401(k) Fees and Investment Selection Litigation

By: Michelle M. Scannell and Kathleen Cahill Slaught

Seyfarth Synopsis: A district court recently denied a motion to dismiss a 401(k) proprietary fund class action, continuing an overwhelming trend of allowing these cases to survive pleading challenges. On the bright side, however, the Eighth Circuit recently affirmed a dismissal of such a case, and the first of these cases to be tried resulted in a defense victory, which is on appeal with the First Circuit.

The plaintiffs’ bar sparked a new 401(k) class action trend a few years ago by targeting “proprietary” in- house investment products, alleging that fiduciaries were committing a breach by including their in-house proprietary funds in plans to the exclusion of less expensive, better-performing comparable options.

In most of these cases, plaintiffs have survived initial pleading challenges. Generally courts have found that allegations underlying these cases supported an inference that the fiduciaries engaged in a flawed process. See, e.g., Cryer v. Franklin Templeton Res., No. 16-cv-4265 (N.D. Cal. Jan. 17, 2017); Urakhchin v. Allianz Asset Mgmt. of Am., L.P., No. 15-cv-1614 (C.D. Cal. Aug. 5, 2016).

A district court in Maryland recently continued the trend by denying a motion to dismiss a first amended complaint for a proprietary fund case. See Feinberg v. T. Rowe Price Group, Inc., et al., D. Md. Case No. MJG-17-0427, 2018 BL 298391 (Aug. 20, 2018). In Feinberg, plaintiffs alleged that fiduciaries breached their duties and committed related ERISA violations by, among other things, including in the plan retail-class versions of in-house funds even though purportedly cheaper versions of the same funds were available for commercial customers. Notably, in addressing defendants’ argument that the plan documents required that they select an exclusive line-up of proprietary funds, the court found that the decision to structure the plan that way was a settlor, non-fiduciary function, and “did not provide a blanket defense” for the fiduciaries. The court concluded that plaintiffs pled sufficient allegations to raise plausible inferences to support all of their claims.

Defendants also argued that plaintiffs’ prohibited transaction claim was barred under ERISA’s six-year statute of repose, because no prohibited transaction (i.e. the initial inclusion of the fund in the plan) occurred within six years of the lawsuit. The court noted that while defendants “may have viable defenses,” the claim would not be dismissed now, because the court could infer a plausible timely claim of prohibited transactions, including the continuous monthly fees being paid for the funds at issue.

In contrast to this decision and the plaintiff-friendly trend on pleading challenges for these cases, one defense victory on a motion to dismiss was recently affirmed by the Eighth Circuit. See Meiners v. Wells Fargo & Co., No. 0:16-cv-003981, 2017 WL 2303968 (D. Minn. May 25, 2017); Eighth Circuit No. 17-2397 (Aug. 3, 2018). In that case, the Eighth Circuit expressly acknowledged the “challenging pleading burden” for plaintiffs because they have different levels of knowledge regarding the investment choices the fiduciary made versus how the choices were made. The Eighth Circuit held that the existence of a cheaper fund, as pled by plaintiff, doesn’t mean that a particular proprietary fund is too expensive in the market generally or that it’s otherwise an imprudent choice.

As any litigator knows, losing a motion to dismiss is the loss of merely one battle in what can be a long-fought (and not to mention, costly) war. In fact, in the first of these cases to go to trial resulted in a defense victory, which is pending appeal in the First Circuit. Brotherston v. Putnam Investments LLC, 1:15-cv-13825, 2017 WL 2634361, (D. Mass. June 19, 2017). While some companies avoid protracted litigation and choose to settle these cases at early stages, this is not to say that a sound fiduciary process cannot be ultimately vindicated in court. Stay tuned on further developments. . .

By Amanda Sonneborn, Megan Troy, and Tom Horan

Seyfarth Synopsis: Since August 2016, sixteen elite colleges and universities have faced class action lawsuits related to management of their retirement plans. After five cases previously survived motions to dismiss, the University of Pennsylvania became the first college to secure a complete victory when accused of retirement plan mismanagement.

