The U.S. Court of Appeals for the Seventh Circuit recently took a second look at allegations that a defined contribution plan’s fiduciaries had breached the duty of prudence under ERISA in Hughes v. Northwestern University, 63 F.4th 615, 2023 WL 2607921 (7th Cir. 2023). The plan participants claimed that plan fiduciaries breached the duty of prudence by allowing excessive recordkeeping fees to accumulate, partly through revenue sharing agreements, failing to substitute cheaper identical institutional shares for more expensive shares, and maintaining duplicative funds, which confused participants making investment decisions.
After the Seventh Circuit affirmed the trial court’s dismissal of the plan participants’ claims, the U.S. Supreme Court held that the availability of prudent investment options does not justify the fiduciaries’ failure to remove imprudent investment options from the plan. The Supreme Court remanded the case to the Seventh Circuit to reconsider the participants’ claims based on the ongoing duty to monitor investments articulated in its decision in Tibble v. Edison International, 575 U.S. 523 (2015).
On remand, the Seventh Circuit held that fiduciaries have an ongoing duty to monitor and refrain from incurring excessive recordkeeping expenses. The court noted that revenue-sharing arrangements are not automatic breaches of fiduciary duty. The participants’ allegation that the fees incurred by the fiduciaries were excessive was plausible in that it was unreasonable to fail to obtain comparable services at a substantially lower rate. The court allowed this claim to proceed.
The court also allowed the claim concerning the failure to substitute retail class shares for identical, less expensive institutional class shares to proceed, reasoning that no prudent fiduciary would purposely invest in higher-cost identical shares. The court upheld the dismissing of the claim concerning duplicative funds, as the plan participants failed to prove how they were confused by the available funds.
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