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12 August 2020
The Employee Retirement Income Security Act (ERISA) 1974 requires plan fiduciaries to act prudently and loyally when making decisions about a plan. In Martin v CareerBuilder, LLC, a federal district court held that the plaintiff's allegations about expensive record-keeping costs and imprudent investment options failed to give rise to an inference that the defendants had violated their ERISA obligations.
The plaintiff, a former CareerBuilder employee, sued 401(k) plan fiduciaries for allegedly permitting unreasonable record-keeping fees and imprudent investment options. The complaint alleged that the plan paid record-keeping fees of $136.39 to $222.43 per participant, which was more than an allegedly reasonable fee of $40 per participant. The plan also included retail share classes of investment options instead of institutional classes, and many funds were allegedly more expensive than supposedly identical, cheaper funds. Some funds were actively managed, allegedly so that the plan could share more revenue with the record keeper. The complaint alleged that 40% of the more expensive funds had remained in the plan for five years before being removed.
Relying on three principal US Court of Appeals for the Seventh Circuit cases, the US District Court for the Northern District of Illinois dismissed the complaint without prejudice.(1) In the Seventh Circuit, the courts are dissuaded from paternalistically interfering with plan fiduciaries' selections. Even if cheaper or better-performing funds might exist, ERISA does not require fiduciaries to scour the market to find the cheapest funds or select index funds instead of other fund types. Further, ERISA protects fiduciaries whose process of reviewing an investment was prudent even if the investment then failed to meet expectations. ERISA also requires the court to review the entire menu of options offered to participants, and not any one option in isolation. Fiduciaries are not liable for including retail shares in a plan if the plan offered cheaper alternatives as part of a menu of investment options.
The CareerBuilder menu offered a mix of 23 options, with expense ratios ranging from 0.04% to 1.06%. The court observed that the defendants had removed some funds and modified the majority of the funds over five years. Such action did not suggest imprudence in managing the options for participants. The court also held that the complaint did not allege objectively unreasonable record-keeping fees in view of similar amounts at issue in other cases. The court distinguished the complaint from one that survived dismissal in the US Court of Appeals for the Third Circuit case of Sweda v University of Pennsylvania (923 F3d 320 (3d Cir 2019)). In Sweda, the plaintiffs had included numerous and specific factual allegations and specific comparisons between the plan's options and readily available alternatives, along with allegations that the defendants had failed to remove underperformers.
The dismissal was without prejudice, meaning that the plaintiff was given the chance to replead the claims.
The Seventh Circuit remains a difficult jurisdiction for plaintiffs seeking to file bare-bones, conclusory ERISA claims against 401(k) fiduciaries. CareerBuilder highlights the importance of selecting a prudent overall mix of options for participants. The case also rejects the one-size-fits-all pleading approach to choosing retail investment classes over institutional classes, selecting passive instead of active options and including funds from only one or two of the allegedly best investment managers. The plaintiff in CareerBuilder will likely have filed an amended complaint by 10 August 2020, the deadline set by the court.
For further information on this topic please contact Richard J Pearl or J Christian Nemeth at McDermott Will & Emery by telephone (+1 312 372 2000) or email (firstname.lastname@example.org or email@example.com). The McDermott Will & Emery website can be accessed at www.mwe.com.
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