Legal Blog

How 401(k) Plans and Trustees Can Guard Against Class Action Suits

On February 14, 2017, David G. Feinberg, a participant in T. Rowe Price’s 401(k) plan, filed a lawsuit in U.S. District Court in Baltimore against T. Rowe Price (“TRP”), certain TRP affiliates and Plan Trustees.  The charge: The Plan and its Trustees engaged in self-dealing and reaped windfall profits in violation of their fiduciary duties under ERISA, the federal statute that regulates employer-sponsored pension plans.  TRP violated its fiduciary duties, according to the complaint, by picking TRP in-house investment funds instead of other non-proprietary alternatives and permitting excessive fees to be charged to the Plan. According to the complaint, Plan participants could have saved $27 million in fees and earned more than $123 million more in profits if TRP, its affiliates and Plan Trustees had acted as proper fiduciaries for the exclusive benefit of participants.

The action filed by Mr. Feinberg is not an isolated occurrence.  In the past two years, other financial companies, including Edward Jones, Morgan Stanley, Neuberger Berman, Franklin Templeton, American Century Investments and New York Life, have been hit with similar class action suits on behalf of disgruntled pension plan participants.

Litigation against Plan sponsors, Trustees and investment advisors likely will increase in the coming months.  On June 9, the U.S. Department of Labor fiduciary rule went into effect.  The final rule expands the scope of parties who are fiduciaries and who must act at all times in the best interests of pension plan participants.

What should a retirement plan and its fiduciaries do?  First, as I suggested in my Blog post on March 15, you should consider converting your 401(k) Plan to a §3(38) Plan to avoid lawsuits for breach of fiduciary duty for failure properly to manage 401(k) investment options.  ERISA §3(38) allows a Plan sponsor to appoint an Investment Manager to manage its Plan investments.  The Investment Manager undertakes sole discretionary authority to select, monitor and replace investment options for the 401(k) retirement plan.  The Plan sponsor and Plan administrator are relieved of the responsibility for the Investment Manager’s investment decisions.  That leaves the Plan sponsor/administrator only responsible for prudently selecting and monitoring the Investment Manager.

Second, if the employer is Plan sponsor or administrator, you should consider an audit of the Plan’s current structure and operations.  What investments are included in the menu of investment options for Plan participants?  Are there too many or too few choices?  Do the investments tilt toward in-house, proprietary investments that charge higher fees than other options?  How does your investment advisor stack up against the industry standard?  Does the advisor comply with the final fiduciary rule?  As part of my practice, I advise companies, their pension plans and their plan trustees on ERISA and related legal matters.  If you have a question, call me.


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