For the past several years, retirement plans governed by the Employee Retirement Income Security Act of 1974, as amended (ERISA), have faced significant litigation around plan fees. In 2020, in fact, more than 200 ERISA excessive fee lawsuits were filed1 in federal court, which was an all-time record, reflecting an 80 percent increase of cases filed in 2019.

As cases continue to be filed, the U.S. Supreme Court ruled on a highly anticipated ERISA case, Hughes v. Northwestern University2 earlier this year. In Hughes, a handful of Northwestern University current and former employees sued the university, the retirement plan committees, and the individuals administering two university-sponsored retirement plans.

Here are the three major takeaways for 401(k) plan fiduciaries to keep in mind.

3 Takeaways from Hughes for 401(k) Plan Fiduciaries

  1. Continual Monitoring of Plan Investments. Plan fiduciaries have a duty to monitor plan investments, making sure to remove those investments that perform poorly. Failure to remove poorly performing investments constitutes a breach of fiduciary duty under ERISA.
  2. Number of Plan Investments. Although the Supreme Court did not directly analyze the over 400 plan investment options in the Northwestern retirement plans, plan fiduciaries should ensure that the number of retirement plan investments is reasonable and prudent. When offering 401k plan investment options, fiduciaries should consider the amount of work necessary to oversee and monitor all options, as required by ERISA. Additionally, offering an unusually high number of investment options can lead to decision fatigue for participants, directly working against the best interests of plan participants. As plan sponsors shift to target date funds, the average number of investment options in 401k plans stands at 15.4 in 20203, down from 26.3 in 2010, significantly less than those offered by Northwestern.
  3. Continual Monitoring of Plan Fees. Additionally, plan fiduciaries have a duty under federal law to monitor plan fees, confirming that the fees are reasonable and prudent. This question often comes into play when retirement plans offer retail investments with high fees when an identical or similar wholesale investment exists at a cheaper cost. As such, fiduciaries should regularly review their plan fees, compare provider fees through benchmarking, and document those discussions. This can help to prove that the fiduciaries discussed the plan investments’ performance, their risk characteristics, and their expense ratios, which can further help to confirm that reasonably-priced investments remain in the 401k plan.

Additional Resources

  1. Groom Law Group. (2021, January 3). 2020 ERISA Litigation Trends Hint at What’s Ahead This Year. https://www.groom.com/resources/2020-erisa-litigation-trends-hint-at-whats-ahead-this-year/
  2. Hughes et al. v. Northwestern University et al., No. 19-1401 (U.S. S.Ct. Jan. 24, 2022). https://www.supremecourt.gov/opinions/21pdf/19-1401_m6io.pdf
  3. Stephen Miller (2020, Dec 1). Number of 401k Funds Offered to Plan Participants Shrink. Society of Human Resources Management (SHRM). https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/number-of-401k-funds-offered-to-plan-participants-shrinks.aspx
  4. Id.
  5. U.S. Department of Labor, Employee Benefits Security Administration (EBSA). (2021). Meeting Your Fiduciary Responsibilities [Brochure]. https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/meeting-your-fiduciary-responsibilities.pdf

Pensionmark Financial Group, LLC (“Pensionmark”) is an investment adviser registered under the Investment Advisers Act of 1940. Financial Advisors at Pensionmark may also be registered representatives of Pensionmark Securities, LLC (member SIPC), which is affiliated with Pensionmark through common ownership.

Disclaimer: This content is intended for informational purposes only and should not be construed as legal, medical or tax advice. It provides general information and is not intended to encompass all compliance and legal obligations that may be applicable. This information and any questions as to your specific circumstances should be reviewed with your respective legal counsel and/or tax advisor as we do not provide legal or tax advice. Please note that this information may be subject to change based on legislative changes. © 2022 Sequoia Benefits & Insurance Services, LLC. All Rights Reserved

Jenny Kiesewetter — Jenny is a Retirement Plan Compliance Consultant for Sequoia, where she works with our clients to optimize and streamline retirement plan compliance. In her free time, Jenny enjoys spending time with her friends and family, traveling, live music, and dining out.