Timely, relevant, and actionable investment perspective, best practices, and planning insights for institutional and wealth management clients from CAPTRUST's Consulting Research Group.

Advanced Filter

Fiduciary Update | February 2016

Drew McCorkle
Vice President, Financial Advisor


  • Participant Claims Evolve
  • Tussey v. ABB Attorney Fees
  • DOL on Socially Responsible Funds
  • Fiduciary Buyers Beware
  • No Harm No Foul—When Pension Plan Fully Funded
  • Not Disclosing Difficult Facts Costly to Plan Sponsor
  • QDRO Situation
  • Tidbits

Participant Fiduciary Claims Continue to Evolve

Three recently filed cases provide examples of the continuing evolution of participant fiduciary claims. These cases include allegations that 401(k) plan fiduciary committees and their members breached their responsibilities by:

  • Constructing a custom target date strategy that included hedge funds that suffered significant losses;
  • Not using the least expensive mutual fund share classes available to the plan—or using mutual funds when less expensive commingled trusts or separate accounts of essentially the same investment strategies were available;
  • Allowing the plan to pay excessive recordkeeping and administrative fees in a multiple employer plan arrangement;
  • Using a money market fund rather than a stable value fund as the plan’s cash-equivalent alternative.

A class action suit filed against Intel Corporation’s Investment Policy Committee and others alleges that the committee materially departed from established investment practice for 401(k) plans by including significant exposure to hedge funds in custom age-based target date and other asset allocation funds. According to the complaint, a re-enrollment was done in 2011, resulting in a large portion of participant assets being invested by default in the custom target date funds. Also, the plan includes automatic enrollment at a 6 percent initial deferral rate—with automatic annual increases up to 16 percent—with the custom target date funds being the default. The suit alleges that losses in the hedge funds led the target date and other commingled funds to underperform by “hundreds of millions of dollars.” The complaint was filed late last October and is pending. Sulyma v. Intel Corporation Investment Policy Committee (N.D. CA filed October 29, 2015.).

Anthem, Inc. and others have been sued in a class action alleging that their $5 billion plan could have used less expensive share classes of mutual funds and, further, could have used less expensive separate accounts and commingled trust structures. According to the complaint, the Anthem 401(k) Plan, which is administered by Vanguard and holds mostly Vanguard funds, changed to less expensive share classes of several funds in mid-2013. However, the plan could have saved $18 million by making this change sooner. The complaint goes on to detail opportunities to use less expensive commingled accounts and separate accounts. Finally, the complaint alleges that by using a money market fund rather than a stable value fund, plan participants missed out on earnings of more than $65 million. This case is also in the early stages. Bell v. Anthem Inc. (SD IN filed December 29, 2015).

Reliance Trust Company, Insperity Inc., and others have been sued in a class action alleging that their $2 billion multiple employer plan paid excessive recordkeeping and administrative costs and suffered other losses. Unlike a multi-employer plan, which involves union participation, a multiple employer plan is a single plan in which more than one employer participates. In this case, it is alleged that costs could have been reduced by using less expensive share classes of mutual funds, separate accounts, and commingled trust structures. It is also claimed that a custom target date fund series should not have been used because it was more expensive and underperformed major “off-the-shelf” target date funds available at the time. The complaint contends that a much smaller 401(k) plan maintained for Insperity’s corporate employees offers a stable value fund rather than a money market fund and offers less expensive share classes of the same investments used in the multiple employer plan.

The complaint alleges that $30 million in unreasonable recordkeeping fees were paid, $26 million in excessive investment management fees were charged, $50 million was lost in performance by using an unproven proprietary custom target date series, and, finally, $14 million was lost by using a money market fund rather than a stable value fund. The Insperity 401(k) Plan is a multiple employer plan recordkept and administered by Insperity Retirement Services. Reliance Trust Company is the plan’s discretionary trustee. This case is also in the early stages; we have seen no response to the original filing. Pledger, et. al v. Reliance Trust and Insperity, Inc. (N.D. GA filed December 22, 2015).

Tussey v. ABB Attorney Fees — The Last Chapter?

In the widely reported case of Tussey v. ABB, the issue of attorney’s fees has come before the court and been decided. The final result of the fiduciary breach claims, following appeals, was total fiduciary liability of $13.4 million as follows:

  • Failure to monitor recordkeeping fees and negotiate rebates—$13.4 million liability. Affirmed on appeal.
  • Improper mapping of assets from the Vanguard Wellington Fund to the Fidelity Freedom Funds—$21.8 million liability. Reversed in part and affirmed in part on appeal. No financial liability upon reconsideration.
  • Float income retained by Fidelity—$1.7 million. Reversed on appeal.

