PLANADVISER - September/October 2018 - 55

fiduciary fitness
Appropriate Benchmarking
The most common method to ensure reasonable fees
IN light of the focus in many of the 401(k)
and 403(b) lawsuits on alleged excessive
fees, plan fiduciaries have been
advised that it is important that they take
measures to document their fees' reasonableness.
This is most commonly done
through the use of benchmarking. While
the law is clear that there is no fiduciary
requirement to use the least expensive
investment fund, the fees associated with
a fund should be within a range that is
reasonable.
The importance of appropriate benchThe
court made
the obvious
but important
comment that
" no authority
requires a
fiduciary to
marking was recently noted by the Court
of Appeals for the 8th Circuit in Meiners v.
Wells Fargo. The Wells Fargo Plan offered
more than two dozen investment options,
12 of which were Wells Fargo Dow Jones
Target Date Funds (TDFs). These funds were allegedly more
expensive due to higher fees than comparable Vanguard and
Fidelity funds, and also underperformed the Vanguard funds.
The plaintiff alleged that the Wells Fargo defendants
breached their fiduciary duties when they failed to remove
their expensive and underperforming funds from the plan's
options and that the breach occurred because defendants
were maximizing their own profits.
The court began its analysis with a discussion of the
applicable pleading requirements, which determine whether
a plaintiff's claim will survive a motion to dismiss. The test
is whether, accepting all of the facts alleged as true, the
complaint states a claim for relief that is plausible on its face.
What is the meaning of these general rules of civil procedure
in the context of the Employee Retirement Income
Security Act (ERISA)? The court explained that plaintiffs
claiming a breach of fiduciary duty have a challenging
pleading burden when trying to survive a motion to dismiss,
because of their different levels of knowledge regarding
what investment choices a plan fiduciary has made as
opposed to how it made those choices. Because of ERISA's
disclosure requirements, plan participants generally have
extensive information regarding the selected funds, but will
lack the same breadth of information regarding the fiduciary's
methods and actual knowledge, as those details tend to
be in the fiduciary's sole possession.
As a result, " the challenge for ERISA plaintiffs is to use
the data about the selected funds and some circumstantial
allegations about methods to show that a prudent fiduciary
would have acted differently. " Further, to establish that a
pick the bestperforming
fund. "
prudent fiduciary in like circumstances
would have selected a different fund
based upon the cost or performance of
the one that was chosen, a plaintiff must
generate a sound basis for comparison,
for example, " a meaningful benchmark. "
The plaintiff's failure in this regard
caused the 8th Circuit to affirm the
decision of the district court dismissing
the breach of fiduciary duty claims.
Meiners pleaded that one Vanguard fund
performed better than the Wells Fargo
target-date funds, but the fact that one
fund with a different investment strategy
ultimately performed better than the
Wells Fargo funds does not establish
whether those were an imprudent choice.
The court made the obvious but important
comment that " no authority requires a fiduciary to pick
the best-performing fund. "
With respect to the benchmarking of fees, the 8th Circuit
distinguished between considering the different shares of
one fund-a meaningful benchmark-and finding a fund
with some similarities that was less expensive. It held
that " the existence of a cheaper fund does not mean that a
particular fund is too expensive in the market generally or
is otherwise an imprudent choice. "
Finally, if the plaintiff could not establish that selection
of the Wells Fargo target-date funds was imprudent,
the court could not draw a reasonable inference that the
company retained the funds from improper motives. The
court concluded that it could not reasonably infer that
defendants acted out of a motive to seed underperforming
or inordinately expensive funds if the plaintiff was unable
to plausibly plead that the funds were underperforming or
inordinately expensive. That is, from a pleading perspective,
plaintiffs must establish that a fund is an imprudent choice.
The bottom line: While it is possible under these facts
that the Wells Fargo defendants breached their fiduciary
duty, the plaintiffs' pleadings failed to show plausibility that
they had done so.
Marcia Wagner is an expert in a variety of employee benefits and
executive compensation areas, including qualified and nonqualified
retirement plans, and welfare benefit arrangements. She is a summa
cum laude graduate of Cornell University and Harvard Law School and
has practiced law for 31 years. Wagner is a frequent lecturer and has
authored numerous books and articles.
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