Plan Fiduciaries Prevail In First Published Appellate Opinion Applying Supreme Court’s ERISA Ruling In Hughes v. Northwestern

Troy, MI – June 29, 2022 – On June 22nd, the 6th Circuit Court of Appeals handed down Smith v. CommonSpirit Health, et al., dismissing a class-action complaint alleging (in part) fiduciary imprudence by the 401(k) Plan’s trustees for having poorer performing actively managed investment choices rather than lower cost (and apparently better performing) passive choices. 


We don’t disagree with the result.  Just the fact that a Plan has actively managed choices which are under-performing passively managed choices alone is probably not enough.  But, the Court did not take the position that chronic under-performance was somehow OK?  Here are a couple of key quotes from the Opinion:

  • “We accept that pointing to an alternative course of action, say another fund the plan might have invested in, will often be necessary to show a fund acted imprudently (and to prove damages). But that factual allegation is not by itself sufficient. . . . these claims require evidence that an investment was imprudent from the moment the administrator selected it, that the investment became imprudent over time (emphasis added), or that the investment was otherwise clearly unsuitable for the goals of the fund based on ongoing performance.” No. 21-5964 Smith v. CommonSpirit Health, et al. Pages 7-8
  • “That a fund’s underperformance, as compared to a “meaningful benchmark,” may offer a building block for a claim of imprudence is one thing. Meiners, 898 F.3d at 822. But it is quite another to say that it suffices alone, especially if the different performance rates between the funds may be explained by a “different investment strategy.” Id. at 822–23. A side-by-side comparison of how two funds performed (emphasis added) in a narrow window of time, with no consideration of their distinct objectives, will not tell a fiduciary which is the more prudent long-term investment option. A retirement plan acts wisely, not imprudently, when it offers distinct funds to deal with different objectives for different investors.”  Id., Page 9.

It appears clear, that deteriorating performance overtime – holding chronically under-performing choices – can lead to a valid claim of fiduciary imprudence, when the comparison is “apples to apples” – i.e., when actively managed funds, with the same investment goals, are compared.  This is precisely what TEPI’s iCPR(TM) is designed to do.

However, our Goal is to help prevent plan trustees and trustees from getting sued in the first place . . . because even if a plan sponsor and trustees “win,” as they did this case, they “lose.” Why?

How much did defending the case up to the 6th Circuit Court of Appeals cost?  What as the plan sponsor’s deductible (“retention”) in their fiduciary liability insurance policy (assuming they likely have one).  And, what reputational damage (for which there is no insurance coverage) has been done to both the plan sponsor and individual trustees?  That damage extends to family members as well, who have to face comments and inquiries about publicly made allegations that a spouse and/or parent has breached their fiduciary duty . . . has been a “bad” trustee.  Unfortunately, these 2nd and 3rd order, collateral effects are seldom thought through by plan sponsors, trustees, and those advising them.

Reputation matters . . . and, in many cases / to many persons and companies, it matters more than the money.

TEPI is working not just to help plan sponsors and trustees “win” such cases, but to prevent the filing of such cases and to simultaneously improve the investment results and retirement security of the plan’s participants.

Written by Eric Smith, J.D., President and an Investment Advisor Representative of Trustee Empowerment & Protection, Inc.,
A Registered Investment Adviser.  He is also Chairman & CEO of Decision Technologies Corporation.

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