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Debate: Do ERISA Fiduciaries Have a Duty to Monitor Each Plan Investment Option?

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The Supreme Court recently held in Hughes v. Northwestern University that an ERISA fiduciary has a duty to monitor each plan investment option. The court found that a plan fiduciary can be held liable for failure to monitor even if some plan investment options are adequate. The court issued a unanimous opinion holding that ERISA fiduciaries have an ongoing duty to monitor investments and improve imprudent investments regardless of the number of plan investments available.

The opinion reversed the 7th Circuit’s holding that this responsibility was satisfied if the plan offered an adequate array of investment choices. Instead, fiduciaries can be held liable if they fail to monitor all investments and remove any imprudent investments from the plan’s menu of investment choices. In other words, identifying well-designed options doesn’t relieve the plan sponsor of liability with respect to poor options and the ERISA fiduciary has a duty to protect participant-employees from making poor investment choices.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the Supreme Court’s decision in Hughes v. Northwestern University.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink

Byrnes

Their Reasons:

Bloink: The Supreme Court absolutely got it right when they confirmed that fiduciaries have an ongoing duty to monitor all investment options to ensure they remain prudent over time, regardless of the number of plan investments available. That duty should extend to each and every investment choice that the fiduciary makes available to plan participants. 

Byrnes: Unanimous or not, the Supreme Court merely punted the real issue back to the lower court with their holding. What we really need are specific parameters on the fiduciary’s duty in these 401(k) investment option cases. Perhaps once the 7th Circuit addresses the issue yet again, the case could make its way back to the Supreme Court for a more decisive, concrete ruling.

Bloink: Fiduciaries shouldn’t be able to avoid fiduciary liability by simply offering a wide array of options — quantity shouldn’t be a substitute for quality, in other words. Plan participants trust investment fiduciaries to conduct their due diligence and remove any options that have excessive fees or are imprudent/poorly performing in other ways. We shouldn’t expect the plan participant to have to wade through the details when making their investment choices. 

Byrnes: The fact is, participants should be entitled to make their own investment choices when it comes to their retirement assets. It’s entirely possible that not every investment option will be suitable for every participant — but that doesn’t mean the participant should be stripped of their right to choose. This decision could scare plan sponsors into offering fewer investment choices in the long run.

Bloink: The plan sponsors in this case attempted to evade their fiduciary responsibilities by simply offering a wide range of plan investment options. By definition, the fiduciary should be responsible for helping plan participants make sound and smart investment decisions. Absent a duty to individually advise each plan participant with respect to each investment option (which would be administratively impossible in many cases), the only way to enforce that duty is to make sure fiduciaries are responsible for the prudence of each and every plan offering.

Byrnes: Every plan participant has a slightly different risk tolerance. For many 401(k) plan participants, their retirement assets constitute the bulk of their assets available for investment. We do need more specifics regarding a plan sponsor’s duty to monitor. But when it comes down to it, offering additional investment options to suit the needs of a broader range of plan participants shouldn’t expose the plan sponsor to increased liability — as long as the plan participant does, in fact, have access to strong and prudent investment options.


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