In its opinion the appellate court said the district
court erred in concluding that Jeremy Braden lacked standing to maintain claims
for the period before he began participating in the plan (see Wal-Mart Captures Resounding Excessive Fee Suit Victory). The court found Braden
satisfied the requirements for constitutional standing because he alleged actual
injury to his own plan account, and that injury is fairly traceable to the defendants’
conduct because Braden alleged a causal connection between their actions – even
those taken before his participation in the plan – and his injury.
In addition, the court determined the injury is likely to
be redressed by a favorable judgment.
The appellate panel also concluded that the district
court erred in finding the complaint inadequate because it did not allege
sufficient facts to show how Wal-Mart’s decision making process was flawed.
“Accepting Braden’s well pleaded factual allegations as true, he has
stated a claim for breach of fiduciary duty,” the court said.
Braden alleged that Wal-Mart and other employees involved
in administering the plan failed adequately to evaluate the investment options
included in the plan, and that the process by which the mutual funds were
selected was tainted by their failure to consider trustee Merrill Lynch’s
interest in including funds that shared fees with Merrill Lynch.
While the appellate court said the district court
correctly noted that none of Braden’s allegations directly addresses the
process by which the plan was managed, it said it is reasonable, however, to infer
from what is alleged that the process was flawed.
Braden’s allegations included that:
- The plan comprises a very large pool of assets, that the 401(k) marketplace is highly competitive, and that retirement plans of such size consequently have the ability to obtain institutional class shares of mutual funds, but despite this ability, each of the ten funds included in the plan offers only retail class shares, which charge significantly higher fees than institutional shares for the same return on investment.
- Seven of the plan’s ten funds charge 12b-1 fees from which participants derive no benefit.
- Defendants did not change the options included in the plan despite the fact that most of them underperformed the market indexes they were designed to track.
- The funds included in the plan made revenue sharing payments to the trustee, Merrill Lynch, and that these payments were not made in exchange for services rendered, but rather were a quid pro quo for inclusion in the plan.
“If these allegations are substantiated, the process by which appellees selected and managed the funds in the Plan would have been tainted by failure of effort, competence, or loyalty. Thus the allegations state a claim for breach of fiduciary duty,” the opinion stated.
Duty to Disclose
In its opinion in Braden v. Wal-Mart Stores Inc., the 8th U.S. Circuit Court of Appeals noted that the district court concluded that the Employee Retirement Income Security Act (ERISA) does not require disclosure of revenue sharing arrangements and that the other information 401(k) participant Jeremy Braden sought was not material. The appellate panel disagreed, citing a 6th Circuit opinion that said information is material if there is a substantial likelihood that nondisclosure "would mislead a reasonable employee in the process of making an adequately informed decision regarding benefits to which she might be entitled."
Braden alleged that defendants' had a duty to disclose to
participants that plan funds charged higher fees than comparable funds, that
Wal-Mart had access to more cost effective institutional shares, and that defendants
did not select or evaluate the funds on the basis of the fees they charged. "A
reasonable trier of fact could find that failure to disclose this information
would mislead a reasonable participant in the process of making investment
decisions under the Plan," the 8th Circuit opinion said.
In his complaint, Braden estimated that fees unnecessarily cost the plan some $60 million over the past six years and will continue to waste approximately $20 million per year.
The appellate court vacated the district court's opinion and
sent the case back for further proceedings.
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