A U.S. District Court judge for the District of Connecticut dismissed a 401(k) lawsuit against Prudential Retirement Insurance and Annuity Company, Prudential Bank & Trust, FSB, CapTrust Financial Advisors and Ferguson Enterprises Inc. that claimed the organizations breached their fiduciary duty by offering high-cost mutual funds in Ferguson’s 401(k) plan.

Judge Victor Bolden said in his dismissal of the case that Prudential, as 401(k) plan provider, was not acting as a fiduciary for the plan. That job was held by plaintiff Richard Rosen’s employer Ferguson Enterprises and the company it hired as an adviser to the plan, CapTrust Financial Advisors. But because the 401(k) plan menu offered lower fee options, like a Vanguard index fund and stable value funds, plan participants had the option to take part in lower cost options.

[Image credit: Bloomberg]
[Image credit: Bloomberg]

In his initial lawsuit, Rosen said that “most of the investment options offered by the Plan took the form of mutual funds, and the majority of those funds were ‘actively managed’ mutual funds.” Actively managed mutual funds typically involve higher fees than passively managed funds, he asserted. Eleven out of 16 investment options offered to participants were actively managed funds.

“Prudential’s compensation for its role as service provider to the Plan came in part from revenue-sharing agreements between Prudential and these mutual funds,” the suit stated. Prudential received payments in exchange for making investments in the selected mutual funds, which were “ultimately borne by plan participants through a variety of fees, including, for example, ‘12b-1 fees, administration fees, service fees, sub-transfer agent fees, other indirect compensation and/or similar fees.’”

The suit also claimed that Ferguson and CapTrust Financial breached their fiduciary duties by “choosing an overly expensive menu of investment options and by failing to monitor Prudential in its administration of these various plans and investments.”

Prudential argued that it was not a fiduciary as a matter of law and could not be held liable for breach of fiduciary duty. Ferguson and CapTrust did not contest their fiduciary status but contended that, as a matter of law, “the alleged conduct does not constitute a breach of fiduciary duty under ERISA.”

The trust agreement between Prudential Trust and Ferguson stated that Prudential “shall take no action except pursuant to directions received by it from the Employer … The Trustee shall have no duty or responsibility to determine the appropriateness of any plan investment, or to cause such investments to be changed.”

Plaintiffs argued that “despite these contractual limitations, Prudential still had discretionary authority over various aspects of the Plan. Specifically, they allege that Prudential possessed authority in the following ways: (1) legal ownership and control over the investments in Separate Accounts and Trusts, (2) power to adjust the available investment options and determine its own compensation, and (3) use of its GoalMaker program to direct participant investments.”

The judge found that Prudential “cannot be considered a fiduciary based on its initial selection of the available investment options for the Plan because this action was taken before the parties entered into a contractual relationship, and it was ultimately up to the plan sponsor — in this case, Ferguson — whether or not to engage the plan on the stated terms.”

Bolden also found that Prudential had disclosed relevant details with respect to its GoalMaker program and that it was Ferguson and not Prudential that had the ultimate responsibility for the investment selections with respect to that program.

In his dismissal, Judge Bolden said that the plaintiffs had “not identified any case law suggesting that ERISA gives Plan participants a statutory right to fees below a certain level, or holding that ERISA requires Plan fiduciaries to make investment decisions that ideally benefit Plan participants.”

In regards to the claims against CapTrust and Ferguson, Bolden said that the plaintiffs were not specific enough in showing that there were lower cost options available. The allegations against the two organizations were broad and non-specific; implying that there was wrong-doing but providing no evidence of it.

“Based on the case law in this Circuit and other Circuits, the alleged concentration of high-cost mutual funds here, without more, is not sufficient to state a claim against Ferguson and CapFinancial for breach of fiduciary duty,” he wrote.

Of the 16 investment plan options, expense ratios ranged from 0.04% to 1.02%. “Despite the relatively small number of total offerings, this Plan offered a far wider ‘mix and range’ than those approved” in two similar cases Hecker and Renfro, he added.

Prudential declined to comment.

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