The SCOTUS Decision on Hughes v. Northwestern University: A Pivotal Point for Plan Sponsors and Plan Advisers?

The Solicitor General of the United States recently filed an amicus brief with SCOTUS asking the Court to hear the case of Hughes v. Northwestern University (Northwestern). The case involves questions regarding the management of University’s 403(b) plan, specifically potential breaches of the plan’s fiduciary duties. You can find a link to the brief here.

While the petition for certiorari poses several questions, the one that I believe could, and should, be unequivocally resolved is the so-called “menu of investment options” defense. While this issues has already been rejected by most courts, there are a few courts that continue to accept the defense, effectively deny plan participants the rights and protections guaranteed to them under ERISA. The plaintiffs cite this ongoing division within the federal judicial circuits as one reason for why cert should be granted.

The case comes to SCOTUS from the Seventh Circuit Court of Appeals. I point this out because of the Seventh Circuit’s statement in connection with an earlier case, Hecker v. Deere & Co. Actually, I should say Hecker I (556 F.3d 575 (2009) and Hecker II (569 F.3d 708 (2009)). In Hecker I, the Seventh Circuit handed down a decision which many interpreted to suggest that plans could insulate themselves from liability by simply offering a large number of potential investment options, regardless of whether they were legally prudent or not.

The decision produced such an uproar that the plaintiffs filed a request for a re-hearing by the entire Seventh Circuit. While the Court denied the request for a re=hearing, they did take the opportunity to “clarify” their earlier decision. In addressing the Secretary of Labor’s concerns regarding immunity and the “menu of options” related portion of the Court’s decision, The Court responded as follows:

The Secretary also fears that our opinion could be read as a sweeping statement that any Plan fiduciary can insulate itself from liability by the simple expedient of including a very large number of investment alternatives in its portfolio and then shifting to the participants the responsibility for choosing among them. She is right to criticize such a strategy. It could result in the inclusion of many investment alternatives that a responsible fiduciary should exclude. It also would place an unreasonable burden on unsophisticated plan participants who do not have the resources to pre-screen investment alternatives. The panel’s opinion, however, was not intended to give a green light to such “obvious, even reckless, imprudence in the selection of investments” (as the Secretary puts it in her brief).  

And yet, many would argue that that is what the Seventh Circuit has continued to do, including in the Northwestern case currently before the SCOTUS. The Solicitor General, in noting the ongoing division between federal judicial districts, cited the rejection of the “menu of options” argument in other Circuit Courts of Appeal:

“fiduciaries are not excused from their obligations not to offer imprudent investments with unreasonably high fees on the ground that they offered other prudent investments.” (citing Sweda v.University of Pa.,923 F.3d 320, 332 n.7 (3d Cir. 2019))

“It is no defense to simply offer a ‘reasonable array’ of options that includes some good ones, and then ‘shift’ the responsibility to plan participants to find them.” (citing Davis v. Washington Univ. in St. Louis, 960 F.3d 478, 484 (8th Cir. 2020)

The Solicitor General concluded with the recommendation that SCOTUS grant cert and hear the case, stating that

The case presents an opportunity for this Court to clarify that ERISA requires fiduciaries to work actively to limit a plan’s expenses and remove imprudent investments, and that fiduciaries will not be excused from those responsibilities on the ground that they selected some (or even many) other prudent investments for a plan.

I believe that the First Circuit’s Brotherston decision and the Solicitor General’s amicus brief to SCOTUS in that case put to rest the “apples and oranges” argument regarding the use of index funds for benchmarking purposes. Hopefully, SCOTUS will follow the Solicitor General’s recommendation and hear Hughes v. Northwestern in order to ensure that all federal judicial districts are making consistent and equitable decisions in 401(k) and 403(b) actions by using the same guidelines and principles, ensuring plan participants the rights and protections guaranteed to them under ERISA.

About jwatkins

I am a securities and ERISA attorney. I am a CFP Board Emeritus™ member and an Accredited Wealth Management Advisor™. I am a 1977 graduate of Georgia State University and a 1981 graduate of the University of Notre Dame Law School. I am the author of "CommonSense InvestSense: The Power of the Informed Investor" and " The 401(k)/403(b) Investment Manual: What Plan Sponsors and Plan Participants REALLY Need To Know. " As a former compliance director, I have extensive experience in evaluating the legal prudence of various types of investments, including mutual funds and annuities. My goal is to combine my legal and compliance experience in order to help educate investors on sound, proven investment strategies that will help them protect their financial security.
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