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Tax Monitor

Fiduciary Obligations of 401k Trustees

February 3, 2022

By: Robert G. Tweel

The Supreme Court of the United States addressed 401k trustee fiduciary obligations in Hughes v. Northwestern University. For 401k fiduciaries, both employers and investment advisors, the case reaffirms earlier requirements that fiduciaries must monitor each and every investment offering in the plan for performance, fees, and expenses, and they have an obligation to remove imprudent investments, including in this case those mutual funds charging too high and investment management fee or a recordkeeping fee. The court did allow room for difficult tradeoffs and reasonable judgement, but the end result of the decision is that 401k fiduciaries need to monitor and remove imprudent investments. Fiduciaries should have minutes of their meetings in which they review fund performance and expenses that they can rely on in future defense of claims of failing to act prudently. The decision also clarifies that this determination is now a facts and circumstances inquiry and not a determination as a matter of law. Also of note, is that the fiduciaries cannot rely on the defense that the recordkeeper required the plan to hold a specific plan investment, and they must review the recordkeeper as well in monitoring the plan.

In the opinion, the U.S. Supreme Court reversed and remanded the 7th Circuit’s decision on 401k trustee obligations concerning plan investments. The district court determined that the plaintiffs in the case had not alleged a claim that could be sustained as a matter of law and dismissed the case upon a motion for summary judgement.  The issue raised by the plaintiffs was that the plan held several high-cost investments that were imprudent.  The Plaintiffs alleged that the investments charged too high a fee as opposed to available lower cost options and also charged a higher recordkeeper fee than was reasonable.  The district court determined that the plan had “provided an adequate array of choices,” including low-cost mutual funds, and accordingly this diverse array of offerings eliminated the plaintiff’s claim that they were forced to bear the burden of the high-cost mutual funds. The 7th Circuit upheld the district court along similar reasoning.

Interestingly, in the 7th Circuit decision, the court noted that the plaintiff’s alleged that:  “’TIAA-CREF required the plans to  use  it  as  record  keeper for its products and to offer [the] CREF Stock Account if  the plans  were  going  to  offer  the  TIAA-CREF  Traditional  Annuity,’ a popular investing option.”  Accordingly, the funds in question as being imprudent investment options because of their higher expense ratio were required as plan options by TIAA-CREF, the recordkeeper.

The U.S. Supreme Court made clear that the 7th Circuit erred in relying on the array of choices as eliminating a fiduciary obligation to monitor investments and remove imprudent ones.  The court made clear that while the plan must have a wide array of offerings, that offering in and of itself does not obviate the trustee’s obligation to monitor each investment offered in the plan and remove imprudent investments. In other words, just because the plan offered low-cost investments as sought by the plaintiffs, the trustees must still look at each specific investment to determine whether it is prudent.

Effectively, the court made the inquiry a facts and circumstances determination rather than a determination as a matter of law. Citing earlier precedent, the opinion stated: “because the content of the duty of prudence turns on the circumstances prevailing at the time the fiduciary acts, the appropriate inquiry will necessarily be context specific. Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 425 (2014). At times, the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgements a fiduciary may make based on her experience and expertise.”


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