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According to
Bloomberg Law, class actions challenging 401(k) plan fees are
increasing at a record pace. The underlying claims in these class
action suits fall into predictable categories that are all too
familiar: excessive fees, poor fund choices, poor plan design,
fiduciary neglect, and prohibited transactions. Khan v. PTC,
Inc. fits the pattern. The plaintiffs claim that the
fiduciaries of the PTC, Inc. 401(k) plan:
- Failed “objectively and adequately [to] review the
Plan’s investment portfolio with due care to ensure that each
investment option was prudent, in terms of cost,” and - Maintained “certain funds in the Plan despite the
availability of identical or similar investment options with lower
costs and/or better performance histories.”
The plaintiffs seek recovery against the plan’s investment
committee for breach of the fiduciary duties of prudence and
loyalty and against PTC’s board of directors for failing to
adequately monitor the committee. A similar narrative might be
found in any of the many dozens of such cases filed each year.
Nevertheless, the case merits attention for three reasons.
Assets Under Management—Which Plans are Targets?
Quoting the complaint, the opinion reports that PTC, Inc.’s
401(k) plan had more than $450,000,000 in assets under management,
which qualifies it “as a large plan in the defined
contribution plan marketplace, and among the largest plans in the
United States.” That claim is wholly unnecessary and
demonstrably false. It is unnecessary because the amount of the
assets held in the plan is not relevant to the substance of the
plaintiff’s claims; and it is false based on readily available
industry data. According to the Investment Company Institute (or
ICI), there are about 600,000 401(k) plans that hold an
estimated $6.7 trillion in the aggregate. Of these,
Morningstar reports that 30.0% of all 401(k) participants are
in plans with more than $1 billion in assets. What is notable,
however, is that a plaintiff’s law firm thought it worth the
effort to bring suit against a plan of this size.
Litigation involving 401(k) plans commenced in earnest in or
about 2006 with a series of lawsuits against plans maintained by
Fortune 500 companies. And until recently, plaintiffs’
attorneys have focused their efforts exclusively on
“large” retirement plans. What is changing is what the
plaintiff’s bar views as large for this purpose. For many
years, plan sponsors of plans with assets under $1 billion felt
relatively safe. If that was ever the case, this case demonstrates
that it is no longer so. Plans with assets on the order of half a
billion dollars in assets (and perhaps less) now appear to be fair
game.
Procedural Posture/Specificity of the Claims
The case was before the U.S. District Court for the District of
Massachusetts on a procedural motion by PTC to dismiss for lack of
subject-matter jurisdiction. The plaintiff’s argument in
support of its motion to dismiss was for “lack of
subject-matter jurisdiction” based on Article III
standing.” PTC alleged that the plaintiffs in this instance
failed “adequately to plead injury and redressability stemming
from PTC’s alleged mismanagement of the specific funds in which
they invested.” The basis of this claim is a 2020 Supreme
Court case, Thole v. U.S. Bank N.A., that dealt with a
defined benefit plan and not a 401(k) plan. PTC’s attempted to
leverage this recent Supreme Court precedent by arguing that
“a plaintiff cannot suffer an injury from an investment that
he or she did not purchase.” The court was not impressed.
There is, said the court, no need for a plaintiff to prove
individualized damages in an ERISA class action case.
While right in our view to sweep aside PTC’s Article III
claims, the Court nevertheless appears to leave in place a
shockingly low bar for what a plaintiff must plead—not what
they must prove—in order to survive a motion to dismiss and
to proceed to a trial on the merits. This is important since
serious settlement discussions generally take place only if there
will be a trial on the merits. But plaintiff, it seems, need only
claim that a 401(k) plan sponsor failed to adequately monitor the
plan committee and that the committee acted without due care to
ensure that each investment option was prudent. This seeming lack
of required specificity could encourage baseless and speculative
claims and actions.
401(k) Governance 101
The structure of the plaintiff’s claims is notable: the
401(k) plan sponsor failed to adequately monitor the plan
committee, and the committee failed to act prudently. For purposes
of ERISA, the “plan sponsor” is usually the company that
sponsors the plan, the control of which is vested in the
company’s board. Thus, it is the board that is at least
presumptively obligated to comply with all of the ERISA fiduciary
standards. But ERISA also liberally allows for the delegation of
fiduciary responsibility, subject to a residual duty to monitor
those to whom fiduciary duties have been delegated.
It is commonplace for boards to formally delegate the fiduciary
duties for a company’s plans to a fiduciary committee. This
generally requires a vote by the board (of the members of an LLC),
and it is often accompanied by the adoption of a committee charter
and or bylaws. While not always undertaken, these steps are
important. There is no way to know what prompted the plaintiffs in
the PTC case to frame their claims in the manner described above.
Perhaps they were able to determine that there was a proper
delegation of authority, or perhaps they simply guessed. Either
way, the structure of the claim highlights an important issue.
But consider this counterfactual: If there was no proper
devolution of fiduciary authority to the committee, the complaint
would allege that the board and the committee failed to act
prudently. Thus, if (as happened here) the case survived
preliminary procedural motions, during discovery and at trial, the
individual board members could be interrogated about their
compliance with the particulars of the ERISA fiduciary standards.
In contrast, where there is proper delegation, individual board
members could only be quizzed about their oversight of the
committee.
We address the issue of the devolution of authority from a board
or an LLC manager to a fiduciary committee in a previous post. The PTC case serves to reinforce our
previous concerns. At a minimum, this is an item that is worthy of
the a board’s attention.
Conclusion
The lesson of the PTC case is that the stakes are getting higher
for 401(k) plans and 401(k) plan governance. More plans are now in
the sights of the plaintiff’s bar, and the apparent trend
toward more liberal pleading standards is worrisome. As a
consequence, there is now an even greater need for plans to pay
attention to the basic of fiduciary governance in addition to
observing the ERISA standards of prudence and loyalty.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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