Here We Go Again: Participants Prevail at Pleading Stage on Excessive Fee Claim Against Mega 401(k) Plan

Participants in a “mega” 401(k) plan (i.e., a plan with over $500 million in assets) brought this lawsuit claiming that their employer and plan benefits committee breached their fiduciary duty of prudence by allowing the plan to pay excessive bundled recordkeeping and administrative fees, and that the employer and its board of directors breached their duty to monitor those fees. The court denied the employer’s motion to dismiss the case under the Seventh Circuit’s “newly formulated pleading standard” for this type of fiduciary breach claim (see our Checkpoint article).

The participants asserted that the plan received a “standard package” of bundled services “of a nearly identical level and quality to other recordkeepers who service other mega plans,” but paid fees higher than those paid by other 401(k) plans with comparable participant counts and similar amounts of money under management. To bolster their claims, the participants produced tables showing that, from 2014 to 2020, the plan paid an average of more than twice (sometimes 2.5 times) what comparable plans paid per participant for bundled services. The court explained that, under the new pleading standard, to sustain an ERISA fiduciary breach claim based on excessive fees, parties must simply provide enough facts to show that a prudent alternative action was plausibly available, rather than actually available. The court concluded that the participants had plausibly alleged that comparable plans received bundled services with nearly identical services and that, due to the competitive market, comparable services could be obtained for less.

EBIA Comment: The new pleading standard has opened the door to increased litigation because a participant pleading a breach of ERISA’s fiduciary duty of prudence need only plausibly allege fiduciary decisions outside a range of reasonableness. It remains to be seen whether these participants can prove their claim and win at trial. Nevertheless, plan sponsors of mega 401(k) plans may be under increased pressure to find the cheapest recordkeeping service options, now that participants may easily meet the pleading standard for a fiduciary breach claim by arguing that recordkeeping services for mega 401(k) plans are fungible and that the same bundled services could have been provided by other comparable recordkeepers at lower cost. For more information, see EBIA’s 401(k) Plans manual at Sections XXIV.G (“Fiduciary Duty #2: Procedural Prudence”), XXV.F (“Investment Fees and Expenses”), and XXVI (“ERISA Fiduciary Rules: Participant-Directed Investments”). See also EBIA’s ERISA Compliance manual at Section XXVIII.I.8 (“Litigating a Breach of Fiduciary Duty Claim”).

Contributing Editors: EBIA Staff.