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Supreme Court: Duty to Monitor ERISA Plan Investments and Remove Imprudent Ones Is Not Satisfied by Offering Low-Cost Investments as Plan Options

On January 24, 2022, the Supreme Court unanimously vacated the Seventh Circuit’s judgment in favor of defendant plan fiduciaries in a lawsuit where ERISA plan participants alleged that defendants violated their duty of prudence by failing to remove imprudent investments from the plans’ offerings. Hughes v. Northwestern, 142 S.Ct. 737 (2022) (Sotomayor, J.) The Court disagreed with the Seventh Circuit’s conclusion that the offering of petitioners’ preferred type of low-cost investments as plan options eliminated any concern that other plan options were imprudent. The Court held that “[s]uch a categorical rule is inconsistent with the context-specific inquiry that ERISA requires and fails to take into account respondents’ duty to monitor all plan investments and remove any imprudent ones.”

The Court explained that petitioners’ allegation “must be considered in light of the principles set forth in Tibble [v. Edison International, 575 U. S. 523 (2015)] to determine whether petitioners have stated a plausible claim for relief.” In Tibble, the Court considered a plan fiduciary’s duty of prudence under ERISA where plaintiffs alleged that the plan fiduciaries had offered higher priced retail-class mutual funds as plan investments when lower priced institutional-class mutual funds were available. The Court in Tibble concluded that plaintiffs had identified a potential violation because “a fiduciary is required to conduct a regular review of its investment.” The Court further determined that this duty is “continuing” and that “a plaintiff may allege that a fiduciary breached the duty of prudence by failing to properly monitor investments and remove imprudent ones.”

In this case, the Court noted that the Seventh Circuit did not apply Tibble’s guidance and instead focused on “a fiduciary’s obligation to assemble a diverse menu of options.” However, the Court found that “[t]he Seventh Circuit erred in relying on the participants’ ultimate choice over their investments to excuse allegedly imprudent decisions by respondents.” The Court held that fiduciaries could breach their duty if they “fail to remove an imprudent investment from the plan within a reasonable time[.]”