Fiduciary Breach Lawsuits Require Attention

Secure Act ChangesFiduciary lawsuits are garnering more attention.  A recent fiduciary breach suit even went all the way to the Supreme Court, indicating that employers and the retirement industry as a whole must pay careful attention to the outcomes of these cases and their implications for workplace plans.

The fiduciary breach suit in question was Hughes v. Northwestern University.  BenefitsPro recently interviewed Emily Seymour Costin, a Partner at Alston & Bird LLP, and her colleague, associate Ellie Studdard on this high-profile lawsuit.  As they explained, participants brought the original complaint against Northwestern’s two ERISA 403(b) defined contribution plans in 2016.  They claimed the plan’s fiduciaries breached their obligations by paying excessive recordkeeping fees because they used two recordkeepers instead of one and failed to negotiate lower fees with their providers.  The plan’s fiduciaries also allegedly offered too many and higher-cost investment options when lower-cost ones were available, causing participants to pay excessive investment fees.

The suit was dismissed in the lower court because the participants failed to adequately allege a breach of fiduciary duty.  According to Mses. Costin and Studdard, “Affirming the decision, the Seventh Circuit characterized the allegations as expressing merely the named plaintiffs’ investment preferences.  The Seventh Circuit emphasized that plan participants had the choice to select any of the lower-cost, conservative options the named plaintiffs favored out of the plans’ variety of investment options on the menu.  The Seventh Circuit suggested that, because the plan fiduciaries provided a diverse menu of options including the participants’ preferred types of low-cost investment options, this eliminated any concerns that other plan options were imprudent.

“The Supreme Court rejected the notion that a fiduciary could be excused from offering an imprudent investment option as long as there were other prudent options available.  The Supreme Court reiterated its prior holding in Tibble that fiduciaries have a duty to monitor “all” plan investments.

“The Court did not rule on the issue of whether the participants had sufficiently stated a claim against the Northwestern fiduciaries, but instead vacated the decision and remanded the case directing the lower court to reevaluate the participants’ claims in light of prior Supreme Court precedent establishing guidance for plausibly stating such claims.”

Although the case involved a 403(b) plan, it has implications for 401(k) plans as well.  A primary difference between 403(b) and 401(k) plans is that the former typically use multiple recordkeeper platforms.  The suit alleged that participants paid too much in fees due to the use of multiple recordkeepers, as well as higher-cost investment options.  As Mses. Costin and Studdard pointed out, “While 401(k) plans usually do not have multiple recordkeeping platforms, the legal principles for stating a claim of fiduciary prudence are the same.  So, this decision is important to, and will affect, cases challenging fiduciary imprudence in connection with 401(k) plans as well.”

Further, although the Court decision does not endorse or discourage limiting the number of investment options available in a retirement plan, it does reiterate that fiduciaries must regularly monitor all investment options and remove imprudent ones “within a reasonable time”.  However, as Mses. Costin and Studdard aptly noted, “… this may result in fiduciaries choosing to reduce the number of investment options offered, so there is less to monitor.  In doing so, that could impact participants who prefer greater choice.”

Questions arise as a result of the decision in this lawsuit.  For instance, what is a “reasonable time” to remove imprudent investment options? What is a “regular interval” to review a plan’s investment options?  Fiduciary best practices suggest that at least once a year is sufficient; however, many outsourced fiduciary providers, such as registered investment advisors (RIAs), report quarterly to their retirement plan clients on their investment performance.  Of importance is for fiduciaries to act quickly when deciding to remove investment options from the plan, but not to make rash or abrupt decisions.

Fiduciary breach lawsuits are on the rise, and they are also decided on a case-by-case basis.  As such, it’s important to adhere to commonly held best practices when it comes to meeting your fiduciary obligations to your retirement plan, and/or outsource to experts when appropriate if your organization doesn’t have the expertise in-house.  That said, Mses. Costin and Studdard observed that the Court’s opinion “…closes with a reminder that ERISA fiduciaries must make difficult tradeoffs, and ‘courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.’  This is favorable language to fiduciaries and will likely lead to courts taking a stricter approach in analyzing the plausibility of claims of imprudence.”


Thank you for visiting our site!

TRAU, Inc. and its affiliates TPSU and 401kTV do not provide investment, legal, tax or accounting advice. 401kTV readers and viewers should consult their legal and tax advisors for guidance. All materials, including but not limited to articles, directories, photos, videos, graphics etc., on this website are the sole property of TRAU, Inc. and are intended for educational purposes only. We do encourage your sharing 401kTV content with Plan Sponsors; however, unauthorized use of any and all materials is prohibited/restricted.

Permission to use any of the materials, etc. on any of this site or affiliate websites may be requested in writing at and may be granted in writing on a case by case basis. Use of all editorial content without permission is strictly prohibited.

Scroll to Top