(402) 461-4893  preston@eladvisors.us
Mon - Fri 8am - 5pm
(402) 461-4893  preston@eladvisors.us
Mon - Fri 8am - 5pm
Hastings, Nebraska Financial Advisors

Is Participant Choice a “Get Out of ERISA Court Free Card”?

Englund & Lindsteadt Financial Advisors > Blog > Is Participant Choice a “Get Out of ERISA Court Free Card”?

Finally, something everyone could agree on — at least on the Supreme Court of the United States. The question before the court in Hughes v. Northwestern University was the plausibility of a breach of fiduciary duty claim stated by current and former participants in two university retirement plans. SCOTUS ruled that the petitioners in the case, originally dismissed by a district court and upheld by the U.S. Court of Appeals for the Seventh Circuit, did in fact plausibly state their claim. The Supreme Court vacated the Seventh Court ruling and remanded the case for further review.

The defendants in the case were alleged to have breached their fiduciary duty by:

  • Failing to monitor and control excessive recordkeeping fees, which negatively impacted plan participants.
  • Offering retail share classes of investments with higher fees than those charged by otherwise identical share classes of the same investments.
  • Offering too many options that were likely to confuse investors.

SCOTUS found that the Seventh Circuit erroneously relied on “participants’ ultimate choice over their investments to excuse allegedly imprudent decisions by respondents.” In other words, the court asserted that the provision of sufficient investment choices to participants does not automatically exculpate fiduciaries from imprudent actions.

Plan sponsors looking for stricter pleading standards in such cases in the hopes of reining in the recent wave of excessive fee litigation were likely disappointed in the court’s decision. However, they may pay particular attention to some employer-friendly language found in the opinion penned by justice Sonya Sotomayor: “At times, the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs,” she wrote, “and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.”

Ultimately, the court’s decision suggests a myopic focus on either choice or cost may be misplaced. While the court voiced a need for a contextual approach to evaluating fiduciary decision making, plan sponsors must remain vigilant with respect to actively monitoring and controlling fees. They must also evaluate the prudence of including each individual investment in a plan’s lineup.

Over the prior two years, more than 150 excessive fee lawsuits have been filed. Twenty of those cases had been put on hold pending the Hughes decision.

Sources:

https://news.bloomberglaw.com/us-law-week/explosion-of-401k-fee-litigation-gets-boost-from-supreme-court

https://news.bloomberglaw.com/litigation/dozens-of-401k-suits-see-trickle-down-effects-from-scotus-case

https://www.natlawreview.com/article/hughes-v-northwestern-university-lessons-retirement-committees-and-other-fiduciaries

For more information, please contact Preston Englund at 402-461-4893 or preston@eladvisors.us.

Securities offered through IFP Securities, LLC, dba Independent Financial Partners (IFP), member FINRA/SIPC. Investment Advice offered through IFP Advisors, LLC, dba Independent Financial Partners (IFP), a Registered Investment Adviser. IFP and Englund & Lindsteadt Financial Advisors are not affiliated.

The information given herein is taken from sources that IFP Advisors, LLC, dba Independent Financial Partners (IFP), IFP Securities LLC, dba Independent Financial Partners (IFP), and it advisors believe to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as IFP does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. Prepared by 3rd party.