Supreme Court Rules 7th Circuit Erred in Annuity Plan Fiduciary Case

"Congress intended ERISA's fiduciary duties to be broadly construed," AARP said. "ERISA's fiduciary duties are more important than ever, because most employers offer only defined contribution plans, participants rely heavily on the quality of their investments, and the retirement savings crisis has escalated."

The American Benefits Council and the Investment Council Institute asserted that ruling in favor of the employees would hurt retirement plan participants by exposing prudent plan sponsors that have made reasonable choices to the threat of costly litigation based on the premise that the sponsors could have made other choices.

The Teachers Insurance and Annuity Association of America, which sold the tax-sheltered annuities in Northwestern's retirement plans, asserted in a separate brief that one challenge is that the plaintiffs in the cases have failed to acknowledge that offering a vehicle that can provide a guaranteed stream of retirement income is different and more expensive from simply offering a worker a chance to build wealth through an ordinary, non-guaranteed 401(k) plan.

A 403(b) backed by TIAA annuities is also different from, and somewhat more expensive to run than, a 401(k) plan, because each employee owns a separate annuity contract, TIAA told the court.

"Because each plan participant holds his or her own annuity contract, the recordkeeper must determine account values, minimum guarantees, and any additional returns individually for each annuitant rather than simply execute a pro rata allocation of plan assets as in the 401(k) context," TIAA wrote.

As an annuity issuer, TIAA must also spend money to comply with state annuity regulations, TIAA said.

Reactions to the New Ruling

TIAA declined to comment on the ruling.

Northwestern said in a comment that it is disappointed by the court's disagreement with the reasoning adopted by the 7th Circuit.

"We are pleased that the court has asked the 7th Circuit to reconsider whether plaintiffs' allegations fail to state a claim," the university said. "As Northwestern has explained, the university did not violate its fiduciary duty with regard to the recordkeeping or the investment fees related to its retirement plans, and nothing in the court's decision today prevents the 7th Circuit from reaching that conclusion in reexamining the allegations on remand."

Nancy Ross and Jed Glickstein, lawyers with Mayer Brown who helped 18 colleges and universities file a brief supporting Northwestern, have noted that many current and former employees of private universities have filed suits challenging the administration of 403(b) plans, and that the Supreme Court's opinion seems likely to affect how universities and their fiduciaries approach 403(b) plan administration.

Fred Reish, partner at Faegre Drinker, said in a comment on the ruling that the essential issue is whether it was the participants' obligation to find the low-cost, high quality investments that they prefer or whether the plan fiduciaries were obligated to offer only prudent investments.

"The Supreme Court held that the duty to monitor required that all imprudent investments be removed, leaving only prudent investments," Reish said. "The focus on the duty to monitor was at least partially attributable to the fact that some of the investments had been selected years before and that the statute of limitations had run on the issue of prudent selection."

– Melanie Waddell contributed to this report. 

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Pictured: Associate Justice Sonia Sotomayor. (Photo: Erin Schaff/Bloomberg)