Last Wednesday, the Eighth Circuit Court of Appeals issued a decision (Braden v. Wal-Mart) that lowers the bar for class action attorneys to bring claims alleging that 401(k) plans charge and improperly disclose excessive fees. This case should prompt employers to review how they administer their 401(k) plans.
The facts alleged in the case fit the typical “excessive fee” claim. Wal-Mart’s 401(k) plan offers participants the opportunity to invest in mutual funds that charge an expense ratio. On behalf of a plaintiff class, Braden alleged that Wal-Mart breached its fiduciary duty because it could have used its market power to negotiate a more competitive expense ratio by, for example, using lower-priced share classes. The plaintiff class also alleged that the payment of a portion of the expense ratio (known as “revenue sharing”) to the plan trustee (presumably to defray recordkeeping and similar plan expenses) violated ERISA’s prohibited transaction rules.
The district court dismissed the complaint, reasoning that there are all kinds of explanations for why the fiduciaries’ selection of more expensive funds would have been prudent, but the Eighth Circuit reversed. It said that such explanations could not be considered until after discovery – notwithstanding the considerable expense and burden that process would impose on Wal-Mart. The Eighth Circuit also opened a door that the Seventh Circuit had seemed to close in Hecker v. Deere & Co., allowing plaintiffs to pursue a claim that the allegedly excessive fees and revenue sharing payments should have been disclosed to plan participants. Finally, the Eighth Circuit ruled that the mere allegation that revenue sharing was paid to the trustee was a sufficient basis for a prohibited transaction claim, requiring Wal-Mart to wait until after discovery to show that the payments were allowed under the prohibited transaction rules as “reasonable compensation.”
Braden is a flashing yellow light cautioning employers that:
- It is now easier for plaintiffs to proceed to discovery based on allegations that 401(k) fiduciaries should have offered investment options with lower fees, particularly for large plans that allegedly failed to take full advantage of their market power.
- Notwithstanding recent court rulings holding that ERISA imposes no affirmative duty to disclose to participants the plan’s revenue sharing arrangements, employers and fiduciaries are now more vulnerable to such claims and should review what their plan communications say about fees.
- Even if revenue sharing amounts are reasonable and used to defray recordkeeping expenses, the increased possibility that they can form the basis for a prohibited transaction claim that proceeds to discovery may cause plans to reconsider how they use and disclose revenue sharing.
It is likely that issues that the Courts addressed in Braden, Deere and similar cases will be clarified after further litigation.