Hughes v. Northwestern Univ.

P R E L I M I N A R Y P R I N T
Volume 595 U. S. Part 1
Pages 170–177
OFFICIAL REPORTS
OF
T H E S U P R E M E C O U R T
January 24, 2022
REBECCA A. WOMELDORF
reporter of decisions
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170 OCTOBER
TERM, 2021
Syllabus
HUGHES et al. v. NORTHWESTERN UNIVERSITY
et
al.
certiorari to the united states court of appeals for
the seventh circuit
No. 19–1401. Argued December 6, 2021—Decided January 24, 2022
Respondents administer retirement plans on behalf of current and former
Northwestern University employees, including petitioners here. The
plans are defned-contribution plans governed by the Employee Retire-
ment Income Security Act of 1974 (ERISA), under which each partici-
pant chooses an individual investment mix from a menu of options
selected by the plan administrators. Petitioners sued respondents
claiming that respondents violated ERISA's duty of prudence required
of all plan fduciaries by: (1) failing to monitor and control recordkeeping
fees, resulting in unreasonably high costs to plan participants; (2) offer-
ing mutual funds and annuities in the form of “retail” share classes that
carried higher fees than those charged by otherwise identical share
classes of the same investments; and (3) offering options that were likely
to confuse investors. The District Court granted respondents' motion
to dismiss, and the Seventh Circuit affrmed, concluding that petitioners'
allegations fail as a matter of law.
Held: The Seventh Circuit erred in relying on the participants' ultimate
choice over their investments to excuse allegedly imprudent decisions
by respondents. Determining whether petitioners state plausible
claims against plan fduciaries for violations of ERISA's duty of pru-
dence requires a context-specifc inquiry of the fduciaries' continuing
duty to monitor investments and to remove imprudent ones as articu-
lated in Tibble v. Edison Int'l, 575 U. S. 523. Tibble concerned allega-
tions that plan fduciaries had offered “higher priced retail-class mutual
funds as Plan investments when materially identical lower priced
institutional-class mutual funds were available.” Id., at 525–526. The
Tibble Court concluded that the plaintiffs had identifed a potential vio-
lation with respect to certain funds because “a fduciary is required to
conduct a regular review of its investment.” Id., at 528. Tibble's dis-
cussion of the continuing duty to monitor plan investments applies here.
Petitioners allege that respondents' failure to monitor investments
prudently—by retaining recordkeepers that charged excessive fees, of-
fering options likely to confuse investors, and neglecting to provide
cheaper and otherwise-identical alternative investments—resulted in
respondents failing to remove imprudent investments from the menu of

Cite
as: 595 U. S. 170 (2022)
171
Syllabus
investment offerings. In rejecting petitioners' allegations, the Seventh
Circuit
did not apply Tibble's guidance but instead erroneously focused
on another component of the duty of prudence: a fduciary's obligation
to assemble a diverse menu of options. But respondents' provision of
an adequate array of investment choices, including the lower cost invest-
ments plaintiffs wanted, does not excuse their allegedly imprudent deci-
sions. Even in a defned-contribution plan where participants choose
their investments, Tibble instructs that plan fduciaries must conduct
their own independent evaluation to determine which investments may
be prudently included in the plan's menu of options. See id., at 529–
530. If the fduciaries fail to remove an imprudent investment from the
plan within a reasonable time, they breach their duty. The Seventh
Circuit's exclusive focus on investor choice elided this aspect of the duty
of prudence. The court maintained the same mistaken focus in reject-
ing petitioners' claims with respect to recordkeeping fees on the
grounds that plan participants could have chosen investment options
with lower expenses. The Court vacates the judgment below so that
the Seventh Circuit may reevaluate the allegations as a whole, consider-
ing whether petitioners have plausibly alleged a violation of the duty of
prudence as articulated in Tibble under applicable pleading standards.
The content of the duty of prudence turns on “the circumstances . . .
prevailing ” at the time the fduciary acts, 29 U. S. C. § 1104(a)(1)(B), so
the appropriate inquiry will be context specifc. Fifth Third Bancorp
v. Dudenhoeffer, 573 U. S. 409, 425. Pp. 175–177.
953 F. 3d 980, vacated and remanded.
Sotomayor, J., delivered the opi ni on for a unani mous Cour t.
