Hughes v. Northwestern Univ.

(Slip Opinion)              OCTOBER TERM, 2021                                       1

                                       Syllabus

         NOTE: Where it is feasible, a syllabus (headnote) will be released, as is
       being done in connection with this case, at the time the opinion is issued.
       The syllabus constitutes no part of the opinion of the Court but has been
       prepared by the Reporter of Decisions for the convenience of the reader.
       See United States v. Detroit Timber & Lumber Co., 

200 U. S. 321, 337

.


SUPREME COURT OF THE UNITED STATES

                                       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 for-
  mer Northwestern University employees, including petitioners here.
  The plans are defined-contribution plans governed by the Employee
  Retirement Income Security Act of 1974 (ERISA), under which each
  participant chooses an individual investment mix from a menu of op-
  tions selected by the plan administrators. Petitioners sued respond-
  ents claiming that respondents violated ERISA’s duty of prudence re-
  quired of all plan fiduciaries by: (1) failing to monitor and control
  recordkeeping fees, resulting in unreasonably high costs to plan par-
  ticipants; (2) offering 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 op-
  tions that were likely to confuse investors. The District Court granted
  respondents’ motion to dismiss, and the Seventh Circuit affirmed, con-
  cluding 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 fiduciaries for violations of ERISA’s duty of pru-
 dence requires a context-specific inquiry of the fiduciaries’ 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 fiduciaries had offered “higher priced retail-class mu-
 tual 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 identified a potential
 violation with respect to certain funds because “a fiduciary is required
2                 HUGHES v. NORTHWESTERN UNIV.

                                   Syllabus

    to conduct a regular review of its investment.” 

Id., at 528

. Tibble’s
    discussion of the continuing duty to monitor plan investments applies
    here. Petitioners allege that respondents’ failure to monitor invest-
    ments prudently—by retaining recordkeepers that charged excessive
    fees, offering options likely to confuse investors, and neglecting to pro-
    vide cheaper and otherwise-identical alternative investments—re-
    sulted in respondents failing to remove imprudent investments from
    the menu of investment offerings. In rejecting petitioners’ allegations,
    the Seventh Circuit did not apply Tibble’s guidance but instead erro-
    neously focused on another component of the duty of prudence: a fidu-
    ciary’s obligation to assemble a diverse menu of options. But respond-
    ents’ provision of an adequate array of investment choices, including
    the lower cost investments plaintiffs wanted, does not excuse their al-
    legedly imprudent decisions. Even in a defined-contribution plan
    where participants choose their investments, Tibble instructs that
    plan fiduciaries must conduct their own independent evaluation to de-
    termine which investments may be prudently included in the plan’s
    menu of options. See 

id.,

 at 529–530. If the fiduciaries 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 rejecting 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 alle-
    gations as a whole, considering whether petitioners have plausibly al-
    leged 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 fiduciary
    acts, 

29 U. S. C. §1104

(a)(1)(B), so the appropriate inquiry will be con-
    text specific. Fifth Third Bancorp v. Dudenhoeffer, 

573 U. S. 409

, 425.
    Pp. 4–6.

953 F. 3d 980

, vacated and remanded.

   SOTOMAYOR, J., delivered the opinion for a unanimous Court. BARRETT,
J., took no part in the consideration or decision of this case.
                        Cite as: 

595 U. S. ____

 (2022)                                 1

                              Opinion of the Court

     NOTICE: This opinion is subject to formal revision before publication in the
     preliminary print of the United States Reports. Readers are requested to
     notify the Reporter of Decisions, Supreme Court of the United States, Wash-
     ington, D. C. 20543, of any typographical or other formal errors, in order that
     corrections may be made before the preliminary print goes to press.


SUPREME COURT OF THE UNITED STATES
                                    _________________

                                    No. 19–1401
                                    _________________


         APRIL HUGHES, ET AL., PETITIONERS v.
          NORTHWESTERN UNIVERSITY, ET AL.
 ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF
           APPEALS FOR THE SEVENTH CIRCUIT
                                [January 24, 2022]

   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 fiduciaries 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 fiduciary duty of prudence gov-
erns the conduct of respondents, who administer several re-
tirement 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
needlessly expensive investment options and paying exces-
sive recordkeeping fees. The Court of Appeals for the Sev-
enth Circuit held that petitioners’ allegations fail as a mat-
ter of law, in part based on the court’s determination that
petitioners’ preferred type of low-cost investments were
available as plan options. In the court’s view, this elimi-
nated any concerns that other plan options were imprudent.
2             HUGHES v. NORTHWESTERN UNIV.

