ERISA Fiduciary Prudence Does Not Necessarily Reflect Modern Portfolio Management

February 16, 2022


The U.S. Supreme Court recently heard arguments in Hughes v. Northwestern University in which the Seventh Circuit Court of Appeals had rejected claims that the fiduciaries of two Northwestern University retirement plans had breached their fiduciary duty under ERISA. The complaint alleged that the fiduciaries had wasted plan assets by offering many options at retail, rather than at the cheaper institutional cost, overpaying multiple recordkeepers, and offering plan participants a confusing number of investment options. At issue was whether a claim of fiduciary breach under ERISA could be brought against defined contribution plans in which participants chose the investments of their own accounts. The courts below held there was no breach, by law, and the claims were dismissed.

The Supreme Court unanimously reversed, concluding that the Seventh Circuit could not excuse Northwestern fiduciaries from imprudent decisions under ERISA because plan participants made investment choices for their own accounts. Rather, the actions of the Northwestern fiduciaries must be reviewed under Tibble v. Edison International, 575 U.S. 523. which requires fiduciaries to monitor each investment option and remove imprudent choices. A collection of investment options that includes prudent choices does not erase the breach of fiduciary duty of also offering imprudent investment options.

The Supreme Court views ERISA fiduciary duty as requiring prudent decision-making under the circumstances prevailing when the fiduciary acts. The fiduciary must continually monitor investment choices for all their features, including cost, recognizing that there are tradeoffs that a fiduciary must also consider.

The allegations that may give rise to a breach of ERISA fiduciary duty to act prudently in this case are:

  1. The fiduciaries failed to monitor recordkeeping fees resulting in extraordinarily high fees to participants that could have been avoided.
  2. The fiduciaries offered retail funds to participants when they could have offered the same funds at lower institutional rates.
  3. By offering 400 investment options, the fiduciaries confused plan participants, resulting in their poor investment choices.

The Takeaway:

The fiduciary standard of prudence under ERISA requires constant monitoring, considers the circumstances at the time of a fiduciary’s decision, and may take into account various tradeoffs. The demands of ERISA prudence do not reflect modern portfolio management, which seeks to manage risk by examining the portfolio as a whole. Rather, ERISA fiduciaries have a duty to make available only prudent investment choices to plan participants investing their own accounts. Investment choices deemed imprudent are not rehabilitated by looking at all the investment options available to participants as a whole.

The tension between choosing prudent investments and constantly monitoring fiduciary decisions against changing circumstances, tradeoffs, and competing priorities, offers a significant challenge to plan fiduciaries’ decision-making. Documenting the reasons for decisions, monitoring them, and adjusting course to maintain prudence are keys to meeting the high standard of the law.

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