Barrett, J., took no part in the consideration or decision of this case.
David C. Frederick argued the cause for petitioners.
With him on the briefs were Jeremy S. B. Newman, Jerome
J. Schlichter, Andrew D. Schlichter, Sean E. Soyars, and Mi-
chael A. Wolff.
Michael R. Huston argued the cause for the United States
as amicus curiae supporting petitioners. With him on the
brief were Acting Solicitor General Fletcher, Deputy Solici-
tor General Kneedler, G. William Scott, and Jeffrey M. Hahn.
Gregory G. Garre argued the cause for respondents. With
him on the brief were Stephanie M. Graham, Priya J. Har-
jani, Thalia L. Myrianthopoulos, Craig C. Martin, Amanda
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172 HUGHES
v. NORTHWESTERN UNIV.
Opinion of the Court
S. Amert, Brienne M. Letourneau, LaRue L. Robinson, and
Mark
T. Stancil.*
Justice Sotomayor delivered the opinion of the Court.
Under the Employee Retirement Income Security Act of
1974 (ERISA), 88 Stat. 829, as amended, 29 U. S. C. § 1001
et seq., ERISA plan fduciaries must discharge their duties
“with the care, skill, prudence, and diligence under the cir-
cumstances then prevailing that a prudent man acting in a
like capacity and familiar with such matters would use in the
conduct of an enterprise of a like character and with like
aims.” § 1104(a)(1)(B). This fduciary duty of prudence
governs the conduct of respondents, who administer several
retirement plans on behalf of current and former employees
of Northwestern University, including petitioners.
In this case, petitioners claim that respondents violated
their duty of prudence by, among other things, offering need-
lessly expensive investment options and paying excessive
recordkeeping fees. The Court of Appeals for the Seventh
Circuit held that petitioners' allegations fail as a matter of
*Briefs of amici curiae urging reversal were fled for AARP et al. by
Dara S. Smith, William Alvarado Rivera, Catherine Ruckelshaus, and
Karen W. Ferguson; for the American Association for Justice by Jeffrey
R. White; for Investment Scholars by William A. Birdthistle and David
A. Reiser; for the Service Employees International Union by J. Peter
Dowd, Nicole G. Berner, and Claire Prestel; and for Samuel Halpern by
Gregory Y. Porter and Mark G. Boyko.
Briefs of amici curiae urging affrmance were fled for the American
Benefts Council by Meaghan VerGow, Jody Forchheimer, Brian D. Boyle,
and Gregory F. Jacob; for the American Council on Education et al. by
Nicole A. Saharsky, Nancy G. Ross, and Jed W. Glickstein; for the Cham-
ber of Commerce of the United States of America et al. by Jaime A. Santos,
William M. Jay, Christina L. Hennecken, James O. Fleckner, Alison V.
Douglass, Kevin Carroll, and Paul Lettow; for the Committee on Invest-
ment of Employee Beneft Assets by Aaron M. Streett, J. Mark Little, and
Christopher Rillo; for Euclid Fiduciary by Jared R. Butcher and Sharon A.
Rose; for the Investment Company Institute by Douglas Hallward-
Driemeier and Daniel V. Ward; and for the Teachers Insurance and Annuity
Association of America by Catherine M. A. Carroll and Lori A. Martin.
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as: 595 U. S. 170 (2022)
173
Opinion of the Court
law, in part based on the court's determination that petition-
ers'
preferred type of low-cost investments were available as
plan options. In the court's view, this eliminated any
concerns that other plan options were imprudent.
That reasoning was fawed. Such a categorical rule is
inconsistent with the context-specifc inquiry that ERISA re-
quires and fails to take into account respondents' duty to
monitor all plan investments and remove any imprudent
ones. See Tibble v. Edison Int'l, 575 U. S. 523, 530 (2015).
Accordingly, we vacate the judgment below and remand the
case for reconsideration of petitioners' allegations.
I
This case comes to the Court on review of respondents'
motion to dismiss the operative amended complaint. Ac-
cepting the allegations in that complaint as true, see
Rotkiske v. Klemm, 589 U. S. –––, –––, n. 1 (2019), the rele-
vant facts are as follows.
