The Supreme Court told defined contribution sponsors Monday that they have to monitor all investments in plans’ lineups rather than leave the analysis to participants.
In an 8-0 ruling, the justices vacated and remanded a decision by the 7th Circuit Court of Appeals, Chicago, involving two Northwestern 403(b) plans, that had favored the university and its fiduciaries. The 7th Circuit Court reasoning was “flawed,” Justice Sonia Sotomayor wrote in the Supreme Court’s opinion.
The appeals court failed to follow the “duty to monitor” guidelines established by the Supreme Court in the 2015 decision, Tibble et al. vs. Edison International et al., Ms. Sotomayor wrote.
The question before the Supreme Court was whether participants in a defined contribution (DC) ERISA plan stated a plausible claim for relief against plan fiduciaries for breach of the duty of prudence by alleging that the plan sponsor fiduciaries caused the participants to pay investment management and administrative fees higher than those available for other materially identical investment products or services.
Specifically, the plaintiffs in the case sued the defendants for allegedly breaching ERISA’s duty of prudence in the following three ways: failing to monitor and control recordkeeping fees, resulting in unreasonably high costs to plan participants; offering mutual funds and annuities in the form of “retail” share classes that carried higher fees than those charged by otherwise identical share classes of the same investments; and offering options that were likely to confuse investors.
The Supreme Court explains that the act of determining whether plaintiffs state plausible claims against plan fiduciaries for violations of ERISA’s duty of prudence requires “a context-specific inquiry of the fiduciaries’ continuing duty to monitor investments and to remove imprudent ones, as articulated in the Tibble case.