After resolution of the merits of the case, the defendants sought attorney’s fees. The district court reviewed the outcomes of the case and the applicable legal standards, concluding that attorney’s fees of $11.6 million should be paid to the plaintiffs’ attorneys by ABB. Tussey v. ABB, Inc. (W.D. MO 2015).

DOL Takes a Fresh Look at Socially Responsible Investments: No Real Changes

The U. S. Department of Labor (DOL) has issued new guidance on the use of socially responsible investments in ERISA-covered retirement plans. A variety of investments are keyed to objectives other than—or in addition to—producing asset growth and investment returns. These are often referred to with labels such as “socially responsible,” “economically targeted,” or “green.” For our purposes, these are all referred to as socially responsible.

In prior guidance, the DOL has been clear that fiduciaries who invest in socially responsible funds run the risk of violating ERISA’s exclusive benefit rule. Under the exclusive benefit rule, all fiduciary decisions must be made exclusively to advance the retirement benefits of plan participants and beneficiaries and pay reasonable plan expenses. Sacrificing investment performance in favor of an alternative purpose—no matter how laudable—would violate the exclusive benefit rule.

The DOL’s prior guidance has had an understandable—and appropriate—chilling effect on the use of socially responsible investments. Under the prior guidance, socially responsible investments could be used in an ERISA-covered retirement plan, but only if the investment is otherwise suitable for use in a retirement plan independent of the socially responsible aspects. The bottom line of this rule is that the investment must be performing and reasonably expected to perform satisfactorily relative to an appropriate traditional benchmark for that investment type. A benchmark consisting of only socially responsible investments would not be appropriate.

Apparently, to avoid a blanket rejection of socially responsible investments, but without materially changing the applicable rules or standards, last fall the DOL issued Interpretive Bulletin 2015-01 (October 22, 2015). In its preamble, the DOL noted the following:

  • Socially responsible elements may be used as a tie breaker among otherwise equivalent investments.
  • It is possible that socially responsible aspects of an investment could result in superior investment performance. (Of course, in such a situation the collateral purpose issue becomes irrelevant.)
  • Consistent with their overarching obligation to choose economically superior investments, plan fiduciaries can address how socially responsible aspects of investments will be evaluated in investment policies.

Fiduciary Buyers Beware

Plan fiduciaries sued Principal Financial Group alleging that the fees charged for investment and administrative services were excessive, which breached Principal’s fiduciary duty to the plan. The district court dismissed the case, finding that service providers are not fiduciaries in contract negotiations. Therefore, Principal did not owe a fiduciary duty to the plan to charge reasonable fees. On appeal, the U.S. Court of Appeals for the 8th Circuit affirmed the finding that, in setting and negotiating contract terms, service providers are not fiduciaries. The DOL filed briefs supporting the plan fiduciaries’ claim, as it has in other similar cases—with similar results. McCaffree Financial Corp. v. Principal Life Insurance Company (8th Cir. 2016).

One of the arguments that Principal was a fiduciary focused on Principal’s winnowing of the investments available on its platform to a choice of 63 investments. The court disagreed. In the contracting process the client, McCaffree, chose 29 investments to offer in its 401(k) plan, making it responsible for the choices. The client claimed that the fees associated with those 29 investments were excessive. Although it did not formally consider whether the fees were high, the court of appeals noted that the alleged excess was “just one tenth of one percent,” and commented that the plaintiff “cannot plausibly claim that this small [difference] demonstrates that Principal violated any fiduciary duty…” At least for this court, it appears that 10 basis points is immaterial.

An irony of this case is that the evidence produced by plan fiduciaries likely establishes with some clarity that the fees the fiduciaries negotiated and paid to Principal were high. However, it is the fiduciaries themselves, who agreed to Principal’s fees and who would seem to be subject to liability for the overpayment.

No Harm No Foul—When Pension Plan Fully Funded

U.S. Bank was sued by plan participants alleging mismanagement of a pension plan’s assets—primarily in 2007 and 2008—that resulted in a pension plan being underfunded. The pension plan was underfunded when the lawsuit was filed, but has since become overfunded. As a result, the alleged injury—uncertainty of the plan’s ability to pay benefits when they become due—has been eliminated. The case was dismissed as moot. Adedipe v. U.S. Bank, N.A. (D MN 2015).

Plan Sponsor Pays for Not Disclosing Difficult Facts

Foot Locker, the retailer formerly known as Woolworth Corporation, decided to change its pension plan to be a cash balance plan with a new benefit formula. As a result, a number of participants would experience a freeze period during which their accrued benefits under the plan would remain unchanged while their benefits under the plan’s new formula caught up with the benefits they had already accrued.

One reason for the plan change was cost savings for Foot Locker. Communications to plan participants did not inform them of the freeze period, and did not clearly explain differences in benefits under the original and new cash balance formulas.

