Pension & Benefits News Fiduciaries did not breach duties of loyalty and prudence by limiting plan investment options to proprietary funds of plan sponsor
Thursday, April 11, 2019

Fiduciaries did not breach duties of loyalty and prudence by limiting plan investment options to proprietary funds of plan sponsor

By Pension and Benefits Editorial Staff

Fiduciaries did not breach their duties of loyalty and prudence under ERISA by limiting plan investments to proprietary funds of the plan sponsor, according to a federal trial court in Missouri. Putative conflicts of interest did not suggest disloyalty where no evidence indicated that the fiduciaries, who were officers of the plan sponsor, were motivated by the intention to increase the revenues and profits of the company. Moreover, the allegedly poor performance and high fees of the proprietary funds were not relevant to the participants’ claims as they did not indicate an imprudent decision-making process.

Plan investment options limited to proprietary funds. American Century Services (ACS), a retirement services provider, maintained a 401(k) plan for its employees. ACS delegated administration of the plan to a Retirement Committee, comprised of ACS employees, which was responsible for supervising, monitoring, and evaluating the performance of the plan.

A senior management team at ACS appointed the Committee members, but provided no oversight or review of the Committee’s decisions because the members had significant expertise in investment products, retirement plans, and financial markets. Committee members however, did receive training and information about their fiduciary duties. Among the materials provided to the Committee members was an Investment Policy Statement (IPS), which was the governing document for the plan’s administration and set forth the criteria for investment selection.

Since 2010, the plan’s investment options were limited to a selection of American Century mutual funds, American Century collective investment trusts, and American Century Class C common stock. The plan also offered a self-directed brokerage account (SDBA) that included American Century and non-American Century investment options, including index mutual funds, exchange traded funds, and individual stocks and bonds.

Although the plan consisted only of American Century funds, it featured a diverse array of asset classes and investment styles, covering the entire risk/reward spectrum (i.e., money market accounts to specialty funds and common stock funds). The plan also offered a significant number of large cap equity funds, as well as many small and mid-cap equity funds. However, the plan did not offer passively managed funds until 2016 and never provided a stable value fund.

Underperforming funds were identified on a “Watchlist,” and monitored through criteria prescribed by the IPS, which measured a fund’s risk-adjusted return (information ratio). The IPS guidelines, however, did not require the removal of a fund from the plan for failure to attain certain metrics. Instead, the IPS empowered the Committee with discretion to determine whether a fund’s long-term performance goals could still be achieved despite underperformance over a specified period.

Plan participants brought suit, alleging fiduciary breach under ERISA. Essentially, the participants argued that the fiduciaries breached their duties of loyalty by limiting the plan to American Century funds in order to drive revenue and profits to the company. The participants also charged that the fiduciaries breached their duties of prudence in the selection and monitoring of plan investment options.

Limiting plan participants to proprietary funds did not breach duty of loyalty. In dismissing the duty of loyalty claim, the court concluded that the participants did not meet their burden of establishing a single instance in which Committee members placed the interests of American Century over those of the participants. The participants maintained the court should infer impropriety from the fact that the Committee members operated under conflicts of interest in serving as both employees of American Century and as plan fiduciaries. The court, however, noting that ERISA does not prohibit an employer’s corporate officers or employees from serving as plan fiduciaries, stressed that a conflict of interest alone does not constitute a fiduciary breach, absent evidence of an improper subjective motivation animating the alleged disloyal conduct. The fact that the fiduciaries considered only American Century funds for the plan did not establish a motivation to benefit the plan sponsor, the court explained, as it is “not disloyal as a matter of law to offer only proprietary funds.” Fiduciaries, further, are under “no duty to offer more than one investment company’s funds.”

The evidence, beyond the conflict of interest, also did not indicate that the fiduciaries, despite their focus on American Century funds, prioritized the financial interest of the company. By contrast, the evidence established that the Committee undertook a deliberate approach to adding and removing funds, guided by the belief that the American Century funds would most benefit plan participants. That belief, the court conceded, may have proved unfounded in hindsight, but as it was a function of subjective good faith, it did not constitute a breach of the duty of loyalty.

Prudence established by diverse menu of investment options. The court similarly found that the fiduciaries did not breach their duties of prudence by considering only American Century funds for the plan. A fiduciary of a plan sponsored by an asset manager, the court advised, is not required to consider funds of a competitor, if the funds chosen for the plan are prudent options. Contrary to the opinion of the participants’ expert, ERISA does not require a fiduciary to consider every fund from every investment manager and then winnow the funds down to the best performing option. As the plan’s investment lineup included a wide variety of investment options across different asset classes, resulting in a diverse set of investment options within each asset class, the limiting of the plan investment options to American Century funds, the court ruled, was not imprudent.

Prudence did not require plan to offer stable value fund. The fiduciaries also did not act imprudently by failing to offer passive options (index funds) and stable value funds in the plan. As ERISA does not require a retirement plan to offer an index fund or stable value fund, the court explained, the failure to include either in a plan does not, standing alone (i.e., absent a reasoned decision-making process) violate the duty of prudence. The fiduciaries evaluated such options, but omitted them from the plan for sound reasons, including that money market funds and other investment options in the plan’s core lineup covered the entire risk/return spectrum and allowed participants to effectively replicate the underlying positions of a stable value fund.

The plan did add passive investment options in 2016. However, the court found that the plan’s refusal to adopt such options before 2016 was based on a reasoned belief that the cost of actively managed funds was justified by performance, as measured by the funds’ expense ratios.

Prudent monitoring of underperforming funds on Watchlist. The participants forcefully charged that the fiduciaries failed to prudently monitor underperforming funds that remained on the Watchlist over many quarters. The court rejected the charge, first noting that a fund’s rate of return was relevant to the participants claim only insofar as it suggested that the fiduciaries’ decision-making process was flawed. The court then found that the Committee followed a prudent process in monitoring and retaining funds in the plan. The Committee continuously monitored the funds on the Watchlist and, after reviewing the funds’ rolling performance and information ratio data, came to a reasoned decision to retain them in the plan, thereby also relieving plan participants of need to sell shares at a lower price and miss out on the benefits of any subsequent improved performance.

Fiduciaries prudently monitored costs. The participants further charged that the fiduciaries acted imprudently by retaining funds with excessive fees in the plan. While noting that plan fees ranging from 4-158 basis points, were similar to those approved by the Third Circuit (Renfro v. Unisys, CA-3 (2011), 671 F. 3d 314) and the Ninth Circuit (Tibble v. Edison, CA-9 (2103), 729 F. 3d 1110), the court also found that less expensive funds were available within the plan’s diverse selection of options.

Moreover, the court stressed that a fund’s fee is relevant only so far as it demonstrated the imprudence of a fiduciary decision-making process. The evidence, however, indicated the Committee compared the expense ratios of plan funds to funds in peer groups, as well as other relevant information, to ensure that a fund’s fees were reasonable in light of its performance and level of risk.

SOURCE Wildman v. American Century Services, LLC (DC MO).

Back to Top

Interested in submitting an article?

Submit your information to us today!

Learn More