The facts involved not only touch on whether the plan offered investment options with fees much higher than the investors should have or could have tolerated, but also, importantly, the sheer number of investment options that the plan participants had to choose from.
While many Supreme Court watchers keep their eyes on the Court in the Summer, by federal statute, the Court actually begins its year in October. A quick review of what’s on the Court’s docket may not reveal topics relevant to financial advisors but look again and you’ll see the “as yet to be calendared” case of Hughes v. Northwestern University. This case could impact fees and the duty of prudence and is worth watching for a variety of reasons. While the court has released its October and November schedule, which did not include Hughes, there may still be room for that case in the later part of 2021 or earlier part of 2022.
At issue in Hughes is whether a defined-contribution plan charged its participants fees higher than would have been charged in alternative investment products. We discussed the initial petition to the Supreme Court in November of 2020. There we noted that the petitioners in Hughes claimed that the fees charged violated the fiduciary duty of prudence. While the case involves a defined-contribution plan, it’s possible that the Court’s discussion of the case could be more widely read concerning fees and the duty of prudence. For that reason, we think the prudent thing to do would be to keep an eye on this case.
The facts involved not only touch on whether the plan offered investment options with fees much higher than the investors should have or could have tolerated, but also, importantly, the sheer number of investment options that the plan participants had to choose from. We’ve written before about the duty of record-keeping, and the increased scrutiny on how fiduciaries monitor the costs of their record-keepers. But this case involves something more: “Respondents offered many retail-class versions of mutual funds even though…. as large investors, they could have obtained much lower-expense ratio institutional-class versions of the very same funds.… Respondents also offered a dizzying array of hundreds of investment options, many of them duplicative options in the same investment style. This led to higher fees …and imposed an onerous burden on participants to select between so many options and an equally onerous burden on fiduciaries to monitor them.”
The case has also drawn support from a wide range of retirement groups. The arguments of these groups show that the case has a potentially huge impact. For example, the Amicus Brief of Samuel Halpern, often used as an expert in duty of prudence cases arising from ERISA law, notes that the decision from the court below potentially involves the process fiduciaries use in coming to their fee structure: “the Seventh Circuit’s decision overlooks the critical need for governing fiduciaries to observe reasonable practices and ignores petitioners’ specific allegations that tend to show that respondents departed from reasonable practices. Moreover, if left intact, the decision below will erode existing fiduciary standards, while reversing it would only recognize and confirm those existing standards.” AARP, who also filed an Amicus Brief, stated that the lower court’s decision could flip the duty of prudence on its head. As they stated: “The Seventh Circuit’s view that fiduciaries need not eliminate investment options with unreasonably high fees and poor performance so long as another, prudent option is available is inherently inconsistent with the duty to monitor and remove. It also rests on a fundamental misunderstanding of a fiduciary’s duty. While individuals, with proper guidance, certainly may choose their risk tolerance and select a preferred type of investment product, a fiduciary must ensure that no available options in any category are objectively imprudent.”
This case should be on the radar of any advisor that works with institutional clients.
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.get xpress proposal