On September 21, 2017, the Eastern District of Pennsylvania ruled in favor of the University of Pennsylvania on every count in a proposed class action, which challenged the school’s retirement plan fees, investment lineup, and use of multiple plan record keepers. The proposed class action specifically alleged that both Penn and the administrator of its defined contribution retirement plan breached their fiduciary duty by “locking in” participants’ options to two investment companies, allowed the plan to pay too much in administrative fees, and charged excessive investment fees for access to an underperforming portfolio.

Citing Renfro v. Unisys Corp., 671 F.3d 314 (3d Cir. 2011), the court rejected the claim that by “locking in” arrangements with two investment companies, the plan fiduciaries’ imprudently failed to monitor the investment options offered to participants. Specifically, the court found that plaintiffs’ claims amounted to impermissible second-guessing of the fiduciaries’ investment decisions just because they turned out to lose money. The court noted that, standing alone, the decision to “lock in” arrangements with investment companies is not imprudent. The court likened locking a plan into an arrangement with an investment company for a stated period to cell phone companies offering discounted rates in exchange for two-year contracts, and found that plans are often able to obtain favorable terms in exchange for committing to providing a predictable period of business to investment companies.

The court found that plaintiffs’ administrative fee claims failed because there are lawful explanations for not offering the absolute lowest-available fees to participants. In dismissing these claims, the court stated: “the plaintiffs need something more than a claim that there may be (or even are) cheaper options available. The plaintiffs must show that there were no reasonable alternatives given to plan participants to choose from, which the plaintiffs have not pled.”

Similarly, with respect to the unreasonable investment management fees claim, the court stated: “The plaintiffs’ argument that fiduciaries must maintain a myopic focus on the singular goal of lower fees was soundly rejected in Renfro.” Plaintiffs also argued that, by offering too many investment options, there was participant confusion. Because they failed to point to a single participant that was confused by the investment options, however, the court dismissed the claim. The court also found no cause of action for plaintiffs’ claims that certain funds were outperformed in the market.

The Court characterized plaintiffs’ prohibited transaction claims as an impermissible attempt to shoehorn their fiduciary breach claims into prohibited transaction rules. The court found that accepting plaintiffs’ arguments would mean that administrators commit prohibited transactions every time they contract with a party to provide services to a plan for money, and dismissed the claims because there was no evidence of an intent to benefit parties at participants’ expense.

This decision is a significant victory for the University of Pennsylvania and a change in course for the cases against colleges and universities. The Court’s reliance on Renfro requires plaintiffs in these cases to do more than second-guess fiduciary decisions where they lose money, and instead holds them to the burden to plausibly allege systematic mismanagement that left participants with a choice between participating in a poorly-performing retirement plan or no plan at all.  It remains to be seen whether the impact of Renfro will be limited to the Third Circuit or whether it will expand to other circuits as well.





By: Mark Casciari and Gina Merrill

In 2006, a number of large companies that sponsored ERISA 401(k) plans were sued by clients of the Schlichter, Bogard & Denton law firm for, among other things, excessive 401(k) plan provider fees.  The fee litigation placed at issue ERISA Section 413’s limitations rule, which requires the filing of a complaint within the earlier of a six year repose period after the claim accrued or a three year period after the claim accrued with actual knowledge of the violation.  Section 413 also provided a special rule if fraud or concealment of the violation is adequately alleged and shown — the complaint then must be filed within six years after the date of discovery of the violation.

Most of the Schlichter firm cases, but not all, have been resolved though settlement or decisions on the merits of the complaints.  One ongoing Schlichter firm case is Tibble v. Edison International, 729 F.3d 1110 (9th Cir. 2013).  In Tibble, the Court of Appeals for the Ninth Circuit held, in part, that “the act of designating [401(k)  plan investment options] starts the six-year period under section 413(1)(A) for claims asserting imprudence in the design of the plan menu.”  Id. at 1119.  The Ninth Circuit explained that a contrary result would “make hash out of ERISA’s limitation period and lead to an unworkable result.”  Id.  The Ninth Circuit roundly rejected the plaintiff “continuing violation” theory endorsed by the Department of Labor as out of step with the language and purpose of the statute.  The limitations concerns animating the Tibble decision reflect the quintessential concerns that have led to the imposition of statutes of limitation — loss of hard evidence, faded witness memories, and the possibility of being hauled into court for events that occurred 15 or 30 years prior to the commencement of the litigation.  The courts have also been concerned that lax or no enforcements of limitations periods will lead to more litigation and uncertainty in the administration of the law.

