From one perspective, the United States Supreme Court’s January opinion in Hughes v. Northwestern University was not at all ground-breaking. The Court reiterated that fiduciaries have a “continuing duty” to review each investment option and to remove imprudent options. It relied heavily on its 2015 opinion in Tibble v. Edison International and essentially told the lower courts to apply Tibble when considering whether to grant the fiduciaries’ motion to dismiss the case.
At the same time, by affirming its position, the Court confirmed for lower courts that a clear framework exists for those courts’ further consideration of motions to dismiss. It did not take long for lower courts across the country to apply that framework in a manner that supports participants’ ability to survive a motion to dismiss and move into the discovery phase. This month’s article helps fiduciaries to understand the fallout from Hughes and to identify a series of best practices that reflect the lower courts’ application of Hughes.
One Day Later: Goodman v. Columbus Regional Healthcare System. One Federal trial court in Georgia waited only one day to rely on Hughes in denying the fiduciaries’ motion to dismiss. The court had been awaiting the Hughes decision before ruling on the pending motion to dismiss a case involving fiduciary breach claims relating to retail share class funds and excessive recordkeeping fees. The court adopted a broad interpretation of Hughes, stating that the “Supreme Court has suggested that a defined contribution plan participant may state a claim for breach of ERISA’s duty of prudence by alleging that the plan fiduciary offered higher priced retail-class mutual funds instead of available identical lower priced institutional-class funds.” Did the Supreme Court say that? No, it did not. Might courts interpret the Supreme Court as having suggested it? Yes, as we saw only one day after the Hughes opinion became public.
A Matter of Minutes: Lauderdale v. NFP Retirement. A Federal trial court in California interpreted Hughes as articulating a two-level pleading standard for cases involving retail share class funds. To survive a motion to dismiss, the court asserted, there are two criteria that participants must satisfy: (1) an allegation that the lower-cost alternatives are “substantially identical”; and (2) some allegation of an imprudent process. The participants easily met the first criterion and then satisfied the second criterion by highlighting that the fiduciaries’ meeting minutes did not reflect a prudent process.
Believe It When We See It: Salesforce.com & Trader Joe’s. The Ninth Circuit Court of Appeals adopted an expansive view of Tibble and Hughes in reversing dismissals in a couple of cases. In each of these cases, the fiduciaries had used more expensive share classes that generated revenue sharing used to offset the plans’ expenses. The fiduciaries attempted to rely on that use of revenue sharing as a justification supporting their motions to dismiss, but the Court of Appeals rejected that argument – at this stage in litigation. In both cases, the court recognized that the argument may indeed be plausible or reasonable, but would have to wait until a later stage to be heard.
Additional Participant Tools. Student loan debt relief. In-plan guaranteed income. Managed accounts. Participants are demonstrating increased demand and appreciation for these resources. Employers are responding to that demand by implementing strategies to make their benefit plans and various features a key part of talent acquisition and retention. We’ll elaborate on some of those strategies and discuss approaches for implementation and communication.
Best Practices. The lower courts’ application of Hughes and Tibble suggests a series of best practices:
- Use the cheapest share class;
- Consider collective investment trusts (CITs);
- Use the cheapest share class and consider CITs for each investment;
- Document the share class and CIT considerations;
- Know the recordkeeper fee; and
- Benchmark the recordkeeper fee
We hope you will join our Fiduciary 15 webinar on July 12 for a deeper dive into those best practices. In addition, QPA has developed a White Paper that explores these best practices and related topics (retail shares, institutional shares, revenue sharing, and CITs) in greater detail. Please reach out to request a copy. As the White Paper reflects, Hughes is either: (1) not a big deal; or (2) a really big deal. Which will it be for your organization?