What You Need to Know
- Associate Justice Sonia Sotomayor wrote the opinion.
- Associate Justice Amy Coney Barrett took no part in the consideration of the case.
- Financial services groups have argued that letting participants sue over reasonable fiduciary decisions could increase plan litigation defense costs and ultimately hurt the participants.
The U.S. Supreme Court ruled 8-0 on Monday that federal courts should look at more than a 403(b) retirement plan’s flexibility and investment menu size when deciding whether the administrators have met the Employee Retirement Income Security Act standard for the duty of prudence.
For life insurance agents and brokers who help clients with decisions about annuities — or with any other arrangements that involve a federal fiduciary standard — the ruling may mean that offering individual clients, or employer-sponsored plan participants, a wide range of choices will provide only limited protection against a federal suit alleging that a fiduciary acted in an imprudent way.
The 7th U.S. Circuit Court of Appeals ”erred in relying on the participants’ ultimate choice over their investments to excuse allegedly imprudent decisions by respondents,” Associate Justice Sonia Sotomayor wrote in an opinion for the court on the case, Hughes et al. v. Northwestern University et al. (Case Number 19-1401).
Sotomayor noted that in a 2015 ruling in Tibble v. Edison International, the Supreme Court held that ERISA retirement plan fiduciaries must decide which investments can be prudently put on a plan’s investment option menu. The fiduciaries can’t simply offer participants’ preferred options and wave off concerns about the other options, she said.
The 7th Circuit should “reevaluate the allegations as a whole,” Sotomayor said.
But Sotomayor added that the Supreme Court’s new ruling is not a reason to question everything an ERISA plan fiduciary does. “At times,” she wrote, “the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.”
Associated Justice Amy Coney Barrett did not participate in the decision, having served on the appeals court that heard the case previously, according to The Wall Street Journal.
Three current and former Northwestern University employees started the litigation in 2016 that led to the Hughes ruling by suing the university and its retirement investment committee over concerns about the university’s retirement and savings plans.
The employees argued that Northwestern, the investment committee and the committee members had violated their duty under ERISA fiduciary rules to exercise prudence.
The employees accused the fiduciaries of acting in an imprudent manner by offering plans with high record-keeping costs; retail mutual fund and variable annuity share classes with high, retail-level fees; and, in the beginning, an investment option menu that was too long and could have led to poor participant investment choices.
In October 2016, Northwestern cut the investment option menu to about 40 options. The university employees argued that the move was evidence that the original menu was too big to be prudent, and that the withdrawal penalties and restrictions built in to a fixed annuity left on the shorter investment option menu were too high.
A federal district judge ruled in favor of the sponsor, Northwestern University, in 2018.
In 2020, a three-judge panel at the 7th U.S. Circuit Court of Appeals upheld the district court ruling.
The Friends of the Court
At the Supreme Court, the U.S. Department of Justice supported the current and former employees.
AARP argued, in a “friend of the court” brief, that blocking the employees would thwart ERISA’s core purpose, which is to protect plan participants from an administrator’s failure to perform its fiduciary duties.