On October 2, the Supreme Court announced that it will decide if the Ninth Circuit got it right when it applied a limitations bar in Tibble.

If the Court reverses the Ninth Circuit’s limitations decision, Section 413’s six-year limitations periods may provide little repose and less comfort for plan fiduciaries defending cases to which Section 413 applies.

By: Ian Morrison, Sam Schwartz-Fenwick and Abigail Cahak

On August 20, 2014, the U.S. Department of Labor’s (“DOL”) Employee Benefits Security Administration announced that it is requesting information on the use and prevalence of brokerage windows in 401(k) and similar plans.

Brokerage windows are a common feature in defined contribution plans (most commonly 401(k) plans).  They allow participants to choose investment options beyond those selected and monitored by a plan fiduciary.  Brokerage windows are popular amongst participants and plan sponsors as they enable participants to build more customized and diversified investment portfolios.

The DOL’s Request for Information (“RFI”) is intended to “assist the Department in determining whether, and to what extent, regulatory standards or safeguards, or other guidance, are necessary to protect participants’ retirement savings.”  Specifically, the RFI asks interested parties to provide information to answer 39 questions concerning the

  • Scope of investment options available;
  • Types of individuals who participate;
  • Process used to select a brokerage window and provider;
  • Fiduciary oversight;
  • Costs;
  • Role of advisers; and
  • Disclosure of information and options to participants.

The DOL’s focus on brokerage windows could result in regulations that will have an impact on large numbers of defined contribution plans.  If past experience is any indicator, the ensuing regulations may prove onerous for plan sponsors and fiduciaries, and may serve to curtail participant choice in investing.

Comments are due to the DOL by November 19, 2014.

By: Mark Casciari and Anne Harris

In March 2013, we blogged about the Ninth Circuit’s decision in Tibble v. Edison Int’l, No. 10-56406 (9th Cir. Mar. 21, 2013).  The plaintiffs in Tibble alleged that revenue sharing violated plan terms.  The Ninth Circuit found against the plaintiffs, and also applied a six year statute of repose, and found in favor of the plaintiffs on the fiduciary decision to select three retail, as opposed to institutional, mutual funds as investment options.

The plaintiffs filed a Petition for Rehearing on the statute of limitations issue and use of the abuse of discretion standard.   On August 1, 2013, the Ninth Circuit denied the Petition, but amended its earlier opinion clarifying its use of the abuse of discretion standard of review. See 2013 WL 3947717 (9th Cir. Aug. 1, 2013).

The original language of the opinion suggested that the Court had rejected the Second Circuit’s decision in John Blair Communications Inc. Profit Sharing Plan v. Telemundo Group Inc. Profit Sharing Plan, 26 F.3d 360 (2d Cir. 1994).  In John Blair, the plaintiffs challenged the fiduciary’s allocation of plan assets.  The Second Circuit did not use an abuse of discretion review, instead applying the prudent person standard — a tougher standard for a defendant fiduciary. 

The Ninth Circuit’s amended opinion emphasizes that its decision to apply an abuse of discretion standard of review did not conflict with John Blair.  The amended opinion states that the defendant in John Blair tried to avoid the prudent person standard by relying on plan interpretation, while the Tibble plaintiffs directly placed plan language at issue. 

The amended opinion includes this footnote:  “We thus leave for another day what judicial-review standard would apply in a case like John Blair where the Plan is said to authorize what statutory duties codified in ERISA forbid.” 

So the lesson for fiduciaries governed by Ninth Circuit law is:  While the Ninth Circuit still has spoken on whether revenue sharing may violate plan terms, it has yet to speak on whether revenue sharing may violate fiduciary prudence standards.

