On Monday, January 24, 2022, the U.S. Supreme Court issued an opinion in a case of critical interest to employers offering 401(k) or other defined-contribution retirement plans.  In Hughes v. Northwestern University, Case No. 19-1401, the Court voted unanimously to vacate a decision from the U.S. Court of Appeals for the Seventh Circuit, temporarily reinstating allegations by employees of Northwestern University that the fiduciaries of Northwestern’s retirement plans had violated the duty of prudence required by ERISA. Before the case reached the Supreme Court, the Northern District of Illinois determined that the allegations in the plaintiffs’ complaint failed to state a claim for relief, and the Seventh Circuit upheld the dismissal of the case. In upholding the dismissal, the Seventh Circuit credited the diverse menu of investment options that were available to the Northwestern plan participants. The Supreme Court’s decision sends the case back to the Seventh Circuit to re-evaluate the plaintiffs’ allegations again under the pleading standards announced in Tibble v. Edison Int’l¹ and Twombly/Iqbal.²

In a short opinion that largely summarized the plaintiffs’ allegations and the procedural posture of the case, the Supreme Court disagreed with the Seventh Circuit’s focus on “a fiduciary’s obligation to assemble a diverse menu of [investment] options,” which the Seventh Circuit highlighted as a reason for upholding the dismissal of plaintiffs’ claims against Northwestern.  The Supreme Court acknowledged that a diverse menu of investment options is a “component of the duty of prudence,” but ultimately held the Seventh Circuit erred by focusing too strongly on the plan “participants’ ultimate choice over their investments to excuse allegedly imprudent decisions by respondents.”  The Supreme Court reiterated that if plan “fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their duty.”

The Court did not, however, provide any guidance as to what factual allegations at the pleading stage plausibly assert that an investment was “imprudent,” or what constitutes “reasonable time” for removing an allegedly imprudent investment,” providing the Seventh Circuit leeway to expand on those issues when re-assessing the employees’ claims on remand.  Notably, the Court did not state that any of the plaintiffs’ allegations actually raised inferences of imprudence. Instead, the Court highlighted the Seventh Circuit’s “exclusive focus on investor choice” as a reason for vacating its judgment.

The Supreme Court also emphasized a number of critical points that courts must consider going forward when evaluating motions that seek to dismiss ERISA breach of fiduciary duty claims involving similar allegations.  Specifically, while the Court noted that plan fiduciaries must remove “imprudent investments” within a “reasonable time," the Court emphasized that the “content of the duty of prudence turns on the circumstances prevailing at the time the fiduciary acts.” Because of this, an analysis of whether ERISA breach of fiduciary duty claims are well-pled is inherently context-specific. The Court acknowledged that often “the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs” and observed that “courts must give due regard to the range of reasonable judgments a fiduciary may make on her experience and expertise” when assessing the plausibility of such claims.   

While the Supreme Court vacated the Seventh Circuit’s judgment, the Court left open the possibility the Seventh Circuit will clarify its opinion and uphold the dismissal on remand.  In upholding dismissal of plaintiffs’ claims, the Seventh Circuit noted that Northwestern “provided prudent explanations for the challenged fiduciary decisions involving alleged losses or underperformance” and that plaintiffs’ allegations “depict valid reasons” for Northwestern’s decisions.  “Due regard” for these explanations and reasons could be sufficient for the Seventh Circuit to still find plaintiffs’ claims implausible and uphold dismissal consistent with the Supreme Court’s opinion. 

In sum, plan sponsors and fiduciaries should keep a close eye on this litigation going forward because the Supreme Court’s opinion, and any subsequent opinions by the Seventh Circuit or the Supreme Court, will significantly affect how these types of ERISA breach of fiduciary duty claims are evaluated at the pleading stage.