Supreme Court Rules for Northwestern University Employees in Retirement-Plan Case
Posted on 01/25/2022
The Employee Retirement Income Security Act of 1974 is a federal United States tax and labor law that establishes minimum standards for pension plans in private industry. It contains rules on the federal income tax effects of transactions associated with employee benefit plans. On July 2, 2021, the Supreme Court agreed to hear Hughes v. Northwestern University, which involves a challenge to investment fees and recordkeeping fees in two 403(b) plans maintained by Northwestern University. Since the 2010s in the U.S., there have been hundreds of class actions brought under ERISA alleging claims for breach of fiduciary duty in connection with the fees of investment options included in 401(k) and 403(b) defined contribution retirement plans.
FEES AND PERFORMANCE MATTERS
The U.S. Supreme Court ruled that defined contribution sponsors must monitor all investments in plans’ lineups rather than leave the analysis to participants. The case is HUGHES ET AL. v. NORTHWESTERN UNIVERSITY ET AL. No. 19–1401. Argued December 6, 2021—Decided January 24, 2022.
In an 8-0 ruling, the justices vacated and remanded a decision by the 7th Circuit Court of Appeals, Chicago, involving two Northwestern 403(b) plans, that had favored the Northwestern University and its fiduciaries. Justice Sonia Sotomayor wrote in the Supreme Court’s opinion that the 7th Circuit Court reasoning was “flawed.” The appeals court failed to follow the “duty to monitor” guidelines established by the Supreme Court in the 2015 decision, Tibble et al. vs. Edison International et al., Sotomayor wrote.
According the opinion, “Petitioners are three current or former employees of Northwestern University. Each participates in both the Retirement and Savings Plans. In 2016, they sued: Northwestern University; its Retirement Investment Committee, which exercises discretionary authority to control and manage the Plans; and the individual officials who administer the Plans (collectively, respondents). Petitioners allege that respondents violated their statutory duty of prudence in a number of ways, three of which are at issue here. First, respondents allegedly failed to monitor and control the fees they paid for recordkeeping, resulting in unreasonably high costs to plan participants. Second, respondents allegedly offered a number of mutual funds and annuities in the form of “retail” share classes that carried higher fees than those charged by otherwise identical “institutional” share classes of the same investments, which are available to certain large investors. App. 83–84, 171. Finally, respondents allegedly offered too many investment options—over 400 in total for much of the relevant period—and thereby caused participant confusion and poor investment decisions.”
LINK: https://www.supremecourt.gov/opinions/21pdf/19-1401_m6io.pdf
