Compliance

ERISA Suit Questions Money Market Performance, Recordkeeping Fees

Because revenue-sharing payments are asset based in the plan, plaintiffs argue, “they bear no relation to a reasonable recordkeeping fee and can provide excessive compensation.”

By John Manganaro editors@plansponsor.com | July 03, 2017
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Employees of Pioneer Natural Resources have filed an Employee Retirement Income Security Act (ERISA) lawsuit against their employer, alleging a variety of fiduciary breaches in the management of its 401(k) plan.

A close look at the complaint offers plan officials some important—if unwelcome—insight about just how widespread ERISA-based litigation has become and how difficult it can be to avoid a challenge once the plan has gained the attention of the plaintiffs’ bar. Perhaps most notably, in this suit the plan sponsor is called out for failing to remove a money market fund option that had low returns when a stable value fund was also already available in the plan, and yet other suits have been filed arguing essentially the exact opposite, that a given plan should have offered a money market fund option in place of a stable value fund.

The suit, Barrett vs. Pioneer Natural Resources, was filed in the U.S. District Court for the District of Colorado, and it names as defendants not only the company and the 401(k) committee, but also a number of the energy company’s HR and finance executives. The plan in question is a $500 million 401(k) program.

The list of fiduciary breaches alleged goes as follows: “Failing to offer institutional class shares for mutual funds, which resulted in the participants paying excessive costs to invest in the funds; failing to make sure that plan fees were reasonable; and failing to remove the poorly performing money market fund when the better-performing stable value fund was already available, causing losses to plan participants who maintained excessively high cash balances in money market funds rather than the stable value fund, which offered higher returns and the same risk level.”

Given the impermissibility of relying on hindsight in judging investment performance in the context of ERISA breaches, this last claim may be particularly difficult for plaintiffs to succeed on. Indeed, in a similar lawsuit filed against Fidelity regarding money market fund performance relative to other options available to retirement plan clients, the district court was unsympathetic to plaintiffs, dismissing their challenge on summary judgement for failure to establish a breach of either loyalty or prudence.

The claims regarding the purchase of inappropriate share classes may be harder to defend: “Despite having plan assets worth hundreds of millions of dollars, the Pioneer defendants routinely selected the higher-priced Investor share class of mutual funds, instead of the lower-cost Institutional/Admiral share classes of those same mutual funds which were readily available to the plan.”

Most helpful for readers thinking about their own litigation exposure, the text of the suit examines in detail steps the plan sponsor went through to start using the cheaper share classes for some investments. The sponsor clearly communicated its fee-saving activities to plan participants and even told them directly that all plan expenses, “no matter how small, were important.” Yet the Pioneer defendants, after making some share-class changes, continued to offer higher-cost Investment class shares for nine Vanguard funds.

NEXT: Failure to consider CITs also alleged 

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