Supreme Court Says 7th Circuit Erred in Northwestern ERISA Ruling

Current and former Northwestern University employees with contribution retirement plans sued their employer, its retirement investment committee, and the individual officials who administer the plans, alleging violations of the Employee Retirement Income Security Act’s (ERISA) duty of prudence. The U.S. District Court for the Northern District of Illinois dismissed the claims, and the U.S. 7th Circuit Court of Appeals (which covers Illinois, Indiana, and Wisconsin) affirmed the dismissal. Both courts found the duty of prudence was met because the employees were given an array of investment options to choose from. The U.S. Supreme Court vacated the judgment and returned the case to the lower courts, holding the 7th Circuit erred by not considering the Supreme Court’s holding about the duty of prudence in a 2015 case.

Facts

Northwestern offers two retirement plans: the Northwestern University Retirement Plan and the Northwestern University Voluntary Savings Plan. Employees may participate in both plans. As participants, they were able to select how they invest their funds from a menu of options selected by the plan administrators.

The plans included investment management fees and charges for recordkeeping services. The investment management fees were expense ratios, which are calculated as a percentage of the assets the plan participant chose to invest. The recordkeeping charges could be calculated as either expense ratios or a flat rate.

The employees sued the university, the plan, and its administrators in federal district court, claiming they violated ERISA’s duty of prudence required of all plan fiduciaries by:

• Failing to monitor and control recordkeeping fees, resulting in unreasonably high costs to plan participants;
• Offering mutual funds and annuities in the form of “retail” share classes that carried higher fees than those charged by otherwise identical share classes of the same investments available to certain large investors; and
• Offering options likely to confuse investors.

The district court dismissed the claims. The 7th Circuit affirmed, holding the plan had upheld the duty of prudence by assembling an array of investment choices.

Standard of Review

Under ERISA, plan fiduciaries must discharge their duties “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” The Act’s fiduciary duties are not only statutory but also derived from the common law of trusts. Accordingly, a trustee must exercise prudence not only in selecting investments at the outset but also monitoring and removing imprudent investments during their duration.

The Supreme Court discussed the duty of prudence in light of the common law of trusts in 2015 in Tibble v. Edison Int’l. In the case, the participants claimed their plan fiduciaries offered “higher priced retail-class mutual funds as plan investments when materially identical lower priced institutional-class mutual funds were available.”

The Court held the duty of prudence under ERISA includes a duty to conduct regular investment reviews because the common law of trusts imposes the same duty on trustees. As a result, a fiduciary can be liable for ERISA claims by failing to conduct regular reviews and remove imprudent investments.

SCOTUS Opinion

The Supreme Court determined Tibble’s duty to monitor plan investments applied to the Northwestern employees’ claims, which alleged the plan failed to monitor investments in numerous ways. Therefore, the 7th Circuit erred in considering only the duty to assemble a diverse menu of choices and overlooking the duty to monitor plans and remove imprudent investments as articulated by the 2015 ruling.

The Supreme Court vacated the judgment and sent the case back to the 7th Circuit to reevaluate the employees’ allegations.

Bottom Line

ERISA’s duty of prudence isn’t upheld simply by assembling an array of investment options. Plan fiduciaries should ensure they uphold the duty of prudence throughout the duration of the plan investments by periodically reviewing them and removing imprudent ones.

This article, slightly modified to note recent updates, was featured online in the Wisconsin Employment Law Letter and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.