Hughes v. Northwestern: Supreme Court Revives ERISA Lawsuit

The case of Hughes v. Northwestern University involved allegations that Northwestern University and its fiduciaries breached their duties under the Employee Retirement Income Security Act (ERISA) in managing the university’s retirement plans. The plaintiffs, who were participants in Northwestern’s defined-contribution plans, argued that the university failed to monitor and control recordkeeping fees, included imprudent investment options, and offered an overly complex investment lineup. The Supreme Court of the United States vacated the dismissal of the case and remanded it for further proceedings.

Background and Legal Issues

Northwestern University administers two retirement plans for its employees, both governed by ERISA. Participants in these plans choose from investment options selected by the plan administrators. The plaintiffs alleged that Northwestern breached its duty of prudence under ERISA by:

• Failing to control recordkeeping fees, resulting in excessive costs to plan participants.
• Offering retail-class mutual funds and annuities, which carried higher fees than identical institutional-class funds available to large investors.
• Providing too many investment choices, causing confusion and leading to poor investment decisions by participants.

The U.S. District Court dismissed the plaintiffs’ claims, and the Seventh Circuit Court of Appeals affirmed the dismissal. The appellate court reasoned that because participants had access to low-cost index funds, the inclusion of higher-cost options did not constitute a breach of fiduciary duty.

Court’s Analysis and Findings

The Supreme Court, in a unanimous opinion, held that the Seventh Circuit erred in its reasoning. The Court found that:

• The lower court focused too much on the availability of low-cost investment options and did not adequately consider whether Northwestern had failed in its fiduciary duty to regularly review and remove imprudent investments.
• ERISA requires plan fiduciaries to independently evaluate investment options and remove those that are imprudent within a reasonable timeframe.
• The plaintiffs plausibly alleged that Northwestern failed to monitor recordkeeping fees, retain cost-effective share classes, and streamline investment options to enhance plan performance.
• The Court emphasized that fiduciaries must conduct ongoing reviews of plan investments to ensure prudent decision-making, in line with Tibble v. Edison International (2015), which established the duty to monitor investments regularly.

Because the Seventh Circuit’s decision did not properly consider these factors, the Supreme Court vacated the ruling and remanded the case for further proceedings.

Conclusion and Ruling

The Supreme Court’s decision reaffirmed that ERISA fiduciaries must actively monitor and manage retirement plan investments to protect participants. The case was sent back to the lower courts to evaluate whether Northwestern’s actions—or inactions—constituted a breach of its fiduciary duty under ERISA.

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