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U.S. Supreme Court Says Retirement Plan Must Scrutinize Expenses Even if It Offers Lower-Fee Options

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  • January 28, 2022

In recent years, participants in 401(k) and similar employer-sponsored retirement plans have filed class action suits alleging that the plans contain overly expensive investment options. On Monday, the U.S. Supreme Court handed these litigants a major victory by unanimously reversing a lower court decision that dismissed a claim against the plan based on the fact that participants could have chosen lower cost investments.

In Hughes v. Northwestern University, employees sued the university and its retirement plan committee, alleging that that the plan paid excessive recordkeeping fees and investment choices within the plan charged higher retail rather than institutional class fees to participants. The Seventh Circuit Court of Appeals dismissed the claim partially on the basis that plan participants had the ability to choose among an array of less expensive investment options offered by the plan.

The Supreme Court rejected this reasoning, remanding the case for further proceedings. The court noted that under ERISA, plan administrators have a fiduciary duty to monitor plan costs and to change or remove investment options that include excessive fees. The fact that the plan also contains less expensive investment options does not remove the fiduciary duty to review imprudent fund choices.

This decision emphasizes the need for employers and their investment committees to actively monitor and compare investment options maintained in the plan. This review should include periodic benchmarking of recordkeeping fees, as well as comparison of fund classes and alternative funds that may provide similar performance with lower participant fees. While cost is not the only factor that can be considered by the plan, it must be a central part of the fiduciaries’ regular review of plan performance.