I assume some compliance officers often get involved in their firm’s retirement plans. If so, you may want to take a look at a decision last week by the US Supreme Court: Hughes v. Northwestern University. The case is a lawsuit by employees of Northwestern against the school and trustees of the school’s retirement plans. This is one of hundreds of lawsuits against big retirement plans for being mis-managed. Since it’s a non-profit, Northwestern’s plans are not traditional 401ks, but the same standards apply to its plans as to Beacon’s 401k.
The employees claimed that Northwestern and the plan fiduciaries violated their duty of prudence by, among other things, offering needlessly expensive investment options and paying excessive recordkeeping fees.
The Northwestern plans have many options for employees to chose among. Many, many, many options. The plans had over 400 investment options during the time period. Some of those 400 investment options were low-cost index funds. Some were high-cost retail class funds.
The plan used revenue-sharing to plan expense, a completely acceptable way to pay record-keeping expenses and other costs. The funds pay some of the management fee back to the plan and the plan pays the fund administration costs with those fees. As you might expect, low cost index funds usually don’t pay a fee back to the plan and the higher cost funds pay more back to the plan.
Northwestern’s defense was that it “had provided an adequate array of choices, including the types of funds plaintiffs wanted (low-cost index funds).”
The Supreme Court ruled for the employees
“[E]ven in a defined-contribution plan where participants choose their investments, plan fiduciaries are required to conduct their own independent evaluation to determine which investments may be prudently included in the plan’s menu of options. If the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their duty.”
The case makes it clear that retirement plan sponsors have a duty to protect employees from making poor investment choices by monitoring and removing those poor choices from the plan menu. Just adding more good options does not make up for leaving bad options in the plan.
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