According to
- 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
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
Procedural Posture/Specificity of the Claims
The case was before the
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.
Mr
Mintz
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