Hughes v. Northwestern University
Overview
Overview
Hughes v. Northwestern University (2022) unanimously held that ERISA's fiduciary duty to prudently manage retirement plan investments is ongoing and not satisfied simply by offering a large menu of investment options, some of which are prudent. The Court reversed the Seventh Circuit's ruling that Northwestern could not be liable for including imprudent, high-cost investment options because participants also had access to prudent options. The decision strengthened ERISA breach-of-fiduciary-duty claims and reinvigorated 401(k) and 403(b) litigation.
The Facts
Facts
Northwestern University employees sued under ERISA, alleging the university's 403(b) retirement plans included imprudent, high-fee investment options and maintained multiple share classes with different fees for the same fund. The Seventh Circuit dismissed, reasoning that because participants could choose among many options including prudent ones, the plan administrators were not liable for including some imprudent options.
The Issue
Issue
Whether an ERISA plan fiduciary fulfills the duty of prudence by offering a broad menu of investment options that includes prudent choices alongside imprudent ones.
The Rules
Rule
ERISA fiduciaries must act as a prudent person would in managing plan investments, including monitoring and removing imprudent options. This duty is not discharged by offering a wide selection of options; the presence of imprudent options in a plan constitutes a breach regardless of whether participants could have chosen the prudent alternatives.
The Application
Analysis
Northwestern's inclusion of high-cost, underperforming investment options and multiple expensive share classes for the same fund violated the duty of prudence, even though plan participants had access to cheaper, prudent alternatives. The Court rejected Northwestern's defense that offering a broad menu with some prudent choices satisfied the fiduciary obligation, holding instead that fiduciaries must affirmatively police the plan to eliminate imprudent offerings. The decision established that prudence requires ongoing evaluation and removal of problematic options. A fiduciary cannot simply assemble a menu and remain passive, regardless of whether participants could have navigated around the expensive choices.
The Conclusion
Conclusion
Hughes confirmed that the duty to monitor plan investments is active and continuing, not discharged by passive menu design. Retirement plan sponsors and administrators must remove imprudent options and cannot rely on participant choice as a shield from liability. The decision energized ERISA fiduciary litigation and raised the standard for how employers manage the billions of dollars held in defined-contribution retirement plans.
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