Illinois Federal Court Dismisses ERISA Claims against 401(k) Fiduciaries

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The Employee Retirement Income Security Act of 1974 (ERISA) requires plan fiduciaries to act prudently and loyally when making decisions about the plan. In Martin v. CareerBuilder, LLC, a federal district court held that the complaint’s allegations about expensive recordkeeping costs and imprudent investment options failed to give rise to an inference that the defendants violated their ERISA obligations.

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In Martin, the plaintiff, a former CareerBuilder employee, sued 401(k) plan fiduciaries for allegedly permitting unreasonable recordkeeping fees and imprudent investment options. The complaint alleged that the plan paid recordkeeping fees of $136.39 to $222.43 per participant, which was more than an allegedly „reasonable fee“ of $40 per participant. The plan also included „retail“ share classes of investment options instead of „institutional“ classes, and many funds allegedly were more expensive than supposedly identical, cheaper funds. Some funds were „actively“ managed, allegedly so the plan could share more revenue with the record-keeper. The complaint alleged that 40% of the more expensive funds remained in the plan for five years before being removed.

Relying on three principal US Court of Appeals for the Seventh Circuit cases, the United States District Court for the Northern District of Illinois dismissed the complaint without prejudice. (See Divane v. Northwestern University, 953 F.3d 980 (7th Cir. 2020); Hecker v. Deere & Co., 556 F.3d 575, 586 (7th Cir. 2009); Loomis v. Exelon Corp., 658 F.3d 667, 672–73 (7th Cir. 2011).) In the Seventh Circuit, courts are dissuaded from „paternalistically interfering“ with plan fiduciaries‘ selections. Even if cheaper or better-performing funds might exist, ERISA does not require fiduciaries to „scour the market“ to find the cheapest funds or select index funds instead of other fund types, and ERISA protects fiduciaries whose process in reviewing an investment was prudent even if the investment then happened to underperform expectations. ERISA also requires the court to review the entire menu of options offered to participants, and not any one option in isolation. Fiduciaries are not liable for including retail shares in a plan so long as the plan offered „cheaper alternatives“ as part of a menu of investment options.

The CareerBuilder menu offered a mix of 23 options, with expense ratios ranging from 0.04% to 1.06%, and the court observed that the defendants removed some funds and modified a majority of the funds over a five-year period. Such action did not suggest imprudence in managing the options for participants. The court also held that the complaint did not allege objectively unreasonable recordkeeping fees in view of similar amounts at issue in other cases. The court distinguished the complaint from one that survived dismissal in the US Court of Appeals for the Third Circuit case of Sweda v. University of Pennsylvania, 923 F.3d 320 (3d Cir. 2019). In Sweda, the plaintiffs included „numerous and specific factual allegations“ and „specific comparisons“ between the plan’s options and readily available alternatives, along with allegations that the defendants failed to remove underperformers.

The dismissal was without prejudice, meaning the plaintiff was given the chance to replead the claims.

McDermott Insight: The Seventh Circuit remains a difficult jurisdiction for plaintiffs seeking to file bare-bones, conclusory ERISA claims against 401(k) fiduciaries. The CareerBuilder case highlights the importance of selecting a prudent overall mix of options for participants. The case also rejects the one-size-fits-all pleading approach to choosing retail investment classes over institutional classes, selecting passive instead of active options and including funds from only one or two of the allegedly best investment managers. We expect the plaintiff in CareerBuilder will file an amended complaint by August 10, 2020, the deadline set by the court.