Northwestern University offers two retirement plans to
eligible employees: the Northwestern University Retirement
Plan (Retirement Plan) and the Northwestern University
Voluntary Savings Plan (Savings Plan). Both Plans are
defned-contribution plans. In such plans, participating
employees maintain individual investment accounts, which
are funded by pretax contributions from the employees'
salaries and, where applicable, matching contributions from
the employer. Each participant chooses how to invest her
funds, subject to an important limitation: She may choose
only from the menu of options selected by the plan adminis-
trators, i. e., respondents. The performance of her chosen
investments, as well as the deduction of any associated fees,
determines the amount of money the participant will have
saved for retirement.
Two types of fees are relevant in this case. First, the
investment options typically offered in retirement plans,
such as mutual funds and index funds, often charge a fee for
investment management services. Such fees compensate a
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174 HUGHES
v. NORTHWESTERN UNIV.
Opinion of the Court
fund for designing and maintaining the fund's investment
por
tfolio. These fees are usually calculated as a percentage
of the assets the plan participant chooses to invest in the
fund, which is known as the expense ratio. Expense ratios
tend to be higher for funds that are actively managed accord-
ing to the funds' investment strategies, and lower for funds
that passively track the makeup of a standardized index,
such as the S&P 500.
In addition to investment management fees, retirement
plans also pay fees for recordkeeping services. Recordkeep-
ers help plans track the balances of individual accounts, pro-
vide regular account statements, and offer informational
and accessibility services to participants. Like investment
management fees, recordkeeping fees may be calculated as a
percentage of the assets for which the recordkeeper is re-
sponsible; alternatively, these fees may be charged at a fat
rate per participant account.
Petitioners are three current or former employees of
Northwestern University. Each participates in both the
Retirement and Savings Plans. In 2016, they sued: North-
western University; its Retirement Investment Committee,
which exercises discretionary authority to control and man-
age the Plans; and the individual offcials who administer the
Plans (collectively, respondents). Petitioners allege that
respondents violated their statutory duty of prudence in a
number of ways, three of which are at issue here. First,
respondents allegedly failed to monitor and control the fees
they paid for recordkeeping, resulting in unreasonably high
costs to plan participants. Second, respondents allegedly
offered a number of mutual funds and annuities in the form
of “retail” share classes that carried higher fees than those
charged by otherwise identical “institutional” share classes
of the same investments, which are available to certain large
investors. App. 83–84, 171. Finally, respondents allegedly
offered too many investment options—over 400 in total for
much of the relevant period—and thereby caused participant
confusion and poor investment decisions.
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as: 595 U. S. 170 (2022)
175
Opinion of the Court
In 2017, respondents moved to dismiss the amended com-
plai
nt. The District Court granted the motion and denied
leave to amend. Divane v. Northwestern Univ., No. 16–C–
8157, 2018 WL 2388118, *14 (ND Ill., May 25, 2018). The
Seventh Circuit affrmed. Divane v. Northwestern Univ.,
953 F. 3d 980, 983 (2020). This Court granted certiorari.
594 U. S. ––– (2021).*
II
In Tibble, this Court interpreted ERISA's duty of pru-
dence in light of the common law of trusts and determined
that “a fduciary normally has a continuing duty of some kind
to monitor investments and remove imprudent ones.” 575
U. S., at 530. Like petitioners, the plaintiffs in Tibble al-
leged that their plan fduciaries had offered “higher priced
retail-class mutual funds as Plan investments when materi-
ally identical lower priced institutional-class mutual funds
were available.” Id., at 525–526. Three of the higher
priced investments, however, had been added to the plan out-
side of the 6-year statute of limitations. Id., at 526. This
Court addressed whether the plaintiffs nevertheless had
identifed a potential violation with respect to these funds.
The Court concluded that they had because “a fduciary is
required to conduct a regular review of its investment.”
Id., at 528. Thus, “[a] plaintiff may allege that a fduciary
breached the duty of prudence by failing to properly monitor
investments and remove imprudent ones.” Id., at 530.
This Court then remanded the case for the court below to
consider whether the plaintiffs had plausibly alleged such a
violation. Id., at 531.
Tibble's discussion of the duty to monitor plan investments
applies here. Petitioners allege that respondents failed to
monitor the Plans' investments in a number of ways, includ-
*This Court granted certiorari only to review the ruling below on the
motion to dismiss. See Pet. for Cert. i. Accordingly, this Court ex-
presses no view on the propriety of the District Court's denial of leave
to amend.
