Lawsuit over 401(k) fees, active target-date series fails

Comparing actively managed funds on the plan menu to index funds that were available was not an ideal comparison, according to the court.

A lawsuit filed over the use of actively managed Fidelity Investment Co. funds and allegedly high costs in a health care company’s $3.2 billion 401(k) plan fell flat last Wednesday, with a federal judge dismissing all claims.

A plaintiff brought the proposed class-action lawsuit last year against nonprofit CommonSpirit, also known as Catholic Health Initiatives, primarily alleging that the plan sponsor ran afoul of the Employee Retirement Income Security Act by opting for Fidelity’s actively managed target-date series, rather than a passive one, since 2014. The plaintiff also cited underperformance and alleged high costs with two other funds — the American Beacon Large Cap Value Fund and the Allianz NFJ Small Cap Value Fund — as well as excessive administrative fees paid to Fidelity, the plan provider.

However, the judge overseeing the case was unpersuaded and dismissed the claims with prejudice, meaning that the plaintiff cannot file an amended complaint at the district court level.

Although the index target-date series sponsored by Fidelity was indeed significantly less expensive than the actively managed one on the plan’s menu, it is inappropriate to compare active and passive funds, the judge stated in the opinion. And although the active target-date series underperformed compared to the index series over three years and five years since 2014, that wasn’t the case so far this year, the order noted.

“[A]ctively managed funds and passively managed index funds are not ideal comparators: ‘they have different aims, different risks and different potential rewards that cater to different investors,’” the order read.

If the plan had used the passive series rather than the active one, participants would have saved $1.24 million in fees in 2018 alone, the plaintiffs stated.

However, the plan did include some index funds, so participants were not necessarily forced to invest in the higher-cost active funds if they did not wish to, according to the court.

“In fact, a fiduciary is required to offer a diverse array of investment choices to plan participants. Offering funds with different management approaches and varying levels of risk is one way to diversity the portfolio of available investments,” the order read.

“Viewed in this context, a plan fiduciary does not necessarily act unreasonably merely by including an actively managed fund that happens to perform worse or cost more than any given passively managed fund. Any other conclusion would in effect prohibit plan managers from offering investment options a plaintiff views as inferior, something which courts have repeatedly held is not the law under ERISA.”

Claims tied to the other two actively managed funds cited in the lawsuit also failed, as the plaintiffs failed to provide a meaningful benchmark for comparison, the judge stated. The law firms that brought the case — Goldenberg Schneider and Shepherd Finkelman Miller & Shah — used the funds’ benchmark indices, although that was unsuitable for actively managed funds, the court noted.

Additionally, claims over excessive administrative fees paid to Fidelity failed. The plaintiff alleged that the flat fee of $30 to $34 per participant annually was excessive, but the comparative data cited in the complaint did not line up, as it did not include the additional costs paid by funds through revenue sharing. That cost, the judge noted, was $360 per participant, “far greater than the amount charged in CommonSpirit’s Plan.”