Plan participants were disappointed that their benefits under the amended plan did not match what communications about the changes promised, and they sued for reformation—to have the court re-write the pension plan to provide participants what had actually been communicated to them. The court found that not communicating the freeze and not providing a clear comparison of the new and former benefits was “intentionally false and misleading.” The court noted that the initial communication to participants indicated that management was “excited” to let participants know that after “listening to what associates have told us they would like to see,” the plan was updated to “give us a more competitive retirement benefits package.” The positive tone of this communication, in the face of reduced benefits and a freeze period for the vast majority of participants, was seen as disingenuous. Misstatements and failure to describe the freeze continued for years. Footlocker contended that it did not include more specific information because it was too confusing for participants to understand and it would impact different participants differently.

The court was not persuaded and concluded that “Foot Locker committed equitable fraud. It sought and obtained cost savings by altering the Participants’ plan, but not disclosing the full extent or impact of those changes.” The court refused to apply ERISA’s six-year statute of limitations because the breach was hidden from participants, saying, “The world does not yet have commercially available x-ray vision; logically, the Participants cannot see that which is hidden from them.” The plan was reformed to provide both the original plan benefit, plus any enhancements described in cash balance plan communications—without a freeze. Osberg v. Foot Locker, Inc. (SD NY 2015).

Real-Life QDRO Situations—Continued

Given the widely varying real-life situations in which domestic relations issues come up, they produce frequent litigation. In Cingrani v. Sheet Metal Workers’ Local No. 73 Pension Fund (N.D. IL 2015), a participant was divorced in 2002, and his was pension benefit divided evenly in the domestic relations order. The domestic relations order was reviewed by the plan and found to be a qualified domestic relations order (QDRO), and the pension plan’s records reflected that the participant’s ex-wife would receive 50 percent of the participant’s pension benefit. Unfortunately, the ex-wife died in 2011, before the participant retired. Then, when the participant retired, he was told he would receive only 50 percent of the total pension benefit he had accrued because of the 50 percent assignment to his ex-wife. The QDRO did not anticipate the possibility that the ex-wife could die before the participant’s retirement.

The participant had the domestic relations order amended in 2015 to provide for him to receive the full pension benefit if his ex-wife died before pension benefit payments commenced. The plan refused to accept the amended domestic relations order, and suit was filed. The district court ordered the amended domestic relations order to be followed, finding that refusal to follow it was arbitrary and capricious. 


  • Fiduciary Insurance: D&O and E&O May Not Cover Fiduciary Claims—Many standard directors and officers (D&O) and errors and omissions (E&O) policies do not cover fiduciary claims. Rather, a separate fiduciary rider or policy is required. This issue came up in Bilyeu v. Nat’l Union Fire Ins. Co. of Pittsburgh (LA Ct. App. 2nd 2015), where the terms of D&O and fiduciary policies were considered. For the fiduciary claims, only the fiduciary policy would cover the potential liability. The exclusion of fiduciary claims by most standard D&O and E&O policies is a result of the heightened prudence standard under ERISA that applies to fiduciary claims.
  • Form 5500 Filing Extension…Nevermind—As previously reported, last summer’s Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 enlarged the automatic extension available for Form 5500 filings by three-and-a-half months. Apparently this change was not intended and has been stricken by Section 32104 of the Fixing America’s Surface Transportation Act. Form 5500s for calendar year plans will continue to have an initial filing deadline of July 31 with an extended deadline of October 15.
  • DOL Eases Way for State-Mandated Retirement Programs—As previously reported, a number of states have adopted or are considering legislation that would require employers who do not sponsor their own retirement plans to participate in a state-run defined contribution program. These programs would require employers to establish individual retirement accounts (IRAs) with a minimum automatic salary deferral that the employee would have the right to discontinue.

There has been a question of whether ERISA would apply to these programs. Last year the DOL proposed a regulation confirming that state-mandated IRAs would not create employer-sponsored retirement plans covered by ERISA so long as the employers’ involvement remains minimal. 29 CFR §2510.3-2 (Fed. Reg. Vol. 8 No. 222 p.72006, November 18, 2015). On the same day, the DOL also issued Interpretive Bulletin 2015-02, which elaborates on possible structures that could be employed at the state level to encourage—or mandate—participation in retirement programs. It is anticipated that such arrangements or mandates would apply only to employers who do not have retirement programs like a 401(k) plan in place.

  • DOL Rule Expanding Fiduciary Definition Continues to Receive Attention—The DOL’s proposed rule expanding the definition of fiduciary has been the subject of considerable debate in Congress with several bills being suggested or introduced that would impact the regulation. So far, none has gained traction. The DOL is expected to issue a final regulation later this year following its consideration of the numerous comments received.