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3 Lessons for Plaintiffs in 401k Fiduciary Mismanagement Lawsuits

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Are actively-managed investment funds always a breach of ERISA prudence rule?

Green Bay, WI Albert v. Oshkosh Corp., a class action ERISA lawsuit filed in the Eastern District of Wisconsin, alleges that participants in the Oshkosh Corporation and Affiliates Tax Deferred Investment Plan (the “Plan”) were harmed when Plan fiduciaries chose imprudent investments and authorized unreasonably high fees. In a nutshell, the Complaint charges that the Plan wasted the retiree’s money. Foolish fiduciaries lead to pinched pensioners.

By now, many commentators have noticed that these ERISA 401k mismanagement lawsuits have begun to take on a certain sameness. The issues have crystallized. Plaintiffs have also learned a lot about how to plead these cases in order to succeed.

What happened to thousands of Oshkosh Corp. retirement savers

The Complaint describes a plan with runaway recordkeeping fees, not monitored in any methodical way. In particular, the Plan’s investment committee opted for 16 to 18 actively-managed investment funds. They excluded many low-fee passive index funds.

Investment options that require active management have higher administration costs than index funds. They also sometimes produce higher returns. Experience suggests though that, over the long run, retirement savers have a better return on their money when administrative costs are low – even if this means foregoing stock market thrills. Slow and steady may be boring, but it wins the race, especially when savers have the opportunity to save and invest through an ERISA retirement plan over many years.

Here is the question that bubbles at the core of many 401k mismanagement lawsuits: Are actively managed investment funds always a breach of the ERISA fiduciary rules? These rules require that require plan managers:
  • run the plan solely in the interest of participants and beneficiaries for the exclusive purpose of providing benefits and paying plan expenses; and
  • act prudently and diversify the plan's investments in order to minimize the risk of large losses.      
The federal circuit courts are divided. When the U.S. Supreme Court denied certiorari in Putnam Investments LLC. v. Brotherston in January 2020, it left the question open. Although 401k plan plaintiffs do not have the luxury of knowing the answer, they have learned some strategies about how to argue the problem.

Lesson One: Focus on process, not investment results 

ERISA’s rules about fiduciary prudence focus on the process by which decisions are made, not the results. ERISA does not require financial omniscience, just good practice. That is a moving target, however. Those practices have to take full advantage of modern tools and experience. The Albert Complaint notes that “[t]here are commercially available programs commonly used by financial advisors and plan fiduciaries to analyze plans’ performance, comparative costs and other key indicators.” Even those these tools presumably did not exist in 1974 at the time of ERISA’s enactment, the implication is that the fiduciaries’ failure to use them today breaches the legal standard.

A history of bad investment results suggests a flawed decision-making process, but the two are not the same. Federal courts are divided on whether plan participants must actually demonstrate that that they suffered a loss or whether showing a questionable decision-making process, by itself, is enough. Showing a bad process is the first step in any event.

Lesson Two:  Compare apples to apples   

Not every strategy is right for every retirement plan. There is no blanket rule. The appropriate scheme varies according to the employee population, the characteristics of the plan and changing investment trends.

For example, an employee population that features many long-service employees who have long careers with the same employer and are nearing retirement age might be best served by a plan that invests very cautiously in low cost, passive investment vehicles. A younger population that expects to change jobs frequently and to manage their own investments might do better with more risk. The latter group might also handle the challenge of self-directed accounts better. In that case, the fiduciaries’ exercise of prudence would focus on providing a balanced menu of investment options from which participants could choose.

The overall amount of plan assets matters, as well. Larger plans can often be expected to negotiate lower administrative costs, as the Albert Complaint recognizes. Finally, volatile investment markets dictate the frequent review of a plan’s overall strategy. The same might be true of an employee population energized by the challenges of socially conscious investment. 

Lesson Three:  It matters where you sue

U.S. Courts of Appeals for the 2nd, 6th, 7th, 9th, 10th, and 11th Circuits have held that, in order to succeed, plan participants must show that the plan (and thus, they) lost reasonably expected investment returns because of a fiduciary breach. In the case at hand, that would mean that Albert and similarly situated participants would have to show that the flawed decision-making process that lead fiduciaries to focus on investments that required active management deprived them of their expected benefit. This is a heavy lift. Wisconsin, where the lawsuit was filed, is in the 7th Circuit.

In the 1st, 4th, 5th and 8th Circuits, however, the situation is reversed. In other words, if the plaintiff can show that particular actively-managed investment options did not perform as well as a set of passively-managed index funds, that alone suffices to show plan losses strongly suggestive of a breach of fiduciary duty. The defendant plan bears the burden of demonstrating that this is not true.

The law concerning fiduciary breaches in 401k mismanagement lawsuits far from settled. More developments can be expected at least until the Supreme Court finally decides the issue. In the meantime, 401k plan participants who believe that they have been mismanaged out of a secure retirement may take heart at even a mixed record of litigation success.


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