PLANSPONSOR - February - March 2022 - 2

Too Much Choice
INSIGHTS
R
ecently, the Supreme Court issued its ruling in
Hughes v. Northwestern University, one of the few participant
lawsuits to make it to the highest court (see
" Hughes v. Northwestern Ruling, " page 6).
While the Supreme Court didn't rule as to whether the
plan fiduciaries were right or wrong, per se, it sent the case
back to the prior courts for further review. One thing alleged
by the plaintiffs was that the fiduciaries had not removed imprudent investments
from the plan's large menu of investment offerings. The district and appellate courts
had noted that the menu had a diverse range of options from which participants
could choose-including lower-cost selections. However, Justice Sonia Sotomayor,
writing for a unanimous court, took issue with that, reiterating that fiduciaries have
a duty to regularly review and monitor all plan investments and should be responsible
for removing those with high fees or underperformance. " The 7th Circuit erred in
relying on the participants' ultimate choice over their investments to excuse allegedly
imprudent decisions by respondents, " Sotomayor wrote.
When plan sponsors participating in our most recent Defined Contribution
Survey, last fall, were asked how often they formally review their plans' investment
options, 39.2% said they do so quarterly, 13.9% said twice per year, and 33.3% said
they do so annually; the rest reported doing so less than once per year or that they
were unsure. While the four in 10 sponsors say they do so quarterly, the majority
look at their funds less frequently. The challenge with a lack of regular, frequent
reviews, is that the time between putting something on a watch list and removing
it might end up being years instead of quarters.
Also in that survey, the median number of investment options reported
in the lineup was 21. That means half of plans have more than 21 investment
options in the lineup from which their plan participants can choose! To return to
Justice Sotomayor's words about the need to review all funds, complying could be
overwhelming from a fiduciary due diligence perspective.
What can fiduciaries take from this Supreme Court opinion? The above statistics
indicate important steps for sponsors to consider. There continues to be a need
to ensure that all funds in your lineup are there for a reason. Menu consolidation, or,
maybe better, access to advice, is worth considering to ensure all participants can
invest in a strong portfolio. Re-enrollment into your default fund, on a regular basis
if you see participants making poor investment allocations, could be another option.
This leads back to getting advice for plan fiduciaries as well. The industry has
evolved away from educating participants about investment allocation, knowing
that such meetings weren't making participants into investment experts. The
flip side is that you, the plan sponsor, are often being charged with making these
investment selections and fiduciary decisions with no more insight or expertise
than the average participant. If your plan committee doesn't include investment
experts, where is expertise coming from? This continues to support the need for
sponsors to ensure they have solid fiduciary advice, whether 3(21) or 3(38).
We'll continue to watch this case and see how it unfolds. However, for sponsors
it's a reminder that offering a long list of funds, some of which are superior to the
rest, and hoping the participants select the superior ones is not prudent fiduciary
practice. -Alison Cooke Mintzer, Publisher
2 PLANSPONSOR.COM February - March 2022
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