ERISA fiduciary breach class action extends to 100-participant 401(k) plan

May 25, 2016

Benefits Alert

Author(s): Catherine T. Gonzalez

A recent class-action lawsuit demonstrates that employers with even small- or mid-sized 401(k) plans need to take steps to defend against potential ERISA lawsuits.

In recent months, over 20 ERISA fiduciary breach class action complaints have been filed against 401(k) plan sponsors and fiduciaries. The employers and plans involved are well-known corporate giants with mega-size plans. The complaints allege that plan participants have lost millions of dollars in retirement savings due to the plans paying excessive administrative fees and offering expensive, under-performing investment options. Small and mid-market employers seeing the headlines may believe they are flying under the radar, invisible to plaintiffs’ attorneys who stand to collect millions of dollars in fees going after the deep pockets.

A class action complaint just filed in the U.S. District Court of Minnesota may be a wake-up call.

Proving that even modest size 401(k) plans are fair game, a fiduciary breach class action suit has been filed against the plan sponsor and fiduciaries of the LaMettry’s Collision, Inc. 401(k) Profit Sharing Plan. The plan has approximately 130 participants and $9.8 million in assets. The suit claims that LaMettry’s president and CFO are the plan fiduciaries and select the plan’s investment options, which include mutual funds, pooled separate accounts and a guaranteed investment contract offered by Voya. Voya is also the plan’s recordkeeper. Plan participants claim that the plan fiduciaries and Voya “stacked the deck with expensive investments and unnecessary charges costing plan participants millions of dollars over time in lost retirement plan growth.”

The ERISA fiduciary breach allegations are the same as those made in the cases against the giant employers and their plans:

  • The fiduciaries do not have a prudent process for the consideration, selection, evaluation, or active monitoring of the investments offered under the plan.
  • The fiduciaries selected retail class shares of mutual funds rather than readily available lower cost institutional shares. According to the plaintiffs, the fees for the retail shares are as much as 100% higher than the fees for the institutional shares, for the exact same underlying investments. The argument does not stop there though; the participants also assert that the fiduciaries should have investigated similar funds that are readily available in the marketplace, with significantly lower costs and better investment performance.
  • The fiduciaries imprudently allowed the plan to pay Voya recordkeeping fees based on a percentage of assets and failed to solicit competing bids to control costs. The cost incurred by a recordkeeper in providing services to a 401(k) plan is determined by the number of participants in the plan, not the dollar value of plan assets or individual account balances. The complaint alleges that a reasonable cost for a plan with over 100 participants is $18 per participant but that LaMettry’s plan paid Voya almost $886 per participant—4900% higher than a reasonable fee for these services.
  • The fiduciaries did not pay any attention to revenue sharing payments Voya received from the mutual fund companies, which unreasonably increased Voya’s compensation above the already excessive fees paid by the plan.
  • The plan’s bundled expense structure added unnecessary expense and complexity to the detriment of participants. In connection with this allegation, the participants allege that Voya charged a daily asset fee on non-Voya mutual funds and a monthly administration fee. These fees added no value and resulted in an index stock fund costing plan participants 112% more than similar funds in the marketplace.

While any particular claim against these fiduciaries may not be successful, there are lessons to be learned from the unprecedented number of ERISA fiduciary breach class actions being filed. Plan fiduciaries must have a process in place to make prudent decisions about plan investments and the retention of service providers, they must continuously monitor and assess the ongoing prudence of the investments and the reasonableness of plan administrative expenses, and they must make any changes needed based on such diligence.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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