestern University of failing to control high fees and offering too many investment options (more than 400) in its 403(b) defined contribution (DC) retirement plans. The case was dismissed in May 2020 by the Seventh Circuit, which ruled in favor of the University, saying the workers could choose their investments. The participants appealed to the Supreme Court, which on January 24, 2022, issued a unanimous decision to send the case back to the lower courts for further review, citing plan fiduciaries’ ongoing duty to select and monitor all plan investments in the best interest of plan participants.

What you should know

Although the Supreme Court did not deliver the far-reaching victory the plaintiffs hoped for, its six page decision favors the plaintiffs insofar as it confirms that the fact that a plan offers a variety of investment options, including low-cost options, does not by itself provide a sufficient basis to dismiss claims for:

  • Failing to include the lowest-cost share class of a fund;
  • Including too many investment options in a plan, thereby causing participant confusion; or
  • Allowing plan recordkeepers to charge excessive fees.

The decision held that in order for a plaintiff to prove that a plan fiduciary failed to satisfy their duty to monitor, ERISA requires fiduciary conduct be judged in context, both in terms of occurrence and competing considerations.

Northwestern saw the Supreme Court focused on specific investment options rather than the lineup as a whole. This, along with other recent rulings concerning whether each individual seeking relief suffered personal harm, could make it harder to file litigation on behalf of individuals not using the specific investment options being challenged.

The continuing surge in litigation aimed at defined contribution plans is not necessarily going to be affected in the short term. The Supreme Court remanded those issues back to the Seventh Circuit for further consideration.

Plan fiduciaries should take note of the court’s opinion as the litigation continues to play out, but should ultimately continue following best practices in terms of selecting and monitoring the plan’s investment menu. This includes following a prudent process of due diligence for reviewing investment options and conducting and documenting regular reviews of fees and expenses.

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