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 | November 2016

Drew McCorkle
Vice President, Financial Advisor


  • Court Decision Provides Fiduciaries a Breath of Fresh Air
  • Meanwhile, New Fee Litigation Continues
  • Plan Recordkeeper Liable for Un-Deposited Employee Deferrals
  • Float Income Claims Resurface
  • New Flexibility Offers Avenues for Participant Claims
  • Tidbits

Court Decision Provides Fiduciaries a Breath of Fresh Air

In these pages we have chronicled the emergence of ever-expanding plan fee and related claims against plan sponsors and fiduciaries as well as hundreds of millions of dollars in fee litigation settlements. We have also reported the few court decisions handed down in this area.

The court decisions fall into one of two categories. First are cases with an affirmative failure of loyalty or prudence—or both—by plan fiduciaries that also include the payment of excessive fees, and the fiduciaries are found to be liable. Recent examples are:

  • ABB v. Tussey, in which plan assets were used to pay corporate expenses;
  • Tibble v. Edison, in which the plan fiduciaries did not include regular fee monitoring in their process; and
  • Tatum v. RJR Pension Investment Comm., in which a complicated investment decision was made by unauthorized individuals with only 20 minutes of deliberation and no documentation.

The second category includes claims of excessive fees with no connection to an express breach of loyalty or prudence, and the fiduciaries prevail. The recent decision in White v. Chevron (N.D. California, Aug. 29, 2016) illustrates this category, and its outcome speaks to the core of fiduciary committee obligations.

In White v. Chevron, one of the many fee lawsuits filed by the firm of Schlichter Bogard & Denton, the breach claims were:

  • offering a money market fund rather than a stable value fund,
  • using funds with unreasonably expensive investment management fees in a $19 billion plan,
  • paying excessive fees to Vanguard for plan administration services, and
  • being too slow to remove an underperforming fund from the plan.

Each of the claims alleged a breach of fiduciary duties of loyalty and prudence under ERISA.

The court summarily dismissed all of the alleged duty-of-loyalty breaches, noting that nothing in the complaint suggested that the fiduciaries acted with the purpose of benefiting anyone other than plan participants, and there were no conflict of interest allegations.

The court then evaluated the duty-of-prudence breach claims and whether they should be dismissed. It was first noted that prudence “focuses on a fiduciary’s conduct in arriving at an investment decision, not on its results, and asks whether a fiduciary employed the appropriate methods to investigate and determine the merits of a particular investment.” In each instance, the court found that the complaint’s allegations were insufficient.

Following are several of the court’s practical observations about meeting ERISA’s fiduciary requirements, which can serve as guideposts for plan fiduciaries. Particularly relevant items are highlighted with italics.

Money market vs. stable value:

  • A complaint that lacks allegations relating directly to the methods employed by the ERISA fiduciary may survive a motion to dismiss only if the court, based on circumstantial factual allegations, may reasonably infer from what is alleged that the process was flawed.
  • “Offering a money market fund as one of an array of mainstream investment options along the risk/reward spectrum more than satisfied the Plan fiduciaries’ duty of prudence.”
  • “The IPS provides that ‘at least one fund will provide for a high degree of safety and capital preservation … The inclusion of a money market option is consistent with the IPS.”
  • “Finally, plaintiffs’ focus on the relative performance of stable value and money market funds over that last six years is an improper hindsight-based challenge to the Plan fiduciaries’ investment decision-making. A fiduciary’s actions are judged based upon information available to the fiduciary at the time of each investment decision and not from the vantage point of hindsight.

Excessive investment management fees:

  • Fiduciaries have latitude to value investment features other than price (and indeed, are required to do so), as recognized by the courts.
  • ERISA does not require fiduciaries to scour the market to find and offer the cheapest possible funds (which might, of course, be plagued by other problems).
  • Fiduciaries are not required to offer only institutional funds. “There are simply too many relevant considerations for a fiduciary for that type of bright-line approach to prudence to be tenable.”
  • “The mere inclusion of a fund with an expense ratio that is higher than that of the lowest [cost] share class … is insufficient to state a claim that fiduciaries imprudently failed to consider lower cost options. … The plan fiduciaries changed the investment options from year to year… support[ing] the inference that the fiduciaries were monitoring the investment options.”

Excessive administrative fees:

  • “The fact that the Plan fiduciaries renegotiated the arrangement to specify a per-participant fee after just two years of receiving asset-based revenue-sharing payments for its services, and the fact that during those two years, defendants switched to cheaper share classes for at least four funds, plausibly suggest that the defendants were monitoring recordkeeping fees to ensure that they did not become unreasonable.”
  • The allegation that Plan fiduciaries were required to solicit competitive bids on a regular basis has no legal foundation.

Taking too long to replace a fund:

  • Poor performance, standing alone, is not sufficient to create a reasonable inference that plan administrators failed to conduct an adequate investigation—either when the investment was selected or as its underperformance emerged—as ERISA requires a plaintiff to plead some other objective indicia of imprudence.
  • “The allegations [in the complaint] create a plausible inference that the Plan fiduciaries were attentively monitoring the fund, as they removed the fund … while it was still outperforming its benchmark on a long-term trailing basis.”
  • “Indeed, a fiduciary may—and often does—retain investments through a period of underperformance as part of a long-term investment strategy.”
  • ERISA judges fiduciary decision-making as of the time the decisions were made … Plaintiffs have not alleged that the Plan fiduciaries could predict that the … fund would underperform plaintiff’s preferred alternatives during the period [before it] was removed from the lineup.

