Cohen & Buckmann, P.C.
Cohen & Buckmann, P.C.



Tracking Down the Valid Claims-More Victories for 401k and 403b Fiduciaries

Tracking Down the Valid Claims-More Victories for 401k and 403b Fiduciaries

By Carol Buckmann

No fiduciary wants a prolonged legal battle.  Sometimes, though, fighting rather than settling 401k (or 403b) litigation can result in complete or partial vindication for beleaguered plan fiduciaries.  My last post discussed victories for fiduciaries in cases involving the Chevron and Wells Fargo plans.   While it is still true that the majority of these cases get settled at a price, and that some fiduciaries still don’t take their responsibility to pick and monitor investments seriously enough, responsible fiduciaries get caught in the net of class action litigation as well.  At least a few other courts are carefully examining the conclusory allegations in these complaints and finding them wanting.  It is too early to tell whether this is will be a trend in fee litigation, but responsible fiduciaries should be heartened by these victories.

Is It Really That Simple?  One of the misconceptions about ERISA that we see in fee litigation complaints is that always choosing the cheapest option is a legal requirement or, put differently, that it is imprudent not to select the least expensive investments or service provider.  In fact, ERISA has always required fiduciaries to consider performance as well as fees, and the test is that fees must be reasonable in relation to the services provided.  This makes sense if you think about it-should fiduciaries pick a poorly performing fund with low fees over a fund with stellar performance but slightly higher fees? If they have a complex plan, should they hire a recordkeeper that can’t deal with the complexity simply because the recordkeeper charges less?  Complaints also posit that there is only one responsible way to invest, even though investment specialists have many different views on that issue.  One of the trendy current claims is that it is always a fiduciary breach to have a money market fund as the cash equivalent investment rather than a stable value fund, though stable value funds can have transfer and withdrawal restrictions. And some of the basics of litigation-such as standing and causation-have also been found to be missing in these suits. The complaints put forth an oversimplified view of the law, and some judges have seen through it. 

Here are some of the other victories----

In June, Putnam Investments defeated a claim that putting its own funds in its 401k plan was imprudent.  The court said that the employee-plaintiffs hadn’t demonstrated how Putnam’s actions caused them losses.

In the past few days, a decision involving Voya was released dismissing claims based on its stable value fund.  The plaintiff in that case questioned Voya’s ability to profit by setting the minimum guarantee rate in funds which were not even available under her 403b plan.  The court appropriately found that she had no standing to pursue the claims or to be a class representative. Other claims regarding stable value funds were previously rejected in a case involving CVS.  Plaintiffs claimed that the funds, which are cash equivalent investments which compete with money market funds, were too heavily weighted towards ultra-short term investments.  The court concluded that whether the fund was a prudent investment could not be determined in hindsight, and found the actual investments to be consistent with the fund’s objectives.

403b plans became litigation targets last year, and we have now had a decision involving Emory University dismissing plaintiffs’ claims that having too many funds in the menu could be a fiduciary breach.  Similar claims were not dismissed, however, in a case involving Duke University. The court hearing the Duke University case dismissed claims based on failure to monitor investments because plaintiffs had not specified how the monitoring process was deficient.  Duke and Emory won only partial victories, as several other claims were cleared for trial.

If Fiduciaries Choose to Fight--These cases are still a small percentage of those being litigated but they should provide some comfort to fiduciaries who fear being liable no matter what they do or how careful they are in selecting investments.  Fiduciaries who choose to fight these suits are still well advised to follow good procedures, hire professional co-fiduciary advisers and document the reasons for their decisions.  Having experienced ERISA lawyers on board can also make a big difference.