On January 24, the U.S. Supreme Court reversed the dismissal of a suit brought by retirement plan participants against Northwestern University for breach of the ERISA fiduciary duty of prudence. The participants sued alleging the institution allowed its retirement plans to pay excessive investment and recordkeeping fees on some investments included in the menu for participant-directed accounts such as retail share class mutual funds. They also alleged that by having too large of a menu (over 400 choices), participants were confused as to which to choose.
The high Court rejected the reasoning of the lower courts that the availability of other lower cost investments in the menu meant the participants had no cause of action. In a relatively short opinion, that wasn’t expected until later in the year (see, “Happy New Year! Supreme Court Expected To Be Busy With ERISA Again In 2022“), the Court relied on its 2015 decision in Tibble holding the fiduciary duty of prudence includes the duty to continually monitor investments and participants may allege a fiduciary has breached its duty by failing to remove investments that have become imprudent. The Court reasoned that the allegations in the Northwestern case are similar to that in Tibble as the participants allege that by continuing to include imprudent investments with excessive fees, they have failed to monitor and remove imprudent investments.
The Justices found that the lower courts erred in not applying Tibble. Instead they focused on a different aspect of the duty of prudence, to provide an adequate array of choices. The lower courts found that because lower-cost prudent investments were available for participants to choose from, they could not complain they were forced to choose the imprudent investments. The Justices held, the lower courts should have applied Tibble and not dismissed the case. Therefore, it overturned the dismissal and sent the case back to the United States Court of Appeals for the Seventh Circuit with instructions to apply Tibble to determine whether the participants have stated a claim and that such inquiry should be context specific based on the circumstances.
This decision means that it will be easier for suits alleging breach of fiduciary duties due to imprudent investments or excessive fees to avoid a defendant’s motion to dismiss. It also means, the wave of excessive fee litigation will continue. Many cases were suspended, awaiting the high Court’s decision. Plan fiduciaries charged with establishing the investments for the plan should be reviewing their investment menus with respect to fees to be prudent, now and routinely in the future.