Failure to meet the meaningful benchmark standard is increasingly the reason that 401k breach of fiduciary duty ERISA lawsuits fail. Plan participants who believe that the fiduciaries of their retirement savings plans have mismanaged their funds should watch this issue.
In the initial Fritton Complaint, participants claimed that their former employer, Taylor Corporation, and the fiduciaries of the plan breached their legal fiduciary duty under ERISA by:
- authorizing unreasonably high recordkeeping fees;
- allowing the plan's investment portfolio to include options with unjustifiable management fees; and
- permitting the plan to retain an underperforming fund.
Rather than bear the expense of litigation, plan sponsors and fiduciaries very often settle, but a vigorous few have battled on to find a theory that would defeat plaintiffs’ claims. The “meaningful benchmark” standard seems to have emerged as a powerful defense.
ERISA prudence requirements
ERISA requires plan fiduciaries to act prudently, diversifying plan investments in order to minimize the risk of large losses. They must act solely in the interest of participants and beneficiaries and to pay the reasonable expenses of the plan. Notably, however, in a defined contribution plan, like the Taylor Corporation 401k plan, they are not required to guarantee a certain benefit at retirement. That is the essential difference between a defined contribution plan and an old-fashioned defined benefit plan, which promised a monthly annuity at retirement age.
In a defined contribution plan, the risk of investment losses falls squarely on the participant. That is why in a 401k plan, participants must monitor plan expenses and performance closely. The central issue in many breach of fiduciary lawsuits is whether the fiduciaries acted carefully.
The District Court’s latest decision in Fritton concludes in part that:
“(I) Plaintiffs' excessive-recordkeeping-expenses theory continues to suffer from the same problem that prompted dismissal in the first motion-to-dismiss round: Plaintiffs do not allege facts plausibly showing that the Plan's recordkeeping fees are unreasonably high. (II) Though the question is the subject of some disagreement among the federal courts, I conclude that Plaintiffs' excessive-management-fees theory fails largely because as this theory is pleaded, a collective investment trust is not a plausible benchmark for a mutual fund…. (IV) Plaintiffs' single-underperforming-fund theory will be dismissed because the benchmarks alleged to support this theory are implausible.”
Implausible comparisons seem to be a widespread problem. The same issue scuttled the participants’ arguments in the Eighth Circuit’s 2022 decision in Matousek v. Mid-American Energy Co. There, the participants similarly argued that the fiduciaries saddled the plan with unreasonably high costs and low-quality investments. The Court dismissed the Complaint because the participants failed to identify better alternatives. Instead of citing the specific performance of similar plans, they had relied on industry-wide averages and total fees reported on the plan’s annual Form 5500 reporting forms.
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- the plan paid excessive recordkeeping fees and failed to regularly solicit competitive bids;
- it paid excessive investment management fees;
- that certain actively managed funds should not have been offered because they were more expensive than passively-managed funds;
- certain personalized services were unreasonably expensive; and
- that the plan failed to provide a detailed explanation of how revenue-sharing payments were calculated in Form 5500 filings.
Conclusory arguments not sufficient
The theme that emerges is that conclusory allegations are not enough in a 401k fiduciary breach lawsuit. It is true that a Complaint need not set forth all the evidence in a lawsuit, particularly in advance of the discovery process. Nonetheless, a “cookie cutter” Complaint, closely modeled on similar lawsuits, is not enough. Participants in retirement savings plans who believe that the funds are being mismanaged must make sure that their lawsuits set out enough facts based on plausible comparisons. The efforts and advice of a competent ERISA attorney are key.