                      Opinion of the Court

  That reasoning was flawed. Such a categorical rule is in-
consistent with the context-specific 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 Rot-
kiske v. Klemm, 

589 U. S. ___

, ___, n. 1 (2019) (slip op., at 2,
n. 1), the relevant facts are as follows.
   Northwestern University offers two retirement plans to
eligible employees: the Northwestern University Retire-
ment Plan (Retirement Plan) and the Northwestern Uni-
versity Voluntary Savings Plan (Savings Plan). Both Plans
are defined-contribution plans. In such plans, participating
employees maintain individual investment accounts, which
are funded by pretax contributions from the employees’ sal-
aries 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 admin-
istrators, 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 in-
vestment options typically offered in retirement plans, such
as mutual funds and index funds, often charge a fee for in-
vestment management services. Such fees compensate a
fund for designing and maintaining the fund’s investment
portfolio. These fees are usually calculated as a percentage
of the assets the plan participant chooses to invest in the
                 Cite as: 

595 U. S. ____

 (2022)            3

                     Opinion of the Court

fund, which is known as the expense ratio. Expense ratios
tend to be higher for funds that are actively managed ac-
cording to the funds’ investment strategies, and lower for
funds that passively track the makeup of a standardized in-
dex, 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,
provide regular account statements, and offer informa-
tional and accessibility services to participants. Like in-
vestment management fees, recordkeeping fees may be cal-
culated as a percentage of the assets for which the
recordkeeper is responsible; alternatively, these fees may
be charged at a flat rate per participant account.
   Petitioners are three current or former employees of
Northwestern University. Each participates in both the Re-
tirement 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 officials 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 al-
legedly offered too many investment options—over 400 in
total for much of the relevant period—and thereby caused
participant confusion and poor investment decisions.
   In 2017, respondents moved to dismiss the amended com-
plaint. The District Court granted the motion and denied
4               HUGHES v. NORTHWESTERN UNIV.

                          Opinion of the Court

leave to amend. Divane v. Northwestern Univ., No. 16–C–
8157, 

2018 WL 2388118

, *14 (ND Ill., May 25, 2018). The
Seventh Circuit affirmed. 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 fiduciary 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
alleged that their plan fiduciaries 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. Three of the higher
priced investments, however, had been added to the plan
outside of the 6-year statute of limitations. 

Id., at 526

. This
Court addressed whether the plaintiffs nevertheless had
identified a potential violation with respect to these funds.
The Court concluded that they had because “a fiduciary is
required to conduct a regular review of its investment.” 

Id., at 528

. Thus, “[a] plaintiff may allege that a fiduciary
breached the duty of prudence by failing to properly moni-
tor 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 invest-
ments applies here. Petitioners allege that respondents
failed to monitor the Plans’ investments in a number of
ways, including by retaining recordkeepers that charged
excessive fees, offering options likely to confuse investors,
——————
  *This Court granted certiorari only to review the ruling below on the
motion to dismiss. See Pet. for Cert. i. Accordingly, this Court expresses
no view on the propriety of the District Court’s denial of leave to amend.
                 Cite as: 

595 U. S. ____

 (2022)            5

                     Opinion of the Court

and neglecting to provide cheaper and otherwise-identical
alternative investments. As a result, respondents allegedly
failed to remove imprudent investments from the Plans’ of-
ferings. These allegations must be considered in light of the
principles set forth in Tibble to determine whether petition-
ers 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 fiduciary’s obligation to assemble a diverse menu of op-
tions. The court determined that respondents had provided
an adequate 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 unappe-
tizing 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 defined-contribution plan where
participants choose their investments, plan fiduciaries are
required to conduct their own independent evaluation to de-
termine which investments may be prudently included in
the plan’s menu of options. See 575 U. S., at 529–530. If
the fiduciaries 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 of-
fered “investment options that were too numerous, too ex-
pensive, or underperforming” on the same ground: that pe-
titioners “failed to allege . . . that Northwestern did not
make their preferred offerings available to them,” and
simply “object[ed] that numerous additional funds were of-
6             HUGHES v. NORTHWESTERN UNIV.

                      Opinion of the Court

fered as well.” 

953 F. 3d, at 991

. In the court’s view, be-
cause petitioners’ preferred type of investments were avail-
able, they could not complain about the flaws in other op-
tions. 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 plau-
sibly alleged a violation of the duty of prudence as articu-
lated in Tibble, applying the pleading standard discussed
in Ashcroft v. Iqbal, 

556 U. S. 662

 (2009), and Bell Atlantic
Corp. v. Twombly, 

550 U. S. 544

 (2007). “Because the con-
tent of the duty of prudence turns on ‘the circumstances . . .
prevailing’ at the time the fiduciary acts, §1104(a)(1)(B), the
appropriate inquiry will necessarily be context specific.”
Fifth Third Bancorp v. Dudenhoeffer, 

573 U. S. 409

, 425
(2014). At times, the circumstances facing an ERISA fidu-
ciary will implicate difficult tradeoffs, and courts must give
due regard to the range of reasonable judgments a fiduciary
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.