By Carol Buckmann
Can plan fiduciaries ever win a fee lawsuit? Most suits survive the early challenges and go on to be settled or, in a few cases, on to trial and appeal. But once in a while, cases get dismissed in the early stages.
This is encouraging because while there are still many fiduciaries out there who should be paying more attention to their fiduciary responsibilities, plan fiduciaries also sometimes rightly complain that if they become a target of a 401k class action, whatever they have chosen to do will be challenged without any real evidence that they acted improperly. The complaints contain conclusory statements such as “investments were made in X fund, while Y fund in the same class had lower fees.” Last year, a court in the Chevron litigation determined that mere conclusions in a complaint weren’t enough and dismissed a suit against Chevron. We have now had a second case in Minnesota in which a judge looked under the hood and found no substance there. The Minnesota judge dismissed the case with prejudice (meaning plaintiffs won’t have a second bite at the apple.) Is this the beginning of a trend? We can only hope so.
This case involved a challenge to Wells Fargo's putting its own target date funds in its 401k plan. The complaint alleged that Vanguard’s and Fidelity’s target date funds had lower fees. The court correctly ruled that ERISA does not require fiduciaries to scour the market to find the cheapest investments, and that factors other than fees can be relevant to an investment decision. The decision also questioned the comparison between the funds, given that the cited target date funds were designed for different purposes and choose their investments differently. The court found that plaintiffs had not introduced evidence of an appropriate benchmark to which the Wells Fargo funds could be compared.
It is important to note that the decision does not vindicate Wells Fargo’s selection of its own funds. As I noted in a prior post, fiduciaries need to carefully consider their selection of target date funds and we don’t know from this decision whether or not Wells Fargo did that. Other lawsuits involving the use of proprietary funds are proceeding to trial (or settlement).
While these two judges may be swimming against the tide, the point they make is a valid one. No fiduciary should be subjected to a trial without a showing that there is some real basis for the allegations of fiduciary breach. These suits should not be fishing expeditions. Judges should look under the hood, and if there is nothing of substance there, determine that this vehicle can’t move forward.