Importance of Prudent Process to Monitor Investment Options

Company Stock, Fiduciary, Litigation

A review of the holding in a recent Third Circuit Court of Appeals case provides a reminder of the importance of implementing and following a documented, prudent process to monitor plan investment options.

In Santomeno v. John Hancock Life Insurance Co. (Case No. 13-3467 (3d Cir. Sept. 26, 2014)), the plaintiffs (plan participants, not plan fiduciaries) brought an ERISA class action suit against Hancock arguing that Hancock was a fiduciary to the plan and charged excessive fees.  The Third Circuit ruled that Hancock was not a fiduciary and dismissed the case.  (Earlier in its procedural history, a different Third Circuit case held that participants may bring suit directly against the service provider without having to first bring suit against the plan trustees.  The Supreme Court denied review of the earlier decision giving participants standing to sue service providers directly, so that holding stands.)

Under the contested arrangement, Hancock provided 401(k) plans with access to a large line-up of different investment options.  The plan's trustees then selected a smaller menu of investment options from the larger line-up to determine the investment options offered under the plan.  The plaintiffs argued that because Hancock had the discretion to select the original larger line-up of offered funds and to make changes to that line-up, it was a fiduciary.  The court rejected that argument because the plan fiduciaries had the final decision making authority about what investment options were actually offered under the plan.

The takeaway from this case is that plaintiff's lawyers continue to find new, creative ways to bring excessive fee litigation against plan sponsors, fiduciaries, and service providers.  Plan fiduciaries who make final decisions about what investment options are offered under a plan must comply with their responsibilities under ERISA when making those decisions.  As the Third Circuit Court held, a service provider who does not have that final decision making authority is not subject to those same responsibilities.  Plan fiduciaries who have a prudent process in place to actively monitor plan investments options, regularly benchmark fees and document that process have a stronger position to defend should litigation ever come knocking on their door.

NFPR-2016-14 ACR#173059 02/16