Policies & Procedures: The Key to Avoiding Retirement Plan Excessive Fee Litigation

The recent increase in litigation over retirement plans and, specifically, the fees those plans are being charged for administration and management, has many companies concerned about what they need to do to protect the plans they manage. Two recent federal district court rulings illustrate the necessity for plan sponsors to have a prudent decision-making process in place to successfully defend against excessive fee litigation.

Kurtz v. The Vail Corporation

On January 6, 2021, a Colorado federal district court dismissed with prejudice (meaning that the case cannot be refiled) a lawsuit against the Vail Corporation’s 401(k) retirement plan. The plaintiff sought class action status based on a number of allegations regarding the plan’s investments, including that (1) the plan fees were 90% higher than those paid by comparable plans and were therefore excessive; (2) low-fee share classes were not selected by plan fiduciaries; (3) plan fiduciaries should have chosen passive instead of actively managed funds; and (4) the duties of prudence and loyalty were violated.

As to the claim of excessive fees, the court wrote that “courts have held that to establish a valid claim for excessive fees a fund must ‘charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining.’” Young vGeneral Motors InvestMgmtCorp.

As to the claim of poor plan selection based on the availability of lower fee share classes, the court cited Hecker vDeere & Co. in dismissing that claim: “[t]he fact that it is possible that some other funds might have had even lower ratios is beside the point; nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund (which might, of course, be plagued by other problems).” 

When considering the fiduciary breach claims, the court said that these claims must be based on conduct at the time, not on hindsight or the performance of the chosen investments: “As long as a fiduciary meets the prudent person standard, ERISA does not impose a ‘duty to take any particular course of action if another approach seems preferable.’”

Davis v. Salesforce.com

On October 5, 2020, a California federal district court dismissed with leave to amend a case by former Salesforce.com employees against the Salesforce.com 401(k) planning committee for breach of the fiduciary duties of loyalty and prudence and the company’s Board for failing to adequately monitor the committee.

The claims were similar to those made in Vail regarding the failure to choose low-fee share classes and failing to benchmark actively managed fund fees vs. passively managed fund fees. In addition, the plaintiffs faulted the defendants for not looking into other investment vehicles such as collective investment trusts and separate accounts as well as for choosing fund managers who were also investors in the company.

In its ruling, the court found that:

  • Since passive and actively managed funds have different management approaches and different risks, “plaintiffs’ allegations that passively managed funds are available as alternatives to the actively managed funds offered in the Plan do not suffice to demonstrate imprudence.”
  • There is no fiduciary duty requiring the offering of alternative investment vehicles to mutual funds.
  • Stating that a failure to choose share classes with the lowest fees is insufficient by itself to support a fiduciary breach claim.
  • The mere fact that Fidelity Contrafund owns shares in Salesforce.com is insufficient to support a fiduciary breach of loyalty in hiring Fidelity to manage the fund. It must be shown that fiduciaries intended to benefit themselves or others in making investment decisions.

Key Takeaways

These two decisions clarify that, when considering fiduciary duties of prudence, courts will make a determination based on the decision-making process at the time, not on hindsight. Therefore, it is critical that fiduciaries have and follow a good investment policy statement and thoroughly document how and why investment decisions are made. 

HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 678-439-6236.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.
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