“Divane Intervention”: ERISA 401(k) Plan Investment Claims Dead On Arrival

Proskauer - Employee Benefits & Executive Compensation Blog

A federal district court in Illinois recently dismissed “excessive fee” and “imprudent investment” claims against the plan fiduciaries of the CareerBuilder 401(k) plan fiduciaries, relying largely on the Seventh Circuit’s decision in Divane v. Northwestern University, 953 F.3d 980 (7th Cir. 2020).  (Our blog on the Divane decision is available here.)  In the case against the Careerbuilder plan fiduciaries, the plaintiff alleged that defendants breached their duties of prudence and loyalty under ERISA by:

  • Paying excessive recordkeeping fees;
  • Failing to invest in cheaper institutional shares as opposed to retail shares; and
  • Failing to include more passively managed as opposed to actively managed funds.

The court first addressed the recordkeeping fee claim.  The court observed that the fund at issue in Divane charged recordkeeping fees that averaged between $153 and $213 per person and the fees here similarly averaged between $131 and $222 per person.  Because Divane had held that a similar range of fees did not give rise to an inference of imprudence, plaintiff’s allegations here also could not either.  The court further explained that an inference of imprudence was even less plausible here than in Divane because CareerBuilder’s plan had fewer participants and thus less leverage to negotiate lower fees.

The court next quickly disposed of plaintiff’s claim that the plan should have invested in institutional share classes rather than more expensive retail share classes because Divane had held that a fund’s failure to invest in institutional as opposed to retail funds does not give rise to an inference of imprudence.

Turning to plaintiff’s claim that the plans should have included more passively managed funds, the court concluded that defendants’ failure to offer “every index fund under the sun” was not, in and of itself, imprudent as long as the plan offered a mix of investments and there are no other indicia of a flawed process.  The court found that the plan offered an acceptable mix of options with expense ratios ranging from .04% to 1.06%—within the range found to be reasonable as a matter of law by other courts.  The court also found that plaintiff’s allegations that defendants removed or modified a majority of the funds in the plan over a five-year period actually supported an inference that defendants had a prudent process in place for monitoring the plan’s funds.

Finally, the court dismissed plaintiff’s duty of loyalty claims because plaintiff failed to raise an inference of self-dealing and relied largely on facts supporting his duty of prudence claims.

The case is Martin v. CareerBuilder, LLC, No. 19-cv-6463, 2020 WL 3578022 (N.D. Ill. July 1, 2020).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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