By Carol Buckmann
Given the number of investment and fee cases in the news, you would be forgiven for thinking that there wasn’t a plan sponsor or fiduciary committee that wasn’t being sued over its plan investments and fees. Plaintiffs and their lawyers started targeting big 401(k) plans, then kept finding new targets, including universities with 403(b) plans and plans offering the plan sponsor’s proprietary funds.
It is undeniable that these lawsuits have pushed plan fees down and motivated some negligent fiduciaries to pay more attention to getting better fund lineups, but there has been a serious downside as well. Plan fiduciaries came to feel that they could be sued no matter what they did based on conclusory allegations, such as just stating that it was a fiduciary breach if a fund’s fees were higher than those of an index fund, which doesn’t engage in active trading. We want to encourage the formation of new plans, and plans need fiduciaries to run them. It is not a good result for the pension system if potential sponsors and fiduciaries are scared off.
In earlier years, we have had some publicized decisions against well-known plan sponsors, including Wal-Mart. However, lately it seems as if more defendants who are unwilling to settle are prevailing, and that may be a good thing. Here’s a summary of some of the developments-
· A number of the 403(b) plan cases have been dismissed outright as not stating valid claims and NYU won its lawsuit after trial. In the NYU case, the court found that NYU’s use of a prudent investment process was a good defense, even though the process wasn’t perfect. Suits against the University of Pennsylvania, Georgetown and Washington University were dismissed before trial.
· The claim that investment providers violate ERISA by putting their own funds in plans for their employees has met with mixed success.
· A number of claims were dismissed because the plaintiffs hadn’t even invested in the funds being challenged. In legal terms, they had no standing. In plain English, you can’t sue unless you have been harmed by the action you are challenging.
We have also had an education process for fiduciaries, many of whom have learned that they must pay attention to fees and regularly review their investment lineups to satisfy their fiduciary responsibility to make prudent investments available to participants. The earlier cases targeted low-hanging fruit, but prevailing against these more enlightened fiduciaries won’t be so easy.
It’s certainly too early to say that these suits have peaked, but the signs discussed above are encouraging that we may be entering a downward phase soon. Consider these statements from recent court decisions:
“Plaintiffs start with the false premise that just because the plan’s fees could have been lower that necessarily [d]efendants breached their fiduciary duties.” (from the Washington University decision)
“It is not disloyal as a matter of law to offer only proprietary funds” (from American Century litigation.)
Allegations by plaintiffs “showed only that Chevron could have …sought lower fees for administration of the fund. None of the allegations made it more plausible than not that any breach of fiduciary duty had occurred.” (from White v. Chevron)
If fiduciaries feel they have to seek the lowest fees without regard to service level just to reduce their risk of being sued, they will not be serving their participants well or fulfilling their responsibilities. If, as a result of these losses, lawsuits stop targeting fiduciaries who try to follow prudent processes, and focus on fiduciaries who truly appear to have failed to fulfill their fiduciary responsibilities, that will be a major step towards reining in the excesses of this area of litigation.