By:  Ian Morrison and Nadir Ahmed

In Bidwell v. University Medical Center, Inc., Case No. 11-5493, the Sixth Circuit found that plan fiduciaries are shielded from claims over investment losses where they transfer defined contribution accounts into a Qualified Default Investment Alternative (“QDIA”), after notice to the participant, even where the participant had previously made an affirmative investment election.

Plaintiffs James Christopher Bidwell and Susan Wilson were participants in University Medical Center, Inc.’s (“UMC”) defined contribution retirement plans.  Both had elected to be 100% invested in the Lincoln Stable Value Fund (the “Stable Fund”), which UMC had previously used as a default investment vehicle for the plan.

In 2007, the Department of Labor (“DOL”) promulgated new regulations under the Pension Protection Act that permitted plan administrators to automatically invest participant accounts in a QDIA under certain circumstances.  The regulation created a safe harbor for plan administrators that directed automatic-enrollment investments into QDIA’s, which the DOL defined as investments “capable of meeting a worker’s long-term retirement savings needs.” 

In 2008, UMC designated a new fund, known as the Lifespan Fund, as the plan’s QDIA.  Because UMC did not have records of which plan participants elected the Stable Fund and which participants were investors by default, the Company, through a vendor, sent notice to all participants with 100% allocation to the Stable Fund, indicating that all existing investments in the Stable Fund would be transferred into the QDIA unless the participant specifically directed otherwise.  Plaintiffs did not make a specific election; therefore, their accounts were 100% allocated into the Lifespan Fund. 

Plaintiffs claimed not to have received notice of this transfer until they received their first quarterly statement.  Plaintiffs transferred their investments back to the Stable Fund, but claimed to have suffered substantial investment losses as a result of the involuntary transfer.  After exhausting their administrative remedies under the plan, Plaintiffs filed suit to recover their investment losses.  The District Court granted summary judgment in favor of UMC. 

On appeal, Plaintiffs argued that UMC was not entitled to the safe harbor protection because Plaintiffs had made a specific investment election.  In affirming the District Court’s decision, the Sixth Circuit looked to the language of the regulation and the DOL’s preamble to the final regulation.  The Court found the DOL’s interpretation to support the position that upon proper notice, participants who previously elected a specific investment can become non-electing plan participants if they fail to respond to a specific request for an election – precisely what happened to the Plaintiffs.  The Court also found that the method of notice to the plan participants (which was mailed by a third party to participants’ homes) was sufficient because it was “reasonably calculated to ensure actual receipt.”

Bidwell is a good decision for plan administrators because it affirms that they can transfer participant investments to a QDIA under certain circumstances, provided they have given reasonable notice.  While the specific holding is relatively narrow (there was no challenge to whether the safe harbor applied, for example) the decision can be read more broadly to reflect a view that participants who fail to take requested action after having been given notice should not be heard to complain of the consequences.


By: Amanda Sonneborn, John Duke and Sam Schwartz-Fenwick

In David v. Alphin (Case No. 3:07-cv-00011-MOC), the U.S. District Court for the Western District of North Carolina dismissed as time barred a putative class action, which alleged that Bank of America and various plan fiduciaries breached their ERISA fiduciary duties by selecting Bank of America-affiliated mutual funds as investment options in the Bank of America 401(k) plan that allegedly charged improper and excessive fees. The participants claimed that the defendants engaged in prohibited transactions and breached their fiduciary duties of loyalty and prudence by selecting these mutual funds as investment options because the fees associated with the funds were unreasonable.  The defendants moved for summary judgment on the grounds that the participants’ claims were barred by ERISA’s six-year statute of limitations.  The court agreed. 