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176 HUGHES
v. NORTHWESTERN UNIV.
Opinion of the Court
ing by retaining recordkeepers that charged excessive fees,
offer
ing options likely to confuse investors, and neglecting to
provide cheaper and otherwise-identical alternative invest-
ments. As a result, respondents allegedly failed to remove
imprudent investments from the Plans' offerings. These
allegations must be considered in light of the principles set
forth in Tibble to determine whether petitioners have stated
a plausible claim for relief.
In rejecting petitioners' allegations, the Seventh Circuit
did not apply Tibble's guidance. Instead, the Seventh Cir-
cuit focused on another component of the duty of prudence:
a fduciary's obligation to assemble a diverse menu of options.
The court determined that respondents had provided an ade-
quate array of choices, including “the types of funds plaintiffs
wanted (low-cost index funds).” 953 F. 3d, at 991. In the
court's view, these offerings “eliminat[ed] any claim that
plan participants were forced to stomach an unappetizing
menu.” Ibid.
The Seventh Circuit erred in relying on the participants'
ultimate choice over their investments to excuse allegedly
imprudent decisions by respondents. In Tibble, this Court
explained that, even in a defned-contribution plan where
participants choose their investments, plan fduciaries are re-
quired to conduct their own independent evaluation to deter-
mine which investments may be prudently included in the
plan's menu of options. See 575 U. S., at 529–530. If the
fduciaries fail to remove an imprudent investment from the
plan within a reasonable time, they breach their duty. See
ibid.
The Seventh Circuit's exclusive focus on investor choice
elided this aspect of the duty of prudence. For instance,
the court rejected petitioners' allegations that respondents
offered “investment options that were too numerous, too ex-
pensive, or underperforming ” on the same ground: that peti-
tioners “failed to allege . . . that Northwestern did not make
their preferred offerings available to them,” and simply “ob-
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as: 595 U. S. 170 (2022)
177
Opinion of the Court
ject[ed] that numerous additional funds were offered as
wel
l.” 953 F. 3d, at 991. In the court's view, because peti-
tioners' preferred type of investments were available, they
could not complain about the faws in other options. See
ibid. The same was true for recordkeeping fees: The court
noted that “plan participants had options to keep the expense
ratios (and, therefore, recordkeeping expenses) low.” Id., at
991, n. 10. Thus, “[t]he amount of fees paid were within the
participants' control.” Ibid.
Given the Seventh Circuit's repeated reliance on this rea-
soning, we vacate the judgment below so that the court may
reevaluate the allegations as a whole. On remand, the Sev-
enth Circuit should consider whether petitioners have plausi-
bly alleged a violation of the duty of prudence as articulated
in Tibble, applying the pleading standard discussed in Ash-
croft v. Iqbal, 556 U. S. 662 (2009), and Bell Atlantic Corp. v.
Twombly, 550 U. S. 544 (2007). “Because the content of the
duty of prudence turns on `the circumstances . . . prevailing '
at the time the fduciary acts, § 1104(a)(1)(B), the appropriate
inquiry will necessarily be context specifc.” Fifth Third
Bancorp v. Dudenhoeffer, 573 U. S. 409, 425 (2014). At
times, the circumstances facing an ERISA fduciary will im-
plicate diffcult tradeoffs, and courts must give due regard
to the range of reasonable judgments a fduciary may make
based on her experience and expertise.
***
The judgment of the Seventh Circuit is vacated, and the
case is remanded for further proceedings consistent with
this opinion.
It is so ordered.
Justice Barrett took no part in the consideration or de-
cision of this case.
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Reporter’s Note
The attached opinion has been revised to refect the usual publication
and citation style of the United States Reports. The revised pagination
makes available the offcial United States Reports citation in advance of
publication. The syllabus has been prepared by the Reporter of Decisions
for the convenience of the reader and constitutes no part of the opinion of
the Court. A list of counsel who argued or fled briefs in this case, and
who were members of the bar of this Court at the time this case was
argued, has been inserted following the syllabus. Other revisions may
include adjustments to formatting, captions, citation form, and any errant
punctuation. The following additional edits were made:
None