The 7th Circuit's approach was addressed by Supreme Court Justice Sonia Sotomayor who suggested there may be a "happier medium" between what Northwestern wants — dismissal — and what the participants request — reversal.
Justice Elena Kagan cited the 7th Circuit's comments about prudent and imprudent investments during her questioning of Gregory G. Garre, a partner at law firm Latham & Watkins LLP, who represented Northwestern University in oral arguments.
"Are you defending that or not?" Ms. Kagan asked. She described the appellate court ruling as saying "fiduciaries can avoid liability for offering imprudent investments with unreasonably high fees if they also offer prudent investments with reasonable fees."
Mr. Garre said he disagreed with her characterization of the 7th Circuit's opinion.
After more questioning by Ms. Kagan, Mr. Garre responded with an analogy from one of the amicus briefs: "If the question was you've got a contaminated oyster but you've got some good oysters, too, so that was prudent, I wouldn't defend that," he said.
But if there was a choice between two good oysters and that one is "slightly more expensive than the other, then I would defend that," he said.
This exchange and other comments about the 7th Circuit brought some sharp reactions from observers.
"It seems pretty clear from the questioning that the court is not buying the strong reading of the 7th Circuit's decision, that a menu that includes some 'prudent' funds insulates the fiduciary against claims based on some other 'imprudent' ones," said Michael Barry, president of O3 Plan Advisory Services LLC, which provides retirement plan regulatory services to sponsors, and which is part of October Three Consulting in Chicago, a retirement and benefits consulting firm.
"The question that remains is how much latitude the court will allow for a mix of funds, some of which may compete on 'brand' rather than cost," said Mr. Barry, who agreed with the 7th Circuit upholding the lower court's dismissal of the complaint.
Law professor Norman P. Stein, who supports the participants, suggested that the Supreme Court would reject the 7th Circuit's views on prudent vs. imprudent investments in the same lineup. "There is reason to hope that the court will unequivocally reject the 7th Circuit holding that giving a participant a tsunami of investment choices provides a plan fiduciary with an impenetrable shield against liability so long as the plan's investment menu includes some prudent options," said Mr. Stein, professor of law at the Thomas R. Kline School of Law at Drexel University in Philadelphia.
Mr. Stein represented the Pension Rights Center, one of several organizations, including the AARP Foundation, that submitted an amicus brief asking the Supreme Court to overturn the 7th Circuit ruling.