“Meaningful Benchmark” Required to Prove Breach of 401(k) Fiduciary Duties

The U.S. Court of Appeals for the Eighth Circuit ruled that participants in a 401(k) cannot simply point to the existence of lower-price funds as proof that their employer and plan sponsor breached their fiduciary duties.

The appellate court’s opinion upheld a lower court’s decision to dismiss Meiners v. Wells Fargo & Company. Corporate law firm King & Spalding described the case as being “closely watched.” The reason has to do with a prior case, Tibble v. Edison International.

Three years ago, in Tibble v. Edison, the U.S. Supreme Court ruled that employers have an obligation to properly monitor 401(k) investments to determine if lower-cost investment offerings are available [“Supreme Court: Employers Must Monitor 401(k) Investment Options,” AAII Journal, June 2015]. King & Spalding said the 2015 opinion did not specify “what is required to plead a viable claim that [fiduciary] duty has been violated.” Meiners v. Wells Fargo potentially provides a clarification.

John Meiners claimed his former employer, Wells Fargo, improperly included its proprietary investment funds and designated them as the default investment option in its 401(k) plan. Meiners said the Wells Fargo target date funds (TDFs) used in the plan had higher fees than similar offerings from Vanguard and Fidelity. He also said the Wells Fargo funds incurred worse performance than the Vanguard funds.

The Employment Retirement Income Security Act (ERISA) requires that those with fiduciary responsibilities act “with the care, skill, prudence and diligence” a prudent man would when acting in a similar capacity. In its opinion, the court of appeals says a “meaningful benchmark” must be provided by the plaintiff to show that this prudent man rule was violated. Meiners did not meet this standard. Merely pointing to the Vanguard fund’s better performance “does not establish anything about whether the Wells Fargo TDFs were an imprudent choice at the outset.” Furthermore, the court cited case law showing that fiduciaries are under “no authority … to pick the best performing fund.”

Notably, because a meaningful benchmark was not provided, the appellate court further said that it could not reasonably infer whether Wells Fargo purposely included underperforming or “inordinately expensive” funds in its 401(k) plan.

Sources: “Meiners v. Wells Fargo & Company,” The U.S. Court of Appeals for the Eighth Circuit, August 3, 2018, and “In Closely Watched Mutual Funds Case, Eighth Circuit Sets High Bar for Labeling Retirement Plan Investments ‘Imprudent,’” King & Spalding, August 13, 2018.