The U.S. District Court for the Northern District of Illinois has dismissed a putative class action lawsuit brought under the Employee Retirement Income Security Act of 1974 (ERISA) by a participant of 401(k) plan against the plan's fiduciaries, alleging that the fiduciaries allowed the plan to incur unreasonable expenses and retain underperforming investment options. In its opinion in Martin v. CareerBuilder, LLC, et al., issued on July 1, 2020, the court concluded that there was insufficient allegations of a fiduciary breach when the plan's investment lineup contained a diverse array of investment options with varying expense ratios.
The plaintiff was a former CareerBuilder employee and participant in the CareerBuilder 401(k) plan who brought a putative class action against CareerBuilder and other unnamed plan fiduciaries, alleging that the plan permitted its recordkeepers and investment advisor to receive excessive compensation and fees. The plaintiff further alleged that defendants "larded the plan with excessively expensive" and, in some instances, underperforming mutual funds. The expense ratios of the funds included in the plan ranged anywhere from .04 percent on the low end to 1.06 percent on the high end.
The plaintiff's primary allegation was that the defendants permitted the recordkeepers and investment advisor to earn excessive fees through a per participant charge ("hard dollar charge") and through the practice of "revenue sharing," whereby the investment options in the plan share a portion of their expense ratio with the recordkeeper and investment advisor. Although the plaintiff admitted that the revenue sharing charges mitigated the need for higher hard dollar charges, he complained that the total recordkeeping and investment advisory fees charged were excessive in comparison to other plans.
The plaintiff alleged that in furtherance of an excessive fee arrangement with the recordkeepers and investment advisor, the plan fiduciaries selected investment options that were overly expensive, and, in some cases, underperformed the market. The complaint specifically claimed that there were lower-cost share classes available for the same investment options included in the plan and complained that the plan's actively managed mutual funds were more expensive or, in some instances, underperformed "comparable" index funds. As a result of this alleged conduct, the plaintiff contended that the defendants breached their fiduciary duties of prudence and loyalty to the plan and its participants, and failed to adequately monitor other plan fiduciaries.
The court held that there were no indicia of a flawed fiduciary process because the plan offered a wide array of investment options (23) at varying expense ratios, including some funds with very low expense ratios. The court relied heavily upon well-established precedent by the U.S. Court of Appeals for the Seventh Circuit, starting with Hecker v. Deere, and most recently in Divane v. Northwestern University, that "repeatedly has cautioned that plaintiffs and courts cannot use ERISA to paternalistically dictate what kinds of investments plan participants make where a range of investment options are on offer." The district court specifically found that contentions that a lower share class could have been offered, or that less expensive index funds were available, were legally insufficient to move the needle to a "plausible" allegation of a flawed process when cheaper investment options were offered in the plan. The court also found that the allegation that some funds underperformed did not evidence a flawed process because, by inference, other funds performed adequately. As to the allegation of excessive recordkeeping and investment advisory charges (paid through hard dollar fees and revenue sharing), the district court found that the plan's charges were in line with what the Seventh Circuit held were reasonable in Divane, that the plaintiff's allegations were "speculative," and that they were undercut by the plaintiff's admission that revenue sharing payments mitigated the need for additional hard dollar charges.
The district court further found that there was insufficient allegations of a breach of duty of loyalty because the complaint contained no allegations of self-dealing or other misconduct. Because the court found no adequately pled breach of fiduciary duty, it also dismissed the plaintiff's failure to monitor claim. The court dismissed the lawsuit without prejudice, giving the plaintiff the opportunity to address the shortcomings of the complaint.
The court's decision is noteworthy because similar allegations have been asserted in a number of recently filed lawsuits against plan fiduciaries. In certain instances, those allegations – at times combined with others – have been sufficient to survive a motion to dismiss.
The decision underscores the value of offering a wide array of investment options with varying expense ratios and types of investment offerings, such as actively managed mutual funds and passively managed index funds.
The court's analysis highlights the need to continually evaluate your 401(k) plan's investment lineup and investment policy statement, as well as related plan documents, to best position a defense at the motion to dismiss stage.
If you have any questions regarding the court's decision or ERISA, please contact the authors or another member of Holland & Knight's ERISA Litigation Team.
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