Alert June 30, 2010

Federal District Court Dismisses 401(k) Excessive Fee Litigation

In Renfro, et al. v. Unisys Corp., et al., Case No. 2:07-cv-02098 (E.D. Pa. Apr. 26, 2010), the U.S. District Court for the Eastern District of Pennsylvania granted the defendants’ motions to dismiss claims under ERISA, challenging the fees charged to a large 401(k) plan.

One of more than a dozen similar lawsuits filed around the country by the same plaintiffs’ law firm, the case involved allegations that the plan sponsor and the plan’s service providers (the trustee, recordkeeper and the investment adviser to the plan investment options) breached duties owed under ERISA by charging excessive administrative and investment management fees to the plan, and by failing to take advantage of the plan’s large size to negotiate lower fees for plan participants. 

With respect to claims against the service provider defendants, the plaintiffs had alleged that the trustee/recordkeeper defendant had discretionary authority or responsibility in the administration of the plan giving rise to ERISA fiduciary status on the ground that, under the trust agreement, the only mutual funds the plan could offer were those advised by the trustee/recordkeeper’s affiliated investment adviser or those that trustee/recordkeeper approved.  The court held that it did not need to reach the question of whether this alleged “veto power” over changes to investment options was a sufficient grant of discretionary authority or discretionary responsibility in the administration of the plan to render the provider a fiduciary, because there was no such veto power under the facts alleged.  While the trust agreement set forth rules governing that particular trust, it “did not limit [the sponsor]’s ability to establish another trust that would offer [p]lan participants the opportunity to invest in [other] mutual funds.”  Because the trustee/recordkeeper did not have a veto power over investment selections giving rise to fiduciary status, and because the plan sponsor retained sole authority to determine what investment options were offered to the plan, the claims against that defendant were dismissed.  Claims against the affiliated investment adviser were also dismissed because the plaintiffs’ theory of liability as to the adviser was premised on its alleged exercise of authority delegated to it by the trustee/recordkeeper.   

With respect to claims against the plan sponsor and named fiduciary, the court held that the plan offered a sufficient mix of investments to participants and that no rational trier of fact could find, based on the pleaded facts, that the named fiduciary breached an ERISA fiduciary duty by offering this particular array of investment vehicles.  In support of this holding, the court cited to the Seventh Circuit’s decision in Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009), reh’g and reh’g en banc denied, 569 F.3d 708 (2009), cert. denied 130 S. Ct. 1141 (2010), in which the Seventh Circuit affirmed dismissal of similar claims involving another large 401(k) plan on the ground that a plan fiduciary is not obligated to select the cheapest funds available, and that where the plan offered sufficient range of options to afford participants control over their risk of loss, any loss to participants was attributable to their individual choice and could not form the basis for fiduciary liability.  The Hecker decision was discussed in Goodwin Procter’s June 25, 2009 ERISA Litigation Update.  Citing the Hecker decision, among other authorities, the court dismissed the plaintiffs’ second amended complaint in its entirety.