Meanwhile, New Fee Litigation Continues

In recent months, new fee litigation has been commenced with the following allegations:

  • Offering a money market fund rather than a stable value fund and paying excessive recordkeeping fees as a result of a basis-point fee and increasing assets. McDonald v. Edward D. Jones & Co.
  • Financial services firms using their own investments and receiving excessive revenue. Bekker v. Neuberger Berman Group; Cryer v. Franklin Resources, Inc.
  • Twelve fee litigation cases have been filed recently in connection with a number of sizeable defined contribution plans sponsored by many of America’s largest private universities. These include a variety of allegations—some of which are specific to 403(b) plan structures—but almost all were identical and filed by the same law firm on behalf of each plan’s participants.
  • Excessive indirect revenue paid to the plan recordkeeper from fee sharing with participant investment advice provider Financial Engines. Patrico v. Voya Financial, Inc.
  • Excessive fees on target date funds. Lorenz v. Safeway, Inc.

Plan Recordkeeper Liable for Un-Deposited Employee Deferrals—$3 million

In a precedent-setting case, Ascensus, the recordkeeper and asset custodian for a plan with approximately 450 participants, was found to be liable to plan participants for nearly $3 million of employee salary deferrals that the plan sponsor failed to transmit to the recordkeeper. Longo v. Trojan Horse Ltd. (E.D. North Carolina, Sept. 20, 2016).

By contract and per plan documents, recordkeepers and asset custodians routinely limit their role to responsibly providing asset custody services and following the directions they receive. That appears to be the situation here. Regardless, the judge found that Ascensus’s duties went beyond “simply complying with the specific duties imposed by the plan documents or statutory regimen.” The court found that because Ascensus had an express duty to administer plan assets once received, “under the principles of ERISA [it] had a further duty to ensure that those contributions were being made.”

The court found that Ascensus had no knowledge of any actions taken or not taken by the plan sponsor regarding plan contributions, and that it took no affirmative steps to investigate or analyze the contributions it received. This lack of knowledge and action was the breach. Dismissing restrictive language in the documents, the court said that “carefully crafted plan documents aimed at insulating a trustee and an ostrich-like approach to the actions of plan administrators” does not overshadow the fact that ERISA is to be liberally interpreted to protect participants and beneficiaries and preserve plan assets.

Float Income Claims Resurface

Float income, interest earned on unassigned assets, has been the subject of litigation for several years. Fidelity’s float practices have been the main focus of these cases. The central allegation is that float income is a plan asset that must be credited to the plans and cannot be used otherwise by Fidelity. A recent case from the U.S. Court of Appeals for the First Circuit affirmed dismissal of a float income case centered on assets being distributed from a plan. The assets were transferred to a payment account to fund distributions to plan participants, and interest accrued before participants cashed distribution checks. However, the decision distinguished between assets held for distribution and assets held in a receiving account while waiting to be deposited into retirement plans. In Re Fidelity ERISA Float Litigation (1st Cir. July 13, 2016). Just over a month later, a new claim alleging misuse of float income was filed. Burgess v. HP, Inc. (N.D. California). That case is pending.

New Flexibility Offers Avenues for Participant Claims

We have reported on the Supreme Court’s expansion in CIGNA v. Amara of the types of relief that judges can award in ERISA cases. Practical implications of that decision continue to develop. In Moyle v. Liberty Mutual (9th Cir. Aug. 18, 2016), a group of pension plan participants joined the plan sponsor through a corporate merger. They claimed that as part of the merger they were promised past service credit with their merging—and disappearing—employer for all of their benefits, including benefit accruals under a pension plan. A review of the governing plan documents made it clear that past service credit would not be included in calculating the amount of pension benefits. However, what was communicated—and not communicated—to plan participants was not so clear. Based on plan documents, the district court decided for the plan and against the plan participants, who appealed.

Before the decision in CIGNA v. Amara, the governing documents would have controlled and the case would be at an end, which the Moyle appeals court specifically acknowledged. However, courts can now look beyond the formal documents and arrive at equitable solutions based on the circumstances. Here, the court noted that the plan sponsor failed to communicate material information about how past service would be computed. The case was sent back for additional fact finding and application of the equitable remedies of reformation and surcharge.


  • Final DOL Rule to Facilitate State-Level IRAs—As directed by President Obama, the U.S. Department of Labor (DOL) has issued regulations to facilitate state-level adoption of individual retirement accounts (IRAs) primarily by clarifying that ERISA does not preempt applicable state laws. So far, these programs take the following forms:
    • Automatic enrollment IRAs that are mandatory for employers with a minimum number of employees and no other retirement plan
    • State-run multiple-employer plans (MEPs)
    • State-established IRA marketplaces

One aspect of the final regulation that has drawn attention is permitting state automatic-enrollment programs to restrict employee withdrawals.

  • Updated Form 5500 Coming—Form 5500, which is filed annually by employee benefit plans with more than 100 participants, is developed and used by the three federal agencies responsible that regulate these programs: the DOL, Internal Revenue Service, and Pension Benefit Guaranty Corporation. The form was last updated in 2009. The new form will be required for plan years ending in 2019 (filed in 2020). Announcement of changes came from the DOL and identifies four objectives with respect to retirement plans:
    • modernize financial reporting,
    • enhance data mining from form data,
    • improve service provider information, and
    • enhance compliance with ERISA and the Internal Revenue Code.

Practically, the changes will result in significant information about plans being available for screening by these agencies and will enable them to more effectively evaluate plan metrics to identify audit candidates.

The updated form also seeks more detailed information on issues that have been or we expect to become audit and enforcement focuses. For example, additional information on self-directed brokerage account assets is required, as well as whether fees are paid from plan assets and, if so, whether they are assessed on a per capita basis or pro rata based on account balance.