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A Smaller Quiver

Updated: Jul 20, 2023

I love surfing in Costa Rica. It’s my favorite surf destination for a number of reasons, but one big reason is the variety of surf available there. It has long point breaks like Pavones for a left or Ollies for a right. It has punchy beach breaks like Jaco and Witches Rock. It has the playful rivermouth set-ups like Tamarindo, and it has big slabby coral reef double-ups like Salsa Brava.


I love the variety, so it was with great consternation that I read about a recent Supreme Court decision. It was a decision that will most likely force retirement-plan sponsors to begin to offer participants less variety, to start slimming down fund options-- particularly high-cost ones-- for participants in 401(k)s and similar vehicles. That's good news for novice or passive investors to keep their fees low, but it's not great news for those of us who prefer more choice. In terms of surf, it’ll be like turning Costa Rica into Corpus Christi.


The case, Hughes v. Northwestern University, revolved around three university employees' claims that the school failed in its fiduciary duty by offering too many investment options, including "needlessly expensive" ones.


Abigail Hughes, on behalf of a class of current and former employees of Northwestern University, sued Northwestern in 2016 for allegedly violating this duty of prudence. Hughes alleged that Northwestern listed mutual funds that “carried higher fees” than otherwise identical mutual funds; and offered “too many investment options,” thereby causing “participant confusion.” Apparently, Ms. Hughes loves her target retirement 2040 fund, style drift and all.


The district court dismissed Hughes’ claim, and the Seventh Circuit later affirmed. The Seventh Circuit reasoned that Hughes’ claim failed as a matter of law because Northwestern’s plans contained numerous investment options that Hughes conceded were indeed prudent, so Hughes “could not complain about the flaws in other options.”


However, in a unanimous opinion, the Supreme Court reversed the decision a few weeks ago. Delivering the court's opinion, Justice Sonya Sotomayor wrote that the logic that offering a plethora of fund options is acceptable as long as some are low-cost is “flawed.” According to retirement plan rules under the Employee Retirement Income Security Act of 1974 (ERISA), sponsors have a “duty to monitor all plan investments and remove any imprudent ones.”

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Any regular reader of this Insights column will know exactly what I’m going to say about this. More choice is better; limiting choice is bad. What’s more, it makes me borderline crazy that the cost of the fund is the only consideration when evaluating prudence-- cost is certainly an important element, but it shouldn’t be the sole criterion.


I’m also a big believer in taking responsibility for one’s own actions, yet Sotomayor wrote in her opinion, “the Seventh Circuit erred in relying on the participants’ ultimate choice over their investments.” For those of us fortunate enough to have a diverse set of investment options in our retirement plan-- including self-directed brokerage accounts-- well, we might just be kissing those things goodbye. The Court makes it sound very much like any plan sponsor offering such options is now categorically asking to be sued.

I have no idea why it would generate liability to add arrows to investors’ quivers as opposed to taking them away, which must be why I’m not a Supreme Court Justice.

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Many of you know me as the author of this column. We provide tactical insights that are designed to help investors generate better outcomes, but providing the sort of road map found here in Insights and then leaving you to your own devices is most certainly not our practice. Rather, Insights is designed to inform about our core business, which is personalized wealth management.


I firmly believe that most investors should utilize a financial advisor to help craft well-designed portfolios, and that doesn’t just mean brokerage accounts. A family’s portfolio consists of its residence and other real estate holdings, debt, ESPP’s, 401K’s and stock options from employers, insurance, mutual funds, privately held businesses, stocks and bonds. When your 401k choices get sliced and diced, it’s important to generate proper diversification with the rest of your assets, and one of the ways we work with clients is to insure that all those moving parts are simpatico.


Please call or email if we can help you with that. …With recent stock market gyrations, this a good time to review your asset allocation to make sure things haven’t been thrown out of whack anyway.






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