Court Limits Fiduciary Breach Lawsuit to Claims Against Plan Sponsor and Plan Committee

A federal trial court has dismissed portions of a putative class action lawsuit brought by participants in a 401(k) plan alleging that various individuals and entities violated their fiduciary duties relating to investment fund selection. The participants sued the plan sponsor, the sponsor’s board of directors and its individual members, the plan committee and its individual members, and several other individuals with plan-related responsibilities. Without always specifying which individuals or entities were responsible, the participants claimed that the fiduciaries violated their duties of prudence and loyalty by selecting funds that were inappropriate and unnecessarily expensive; failing to properly review investments to assure that fees were appropriate and reasonable; and failing to leverage the plan’s size to obtain less expensive investment options. The lawsuit also alleged that some fiduciaries failed in their duty to monitor other fiduciaries, and that the plan’s stable value insurance fund paid excessive compensation to the plan’s recordkeeper, resulting in a prohibited transaction. In response, the named individuals and entities asked the court to dismiss the lawsuit for failure to state a claim.

On the threshold issue of fiduciary status, the court noted that all parties appeared to agree that the plan committee was a fiduciary with respect to the challenged actions, and that the plan sponsor had a duty to monitor the committee’s actions. However, claims against the other alleged fiduciaries (including the members of the Board of Directors and plan committee) were dismissed because the participants failed to sufficiently allege that those parties were fiduciaries with respect to the contested conduct. Addressing the committee’s investment selections, the court found that the participants had provided “substantial circumstantial evidence” that a breach had occurred—much of it comparing fund costs and performance against meaningful benchmarks—so their claim of imprudence could proceed. The possibility that some comparisons were faulty, or that there might be evidence of investment review, did not justify dismissal at this stage in the litigation. Survival of the imprudence claims against the plan committee also meant that the failure-to-monitor claims must be allowed. The loyalty claims, however, were dismissed entirely for lack of factual allegations suggesting that the fiduciaries acted with improper motives or for their own financial benefit. Finally, the court dismissed the claim regarding the insurance company’s stable value product because the participants failed to sufficiently allege that the transaction involved plan assets and was for the benefit of a party in interest, and that the fiduciary (here, the committee) knew or should have known that these elements were met.

EBIA Comment: It is not uncommon for fiduciary claims to be brought initially against every plausible party, including the plan sponsor’s board and its members, and various individual employees. An interesting aspect of this case is the relative ease with which the court strips away the claims against individuals and the board in light of the plan sponsor’s delegation of investment authority to the plan committee. Even if individuals or the board are fiduciaries with respect to some matters, an effective delegation may insulate them from other fiduciary disputes. Moreover, because a board’s or committee’s fiduciary duties are exercised collectively, individual board or committee members are not necessarily subject to fiduciary breach claims merely because they sit on the board or committee. The case also highlights a paradox of hindsight: The courts generally agree that “hindsight cannot play a role in determining whether a fiduciary’s actions were prudent.” Nevertheless, poor performance may provide circumstantial evidence that a breach occurred for the purpose of avoiding dismissal. For more information, see EBIA’s 401(k) Plans manual at Sections XXIV.B (“Who Is an ERISA Fiduciary?”), XXIV.L (“Prohibited Transactions”), XXV.E (“Monitoring Investment Performance”), and XXXVII.H (“Claims for Breach of Fiduciary Duty”).

Contributing Editors: EBIA Staff.