Pension & Benefits News Participant fails to advance fiduciary breach claims over use of proprietary funds
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Wednesday, September 19, 2018

Participant fails to advance fiduciary breach claims over use of proprietary funds

By Pension and Benefits Editorial Staff

A 401(k) plan participant failed to advance his claims that his former employer's use of proprietary investment funds in the plan constituted a breach of fiduciary duty where the participant did not plead the existence of a meaningful benchmark demonstrating that a prudent fiduciary would have selected a different set of funds, the U.S. Court of Appeals in St. Louis (CA-8) has ruled.

Proprietary investment funds. A former bank employee and 401(k) plan participant filed a class action suit against the bank and its benefit committee alleging that the defendants breached their fiduciary duties when they (1) retained the bank's proprietary investment funds as options for the 401(k) plan and (2) defaulted to these proprietary funds for participants who did not elect other options. The proprietary funds were allegedly more expensive (due to higher fees) than comparable Vanguard and Fidelity funds and also underperformed the Vanguard funds. The district court granted the defendants' motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) and the employee appealed.

No meaningful benchmark. The appellate court affirmed the lower court's ruling in favor of the bank. To show that a prudent fiduciary in similar circumstances would have selected a different fund based on the cost or performance of the selected fund, a plaintiff must provide a meaningful benchmark as a basis for comparison. The employee in this case failed to provide such a benchmark, citing to only one Vanguard fund which he alleged performed better than the proprietary funds. The fact that one fund with a different investment strategy ultimately performed better establishes nothing about whether the proprietary funds were an imprudent choice, the court explained.

With respect to the fee differential, the court stated that the existence of cheaper fund does not mean that a certain fund is too expensive “in the market generally” or that it is otherwise an imprudent choice.

Source: Meiners v. Wells Fargo & Company (CA-8).

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