SCOTUS Issues Decision on Duty to Monitor Defined Contribution Investment Options

The Supreme Court recently issued a decision in Hughes v. Northwestern University. This case addresses the duty of a defined contribution retirement plan fiduciary to prudently monitor a plan’s investment options.

The plaintiffs in the case were three current or former employees of Northwestern University who participated in the University’s defined contribution retirement plans. They alleged that Northwestern violated this duty of prudence in a few ways, including an allegation that the menu of available investment options was imprudently designed. The options included high-cost “retail” plans instead of otherwise identical low-cost “institutional” plans. Additionally, the plaintiffs claim that the University’s offering of 400 options led to confusion, when well-managed plans would offer less than 50 options.

The district court and U.S. Court of Appeals held that the University did not violate its duty of prudence, since some of the options offered satisfied the university’s obligation of prudence and care. The Supreme Court reversed in a short, six-page decision, holding that fiduciaries must conduct their own independent analysis to determine which investments are prudent and must promptly remove any imprudent investment option. Simply offering a wide range of investment choices will not satisfy the duty. This decision is notable because it indicates that fiduciaries must protect participants from making poor investment choices, instead of giving the participant the option to make a good investment choice.