 In reaching this conclusion, the court first dismissed the plaintiffs’ claims that the defendants engaged in prohibited transactions.  The court found that, with the exception of one bank-affiliated fund, all of the challenged funds were added to the plan’s lineup of investment options more than six years before the lawsuit was filed.  To avoid the statutory bar, however, the plaintiffs argued that plan fiduciaries had a continuing obligation to remove the bank-affiliated plans from the plan. The court rejected this argument because “ERISA does not make actionable a fiduciary’s failure to undo what has been done,” but rather “makes actionable a plan fiduciary’s decision to engage in a prohibited transaction.”  As the plaintiffs’ claims rested on the initial decision to invest in bank-affiliated funds, which occurred more than six years before the participants filed suit, the court found the claimed prohibited transactions were barred by ERISA’s six-year limitations period.

 The court also dismissed the claims asserting breaches of the duty of prudence and loyalty.  Although the plaintiffs conceded that all but one of the challenged investment options were added more than six years before they filed suit, they nevertheless maintained that the statute of limitations was tolled by ERISA’s “fraud or concealment” exception.  The court rebuffed this argument because there was no evidence that the corporate benefits committee engaged in any conduct that prevented the participants from realizing they might have had a claim.  Indeed, the court pointed out that several documents, including summary plan descriptions, disclosed the bank-affiliated funds and their related fees.  Moreover, the court continued, even if some statements in the documents were false, there was no evidence that the documents were generated with an intent to defraud or mislead the participants.

 Finally, as to the one fund that was added to the plan’s investment lineup during the six-year statute of limitations period, the court dismissed the plaintiffs’ claim finding that they lacked standing to assert an ERISA breach of fiduciary duty claim as to this fund because none of the plaintiffs invested in the fund.

The court’s decision in David v. Alphin is important victory for plan sponsors because it holds that ERISA’s six-year statute of limitations runs from the initial selection of an allegedly imprudent fund as an option under a plan, rather than years later as plaintiffs’ counsel often suggest.

by Ian Morrison, Jim Goodfellow, Amanda Sonneborn and Sam Schwartz-Fenwick

On September 6, 2011, in Loomis v. Exelon Corp.(Case Nos. 09-4081 and 10-1755), the Seventh Circuit found that the fiduciaries of Exelon Corporation’s defined contribution retirement plan did not breach their fiduciary duties by offering “retail” mutual funds (i.e. funds that are available to the general public), nor by requiring participants to bear the expenses of those funds. 

The Exelon Plan offered 32 investments options, 24 of which were retail mutual funds with expense ratios of 0.03% to 0.96%.  The highest expense ratios were associated with actively managed funds and the lower ratios associated with index funds.  

Citing Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009), and other Seventh Circuit cases which have stressed the importance of participant choice in understanding fiduciary responsibility with respect to defined contribution plan investments, the Court rejected plaintiffs’ arguments.  The opinion, written by Chief Judge Easterbrook and joined by Judges Posner and Tinder, concluded that the plaintiffs benefited from the “retail” funds’ transparency and liquidity.  It also concluded that Exelon was not in a position to guarantee investments in a particular fund, and thus to use the Plan’s alleged bargaining power to secure lower cost options, because participants had complete discretion whether to invest in any of the offered funds.  The Court characterized the plaintiffs’ theory as “paternalistic” because the Plan had given choice over what investments to use to those most interested in the outcome — the participants.  The Court emphasized, “all that matters is the absence from ERISA of any rule that forbids plan sponsors to allow participants to make their own choices.”  The Seventh Circuit further concluded that an attempt to challenge the assessment of investment expenses against Plan participants failed because whether to make participants pay plan expenses is a non-fiduciary matter of plan design. 

The Court also addressed the district court’s award of costs to Exelon and rejected plaintiffs’ assertion that in an ERISA case a showing of bad faith is required for the defendant to recover costs.  The Court held that after Hardt v. Reliance Standard Life Insurance Co., 130 S.Ct. 2149 (2010), all that is required for an award of costs is that the prevailing party shows “some degree of success on the merits.”  Exelon unquestionably was successful on the merits because it had won an early dismissal.

Loomis, along with Hecker, and several Seventh Circuit decisions from the employer stock context, teaches that plan fiduciaries are not liable for offering allegedly imprudent investment options so long as they offer participants a reasonable choice of Continue Reading Breach of Fiduciary Duty Case Addressed By 7th Circuit