ERISA Litigation Update: ERISA Fiduciary Duty of Prudence: Fees and Monitoring Investment Options

Briefed

• Lawsuits targeting ERISA fiduciaries and sponsors are skyrocketing.
• A recent SCOTUS decision confirmed duty of prudence requires the fiduciary to monitor plan investment options and remove imprudent investments. 
• The Dept. of Labor argues that every investment on an ERISA plan’s menu must be prudent.
• Recent Stoel Rives addition, Mark Bieter, has a wealth of experience defending clients against these claims.

In the past few years, lawsuits have skyrocketed against defined contribution plan fiduciaries and sponsors with respect to investment options included in a plan’s investment menu and related fees.  Plaintiffs typically assert a broad interpretation of ERISA’s fiduciary duty standards and allege inadequate fiduciary oversight or other breaches of these fiduciary duties. This includes a recent major U.S. Supreme Court decision.

The U.S. Supreme Court recently remanded a case against Northwestern University and its defined contribution plans to the Seventh Circuit, confirming a plan fiduciary’s duty of prudence under ERISA requires the fiduciary to monitor plan investment options and remove imprudent investment options from the plan’s investment menu.  The U.S. Supreme Court unanimously held that plan fiduciaries must conduct their own evaluation to determine which investments may be prudently included in the plan’s menu of options and are not shielded from liability with respect to the inclusion of an imprudent investment option by: (i) the inclusion of other prudent investment options or (ii) the right of participants to direct the investment of their accounts in such other prudent investment options.  Hughes v. Nw. Univ., 142 S. Ct. 737 (2022). Mark analyzed various implications of the Supreme Court’s decision his article SCOTUS Opens ERISA Litigation Floodgates.

Since the Hughes’ decision, the Department of Labor (DOL) has filed a letter in the Seventh Circuit Court of Appeals arguing that the court should reverse the district court’s judgment of dismissal and send the case back to the district court for reconsideration.  The DOL attached its amicus brief to the Supreme Court decision in support of its position that if the correct legal standard is applied, and the plaintiff’s claims are taken as true, the plaintiffs have alleged two plausible claims for relief: (i) Northwestern selected retail class investment funds for inclusion in the plans even though identical institutional class investment funds with lower fees were available, and (ii) Northwestern caused the plans’ participants to pay excessive fees because they failed to adequately monitor service providers and utilize various methods to reduce those costs. 

The DOL argued that “Hughes holds that every investment on an ERISA plan’s menu must be prudent” and that if plaintiffs prove that “Northwestern failed to take to take advantage of the plans’ size to timely negotiate pricing rebates from existing recordkeepers, then Northwestern could have obtained the same recordkeeping services for less,” and this would be a breach of fiduciary duty.  The DOL also noted Supreme Court precedent indicates the content of the duty of prudence is context specific and, therefore, the facts and circumstances must be considered to assess a claim for breach of the fiduciary duty of prudence with respect to any particular fiduciary decision.

Next Steps

Attorneys in our employee benefits practice group regularly advise plan fiduciaries and sponsors on best practices to proactively take measures to reduce the risk that they will be the target of such litigation and to enhance their legal defenses in the event that, despite best efforts, they find themselves a party to such litigation.  Those measures include:

• maintaining investment policy statements
• engaging qualified experts to support plan fiduciaries in the process of selecting and monitoring all plan investment options and other service providers
• determining the reasonableness of administrative fees and services and how fees are allocated
• establishing and following processes of routinely and thoroughly reviewing all plan investment options and administrative fees and services
• documenting decisions and courses of action (and related reasons) by plan fiduciaries

Mark L. Bieter (208) 387-4217 | mark.bieter@stoel.com Mark Bieter’s practice focuses on defending clients from class action lawsuits alleging breach of fiduciary duty based on fees associated with their 401(k) plans’ investments and services. After the Supreme Court issued the much-awaited decision in Hughes v. Nw. Univ., 142 S. Ct. 737 (2022), Mark drafted an analysis that you can read here.