Defending Against Excessive Fee Cases: It’s All About Procedure

It’s crucial for plan sponsors to have and follow a good investment policy statement and to carefully document the reasons for all their decisions.

There has been a surge of excessive fee lawsuits filed against plan sponsors in recent years. But there are strategies retirement plan sponsors and their attorneys can take to defend themselves, Carol Buckmann, ERISA [Employee Retirement Income Security Act] attorney and founding partner of Cohen & Buckmann, tells PLANSPONSOR.

“Even if a trial progresses, there are a lot of effective arguments that fiduciaries can make,” Buckmann says. “Most importantly, it is critical for them to show that they followed a prudent process in making their decision. Courts are not going to view their decisions with 20/20 hindsight. Rather, the courts want to see that based on the information that the fiduciaries had at the time they made their decision, they followed a structured process, and that they can agree that their decision was a prudent one. There are a few cases where defendants have won by proving these points. The key thing is to have a process and an IPS [investment policy statement] that you follow religiously. It is also important to keep documentation for several years, because many lawsuits are filed years after decisions are made. If you don’t have that, then you could potentially have a problem.”

In a recent blog post, “When Can 401(k) Fiduciaries Get Excessive Fee Suits Dismissed? Anatomy of Two Recent Wins,” Buckmann discusses the logic used in two federal district court cases. “One was dismissed with prejudice, which means that the plaintiffs can’t refile and bring the claims again,” Buckmann writes. “These decisions may provide a template for further dismissals of cases filed based on conclusory allegations and speculation—rather than the actual conduct of the defendants.”

In Kurtz v. Vail Corp., a judge in the U.S. District Court for the District of Colorado dismissed the suit with prejudice without the need for fact-finding or a trial. The plaintiff argued that Vail Corp.’s 401(k) plan fees were excessive because they were higher than 90% of fees paid by comparable plans. The plaintiff was also upset that the plan’s fiduciaries didn’t select the share class with the lowest fees, and that they selected actively managed funds rather than passively managed funds. The plaintiff charged that the fiduciaries had violated their duties of prudence and loyalty.

The court ruled that “conclusory allegations are not entitled to be presumed true,” Buckmann writes. “Just stating that the fiduciaries should have picked the share class with the lowest fees or should have offered all passive investments isn’t enough. If there is a prudent fiduciary process, there is no duty to take a particular course of action.”

The court also said the complaint did not include details about the information that was available to defendants when they made their decisions, Buckmann adds.

In Davis v., a judge in the U.S. District Court for the Northern District of California dismissed claims against the plan committee and the board alleging that the board had failed to monitor the committee.

Similarly to the Vail case, the plaintiffs argued that the fiduciaries failed to pick the share classes with the lowest expense ratio and failed to benchmark the actively managed fund fees against the fees of passively managed funds. In this case, the plaintiffs also wanted the fiduciaries to investigate the use of collective investment trusts (CITs) and separate accounts offered by insurance companies. They also charged “breach of the duty of loyalty by selecting a recordkeeper and fund managers related to investors in the company,” Buckmann says.

The court ruled that passive investment fund fees are not an appropriate benchmark for evaluating the fees of actively managed funds, Buckmann says. The judge also said that the plaintiff’s case was based on five-year investment returns, which is not nearly “a long enough period to justify plausible claims of imprudence,” she notes.

In addition, the judge said the plaintiffs cannot simply charge that a fiduciary breach occurred because the share classes with the lowest fees were not selected and that, in the case of this retirement plan, the share classes with revenue-sharing fees were used to offset fees and benefited the plan.

Further, the court said, “the fact that the Fidelity Contrafund owned shares of the company does not support a claim of breach of the duty of loyalty in hiring Fidelity.” “There must be allegations that the fiduciaries intended to benefit themselves or parties other than the participants in making decisions,” Buckmann says.

The bottom line, she says, is that courts recognize there isn’t only one right way to invest.

“The decisions also confirm that prudence is determined based on process and the information available at the time,” she adds. “If fiduciaries raising the arguments that were successful in these cases don’t succeed in getting the cases dismissed, they will still have an opportunity to demonstrate that they followed a prudent process and could prevail on summary judgment or after trial. Therefore, it remains crucial to have and follow a good investment policy statement and to carefully document the reasons for all decisions.”