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ERISA And Excess Fee Risk: Is The Use Of All Higher Fee Funds A Breach Of Duty?

LinkedIn Corporation agreed to settle a lawsuit filed by current and former participants of its 401(k) plan who alleged that the company and plan fiduciaries violated the Employee Retirement Income Security Act (ERISA).

The plaintiffs sued LinkedIn and plan fiduciaries in 2020, alleging high fees and poor judgment in selecting investment options. The LinkedIn Corporation 401(k) Profit Sharing Plan and Trust, Sunnyvale, California, had $1.28 billion in assets as of July 1, 2019, according to its Form 5500.

LinkedIn's motion for summary judgment was partially granted and most of the claims against it were dismissed.

However, the federal district court ruled that one issue had merit.

The plaintiffs had alleged that the 401(k) plan retained an actively managed target-date series from Fidelity Investments instead of a passively managed target-date series. The actively managed investments charged higher fees than the passively managed fund.

The actively managed investment was withdrawn as an option in 2019, but the court found that "plaintiffs have adequately pled breach of prudence based on excessive management fees" for the actively managed target-date series.

Following mediation, the parties recently filed an agreement to settle in principle. No terms were disclosed. "LinkedIn settles ERISA lawsuit over 401(k) investment options" www.pionline.com (Nov. 08, 2022).
 

Commentary

As ERISA fiduciaries to the Plan, plan administrators are obligated to act for the exclusive benefit of participants and beneficiaries in ensuring that Plan expenses are reasonable.

These duties are the highest known to the law and must be performed to further the interests of the participants and beneficiaries. In discharging these duties, ERISA fiduciaries are held to the standard of financial experts in the field of investment management.

Fiduciaries must initially determine, and continue to monitor, the prudence of each investment option available to plan participants and must remove imprudent ones within a reasonable time.

In this case, offering actively managed funds, even if it charges higher fees, is not per se imprudent or disloyal. Under ERISA, merely alleging that a cheaper alternative investment exists is not a breach of the duty of prudence. ERISA does not require plan administrators to scour the market to find and offer the cheapest possible fund. Fiduciaries should not consider costs alone when establishing an investment menu for plan participants, but a prudent fiduciary must consider all relevant factors. It may be prudent, for example, to choose a fund with a higher fee, if that fund includes the potential for a higher return, a lower financial risk, more services offered, or greater management flexibility. Finally, the fact an investment underperforms in the market does not prove imprudence.

However, a plan fiduciary’s process for selecting and monitoring actively managed funds is subject to the same duties of loyalty and prudence that apply to the selection and monitoring of other investments.

Fiduciaries should also keep in mind that once it determines an investment option should be removed, it must do so within a reasonable time. Keeping an imprudent investment option within an options portfolio beyond a reasonable time, even if identical and less costly investments are available, may still subject a fiduciary to breach of duty claims. Plan administrators should conduct a regular review of competing plans and determine which ones provide services and options that most closely carry out the funds’ written investment goals and objectives.

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