Another 401(k) Plan Fiduciary Defeats Breach of Fiduciary Duty Claims at Trial

Following a bench trial in a Pennsylvania federal district court in Nunez v. B. Braun Medical, Inc., 401(k) plan fiduciaries defeated a lawsuit alleging that the fiduciaries imprudently managed and paid excessive recordkeeping and investment management fees. The B. Braun Medical fiduciaries’ win follows on the heels of a jury trial win by fiduciaries of Yale University’s 403(b) plan. The court opinions in both of these cases serve as a good reminder that offense is the best defense, and ERISA plan fiduciaries best protect themselves against ERISA breach of duty of prudence claims by proactively implementing strong fiduciary governance practices, such as keeping thorough committee meeting minutes. Consistently creating and maintaining detailed records regarding the initial selection and ongoing monitoring of vendors and investment options will help the committee defend those decisions later.

In Nunez, the court found that both the processes and the outcomes with respect to the plan’s recordkeeping and investments were objectively prudent—the opposite of which the plaintiffs would be required to prove to win their case.

Recordkeeping Fees

In Nunez, the court found that (i) the plan’s retirement committee engaged in objectively prudent conduct in the course of monitoring and handling the plan’s recordkeeping expenses, and (ii) the plan’s recordkeeping expenses were objectively prudent.

As evidence of the committee’s prudence, the court pointed to evidence of the committee renegotiating its recordkeeping fees several times during the relevant time period, resulting in two fee reductions over the course of five years. The court noted that the committee routinely benchmarked its recordkeeping fees utilizing a third-party consultant, and in 2019, the plan fiduciaries conducted a request for proposals (RFP) for recordkeeping services involving seven candidates. Plan records reflect that the recordkeeper selected that year was not the lowest priced, but the lowest cost recordkeeper would have required the plan to offer its proprietary funds. Because the committee wanted to retain its current investment lineup, it selected the candidate that scored the highest in all other categories besides cost. This choice was made easier to defend with evidence of the analysis behind the decision.

In addition, the court determined that the committee did not act imprudently by causing the plan to pay higher fees when the committee felt that the vendor provided superior service. And after a 2021 benchmarking study, the committee determined that the fees were still less than the average fees for two comparators. Overall, the court concluded that the committee’s monitoring and selection of the plan’s recordkeeper were conducted prudently.

Finally, the court found that the plan’s recordkeeping fees were objectively reasonable compared to benchmarks. It also concluded that revenue sharing-based recordkeeping fees were not imprudent even though the plan later moved to a “fee leveling” arrangement, not only because revenue sharing is not per se imprudent, but also because the court found that it was consistent with industry practices at the time.

Investment-Related Fees

The court in Nunez also found that the plan’s retirement committee engaged in an objectively prudent process when monitoring and selecting the plan’s investment options and that the investment options were themselves objectively prudent. The participants’ allegations of imprudence included evidence about the committee’s decision to select higher-priced share classes when less expensive classes and collective investment trust options were available.

As further evidence of prudence, the court looked at the committee’s adoption of and updates to an investment policy statement from 2010 to 2022, retention of an investment advisor, and maintenance of a watchlist to monitor investment risks and the investment performance of the funds offered to participants under the plan. The committee met at least annually since 2014 and at least quarterly since 2019 and relied on monthly and quarterly reports from its investment advisor that included comparisons to benchmark investments. All of these materials supported the conclusion that the committee made prudent decisions.

As to investment fees, the plan’s investment options initially paid revenue sharing amounts to the plan’s recordkeeper to offset administrative expenses. The court found that the plan’s net fees—after taking into account both recordkeeping and investment fees and reductions to recordkeeping fees through revenue sharing—were actually lower than they would have been on a net basis if the plan fiduciaries had selected cheaper share classes.

As a result, the court found not only that the plan’s investment selection and monitoring processes were prudent, but that its investment options were objectively prudent because they performed strongly and, within the target date fund category in particular, performed “extremely well.”

Faegre Drinker Takeaway

The court would not have been able to reach these conclusions if the plan’s fiduciaries had not kept such detailed meeting minutes, notes of meeting materials, copies of RFPs, and subsequent evaluations of candidates. The committee’s prudence was demonstrated with these records, as well as ongoing updates to operative documents, such as the plan’s investment policy statement.

Although a staggering number of excessive fee and imprudent investment lawsuits have been filed over the past few years, the recent B. Braun and Yale trial decisions demonstrate that these lawsuits can be defeated by evidence of a strong fiduciary governance structure with established practices and procedures, documented decision-making, and support from outside advisers. All of these actions create a record that reflects the nuances of fiduciaries’ decision-making years later, and demonstrate a prudent process to overcome fiduciary breach allegations.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

About Author: Kimberly Jones

Kimberly Jones advocates for clients in a broad range of ERISA-related matters in federal courts throughout the country. She is co-leader of the firm’s ERISA litigation team, and a member of the benefits and executive compensation practice group. View all posts by and

About Author: James E. Crossen

James Crossen assists clients in the design and administration of employee benefit plans and executive compensation arrangements. His work with clients includes advising on ERISA and Internal Revenue Code issues affecting retirement plans and welfare plans including advice on IRS corrections, DOL audits, and COBRA, HIPAA, PPACA and Consolidated Appropriations Act, 2021 issues. Additionally, James has experience drafting benefits and equity compensation provisions of merger, stock purchase and asset purchase agreements. He has assisted clients in preparing executive compensation-related documents including Section 280G disclosures, employment agreements and equity, incentive, retention and severance plans. View all posts by and

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