Duty Of Prudence Requires Fiduciaries To Continually Monitor Investment Performance

A class of 401(k) retirement plan participants and beneficiaries is suing the Vail Corporation for violating the duties of loyalty and prudence required by The Employee Retirement Income Security Act of 1974 (ERISA).

The defendant, by exercising discretionary authority and control over the 401(k) defined contribution pension plan that it provides employees, has a fiduciary duty under ERISA to avoid excessive fees.

In 2018, the Vail Plan had 8,276 participants and $309,822,304 in assets. It offered approximately 27 different investment choices to participants.

The lawsuit states, "At all relevant times, the Vail Plan's fees were excessive when compared with other comparable 401k plans offered by other sponsors that had similar numbers of plan participants, and similar amounts of money under management. The excessive fees led to lower net returns than participants in comparable 401k plans enjoyed."

An assessment tool found that, in 2017, the plan's expenses were nearly double those of the mean among 19 comparable plans.

The lawsuit also contains allegations that the plan issuer offered a cheaper option for at least 18 of the 27 mutual fund share classes that charged lower fees and consistently achieved higher returns. However, the plan "inexplicably failed to select these lower fee-charging and better-return producing share classes."

The defendant is alleged to have breached the fiduciary duties it owes to plan participants and beneficiaries.

The class action lawsuit seeks to "enforce Vail's liability under 29 U.S.C. § 1109(a) to make good to the Plan all losses resulting from Vail's breaches of fiduciary duty." Kurtz v. Vail Corporation (US.D.Ct of Colorado-1:20-cv-00500, filed 02-24-20); Rebecca Moore "Vail Corporation Sued Over Share Class Choices for 401(k) Investments" plansponsor.com (Feb. 27, 2020).

Commentary

Under ERISA, those who administer pension plans have a fiduciary duty to plan participants and beneficiaries. These fiduciary duties are the “highest known in law.”

ERISA’s “duty of loyalty” requires a plan’s fiduciary to “discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries” and “for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan.”

Furthermore, it's “duty of prudence” requires the fiduciary to exercise duties “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent [person] acting in a like capacity and familiar with such matters would use in the conduct of a like character and with like aims.”

A trustee has a continuing duty to monitor trust investments and remove imprudent ones. Choosing higher-cost investments when identical lower cost ones exist is a breach of fiduciary duty.

As a result, those designated as pension plan fiduciaries under ERISA must evaluate fees and expenses not only when choosing an investment, but on a continual basis, to make sure that those fees and expenses are not excessive. If fees go up or more economic options become available, fiduciaries should reassess and select an option that is more in line with average fees for similar services.

Fiduciaries are required to perform an analysis to determine if investments will outperform their benchmark net of fees. They must also continuously monitor plan options’ investment performance against applicable benchmarks and peer groups to determine if they are underperforming. They must replace underperforming investments with better ones.

ERISA allows any participant or beneficiary of a plan to sue plan administrators on behalf of the plan if they breach their fiduciary duty.

If plan participants suffer financial harm as a result of “imprudent or unreasonable investment and fee options,” they can sue the organization.

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