401(k) Fees and Investment Selection Litigation

By: Michelle M. Scannell and Kathleen Cahill Slaught

Seyfarth Synopsis: A district court recently denied a motion to dismiss a 401(k) proprietary fund class action, continuing an overwhelming trend of allowing these cases to survive pleading challenges. On the bright side, however, the Eighth Circuit recently affirmed a dismissal of such a case, and the

By Amanda Sonneborn, Megan Troy, and Tom Horan

Seyfarth Synopsis: Since August 2016, sixteen elite colleges and universities have faced class action lawsuits related to management of their retirement plans. After five cases previously survived motions to dismiss, the University of Pennsylvania became the first college to secure a complete victory when accused

By: Mark Casciari and Gina Merrill

In 2006, a number of large companies that sponsored ERISA 401(k) plans were sued by clients of the Schlichter, Bogard & Denton law firm for, among other things, excessive 401(k) plan provider fees.  The fee litigation placed at issue ERISA Section 413’s limitations rule, which requires the filing of

By: Ian Morrison, Sam Schwartz-Fenwick and Abigail Cahak

On August 20, 2014, the U.S. Department of Labor’s (“DOL”) Employee Benefits Security Administration announced that it is requesting information on the use and prevalence of brokerage windows in 401(k) and similar plans.

Brokerage windows are a common feature in defined contribution plans (most commonly 401(k)

By:  Ian Morrison and Nadir Ahmed

In Bidwell v. University Medical Center, Inc., Case No. 11-5493, the Sixth Circuit found that plan fiduciaries are shielded from claims over investment losses where they transfer defined contribution accounts into a Qualified Default Investment Alternative (“QDIA”), after notice to the participant, even where the participant had previously

By: Amanda Sonneborn, John Duke and Sam Schwartz-Fenwick

In David v. Alphin (Case No. 3:07-cv-00011-MOC), the U.S. District Court for the Western District of North Carolina dismissed as time barred a putative class action, which alleged that Bank of America and various plan fiduciaries breached their ERISA fiduciary duties by selecting Bank of America-affiliated mutual

by Ian Morrison, Jim Goodfellow, Amanda Sonneborn and Sam Schwartz-Fenwick

On September 6, 2011, in Loomis v. Exelon Corp.(Case Nos. 09-4081 and 10-1755), the Seventh Circuit found that the fiduciaries of Exelon Corporation’s defined contribution retirement plan did not breach their fiduciary duties by offering “retail” mutual funds (i.e. funds that are available to the general public), nor by requiring participants to bear the expenses of those funds. 

The Exelon Plan offered 32 investments options, 24 of which were retail mutual funds with expense ratios of 0.03% to 0.96%.  The highest expense ratios were associated with actively managed funds and the lower ratios associated with index funds.  

Citing Hecker v. Deere & Co., 556 F.3d 575 (7th Cir. 2009), and other Seventh Circuit cases which have stressed the importance of participant choice in understanding fiduciary responsibility with respect to defined contribution plan investments, the Court rejected plaintiffs’ arguments.  The opinion, written by Chief Judge Easterbrook and joined by Judges Posner and Tinder, concluded that the plaintiffs benefited from the “retail” funds’ transparency and liquidity.  It also concluded that Exelon was not in a position to guarantee investments in a particular fund, and thus to use the Plan’s alleged bargaining power to secure lower cost options, because participants had complete discretion whether to invest in any of the offered funds.  The Court characterized the plaintiffs’ theory as “paternalistic” because the Plan had given choice over what investments to use to those most interested in the outcome — the participants.  The Court emphasized, “all that matters is the absence from ERISA of any rule that forbids plan sponsors to allow participants to make their own choices.”  The Seventh Circuit further concluded that an attempt to challenge the assessment of investment expenses against Plan participants failed because whether to make participants pay plan expenses is a non-fiduciary matter of plan design. 

The Court also addressed the district court’s award of costs to Exelon and rejected plaintiffs’ assertion that in an ERISA case a showing of bad faith is required for the defendant to recover costs.  The Court held that after Hardt v. Reliance Standard Life Insurance Co., 130 S.Ct. 2149 (2010), all that is required for an award of costs is that the prevailing party shows “some degree of success on the merits.”  Exelon unquestionably was successful on the merits because it had won an early dismissal.

Loomis, along with Hecker, and several Seventh Circuit decisions from the employer stock context, teaches that plan fiduciaries are not liable for offering allegedly imprudent investment options so long as they offer participants a reasonable choice of
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