Supreme Court ruling highlights an expansive definition of plan fiduciary

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The U.S. Supreme Court, in its Hughes v. Northwestern University ruling, underscored the need for plan sponsors to err on the side of more rather than less when considering the scope of their fiduciary responsibilities. While the case focused on high-cost investment options, it’s conceivable that the ruling could eventually expose plan sponsors to fiduciary risk for decisions that produce unnecessarily high levels of cash-out leakage for terminated participants, a potential risk that could be avoided if plan sponsors were to proactively adopt asset portability solutions, such as auto portability.

The Court’s ruling in Hughes v. Northwestern University makes something very clear. The 8-0 ruling, issued on Jan. 24, mandates that the ability of participants to choose from a selection of inexpensive and higher-cost investment options in defined contribution retirement plans cannot, in and of itself, prevent lawsuits claiming that plan sponsors are in breach of the Employee Retirement Income Security Act’s duty of prudence for fiduciaries. The “fiduciaries” here are, of course, plan sponsors that are in charge of managing defined contribution plans.