With the Supreme Court’s new term scheduled to begin in a few days, we move closer to the Court hearing the Northwestern University 403b case. I believe that this case has the potential to be a landmark case, not just regarding the future of 401(k) and 403(b) litigation, but also for fiduciary litigation in general.
For that reason, I cannot help but think of two relevant quotes:
Moreover, any fiduciary of a plan such as the Plan in this case can easily insulate itself by selecting well-established, low-fee and diversified market index funds. And any fiduciary that decides it can find funds that beat the market will be immune to liability unless a district court finds it imprudent in its method of selecting such funds, and finds that a loss occurred as a result. In short, these are not matters concerning which ERISA fiduciaries need cry “wolf.”1
When market index funds have become available in sufficient variety and their experience bears out their prospects, courts may one day conclude that it is imprudent for trustees to fail to use such accounts. Their advantages seem decisive: at any given risk/return level, diversification is maximized and investment costs minimized. A trustee who declines to procure such advantage for the beneficiaries of his trust may in the future find his conduct difficult to justify.2
The first quote is from the First Circuit’s 2018 Brotherston v. Putnam Investments, LLC decision. The second quote is from a 1976 article written by John H. Langbein and Richard A. Posner, published shortly after the release of the Restatement (Third) of Trusts. Langbein served as the Reporter on the Restatement committee.
These quotes will obviously gain greater importance if SCOTUS effectively shifts the burden of proof regarding causation to 401(k) and 403(b) plan sponsors, as well as investment fiduciaries in general.
1. Brotherston v. Putnam Investments, LLC, 907 F.3d 17, 39 (1st Cir. 2018).
2. John H. Langbein and Richard A. Posner, “Market Funds and Trust-Investment Law,” 1976 Am. Bar. Found. Res. J., Vol. 1, No. 1, 1 (1976) https://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=1492&context=fss_papers.