On Monday, Jan. 24, 2022, the U.S. Supreme Court issued an important decision dealing with defined contribution retirement plans. These plans, which include 401(k) plans, provide an array of investment choices from which participants may choose to invest their own or employer match contributions.
Background: Hughes, et. al. v. Northwestern University, et al.
In this case, certain current and former employees of Northwestern University participated in two defined contribution 401(k) plans offered by the University. The employees alleged that the trustees of the plans breached their fiduciary duty to the participants 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 for otherwise identical share classes (institutional share class) of the same investments; and (3) offering investment options that were likely to confuse investors.”
The Court’s Opinion
The Court’s opinion, authored by Justice Sotomayor, held that even while the plans offered a mix of both traditional “retail” class of mutual fund shares as well as lower cost index funds, that wide variety of possible choices did not relieve the fiduciaries of their duty to monitor investment choices and conduct their own independent investigation to determine which investments may be prudently included in the plan’s investment choices. In addition, the Court held that the fiduciaries’ failure to remove recordkeepers which had charged excessive fees constituted a breach of their ERISA imposed fiduciary duty to act prudently to protect participants’ investments.
What Does This Mean for Plan Sponsors and Fiduciaries?
Considering this decision, plan sponsors and fiduciaries should actively monitor the performance of a plan’s investment options and make certain that the plan is delivering returns at a reasonable cost to the participants. Merely offering a wide range of investment choices with varying associated costs will not insulate the fiduciaries from potential personal liability. Equally important is adequate documentation of this investigation. Without such written documentation, the fiduciaries may be hard pressed to prove their exercise of the required prudence. Further, fiduciaries should, every few years, entertain proposals from several different service providers and investment managers to (if nothing else) document the exercise of their fiduciary responsibility.
KJK can assist in navigating these changes and address any questions or concerns you may have regarding the Court’s decision and what it means for you. Contact Kevin O’Connor at firstname.lastname@example.org or 216.736.7213.