December 3, 2021
Monday’s controversy Hughes v. Northwestern University The justices will be given another opportunity to explain the fiduciary duties of patrons who control the fixed contribution plans that many of us rely on for retirement.
The case was submitted to the judge under ERISA (Employee Retirement Income Guarantee Act of 1973). In response to the shocking pattern of self-dealing and mismanagement in employee pension plans, the Act federalized most of the laws governing these plans. As employers switch from fixed-income plans to fixed-contribution plans, employees are increasingly concerned about the investment choices of the sponsors and trustees of these plans—the trustees of operating plans are usually the employer’s executives. Adopt the standard of general trust law, ERISA obligation They act with “cautious, skillful, cautious and diligent attitude” [of] A prudent person [sic]. ” Hughes It will be the fourth argument the court has heard about the standard in the past eight years.
Although Hughes Involving several incidental allegations, the center argued that Northwestern University had not fulfilled its duty of care and included high-cost investment options in the menu of funds to which employees can contribute. One allegation is that Northwestern University provides higher-cost “retail” funds from institutions that provide low-cost “wholesale” versions of the same funds. Another reason is that if Northwestern University had restricted the number of options, it could have reduced costs: the larger investment flowing into the remaining options would enable it to bargain to reduce costs. The general idea is that Northwestern University only offers a large number of options (more than 200), and does not pay attention to the level of fees charged by any particular fund. Putting the case in context, the charges against Northwestern University are not uncommon. Similar class actions have occurred in recent years, many of which are against large universities. The risk is not small: this fall, the court approved a settlement agreement involving my employer (Columbia University), saying that the settlement agreement in this type of case saved retirees more than $2 billion.
April Hughes and the other plaintiffs — all current or former employees of Northwestern University — described it as a simple case, requiring the judge to apply normal defense rules. ERISA draws its general fiduciary duty from the general trust law, which requires the trustee to perform due diligence in all aspects of its conduct. The responsibility to minimize investment costs has always been the concept of fiduciary duty. According to the general belief that wasting the beneficiary’s money is imprudent, the allegations in the complaint are in full compliance with any reasonable understanding of the obligation.
Northwestern University ridiculed the beneficiaries’ argument as a “paternalistic” complaint that they were given too many choices. For its part, as long as each individual choice is reasonable and independent, the beneficiary cannot file a claim for breach of fiduciary liability just because some choices are less cost-effective than others. If Hughes and other participants are so keen on low-cost options, they should choose the low-cost option from the menu. Northwestern University offers many such options.
Northwestern believes that Hughes fundamentally misunderstood the criteria for defending breach of fiduciary duty and raised the stakes far beyond the meaning of the case. It is not enough to make some rash general allegations about actions taken by other trustees. For example, Hughes claimed that other universities had been able to reduce the fees paid by participants by following the recommendations Hughes made in her complaint. Instead, Northwestern University argues that Hughes must determine at every point the specific actions that the trustee can take, and (in the complaint) show that the prudent trustee “cannot draw conclusions” that the action does more harm than good.
Hughes from Fifth Third Bancorp v Dudenhoeffer, A case involving a plan to invest in employer stocks. In this case, the court tailored its standards based on the difficulties it plans to face in responding to non-public adverse information about employers. The plan to divest the employer’s stock can be problematic because it may violate securities laws, and if the divestiture causes the price of the employer’s stock to plummet, it may end up harming the plan rather than helping it.
Hughes argues here that the improved standard of defense is limited to the context of “damn if I do this, damn if I don’t” Five threeHowever, Northwestern University believes that high standards are necessary to avoid the “destructive consequences” of the “endless litigation” faced by the ERISA plan, which challenge the trustees to comply with traditional industry practices. For Northwestern University, it is meaningless to force the court to be an afterthought “investment manager” and audit every cost of every investment option provided by the plan.
The strategy of Northwestern University is not uncommon. In recent court opinions in this area, it takes much less time to resolve traditional common law prudential responsibilities, rather than worrying about the drawbacks that some judges see in the unrestricted spread of class actions. If the court classifies this as an “abuse of class action,” then it would seem natural for justices who are concerned about class actions to use increased defense standards to prevent the defendant from being forced to reach an improper settlement. We will know more after the debate about whether Hughes can persuade judges to look at this issue from a more traditional trust perspective.