Case by Participants in Terminated 403(b) Allowed to Proceed

Just two days after the U.S. Supreme Court handed down its decision in the Hughes v. Northwestern University lawsuit, a federal court has used the high court’s reasoning to deny a motion to dismiss a lawsuit against 403(b) plan fiduciaries.

A group of 403(b) plan participants sued Columbus Regional Healthcare for allegedly keeping imprudent investments as choices in the plan and for causing them to pay excessive fees for plan investments, among other things. The plaintiffs allege the use of actively managed funds and higher-cost share classes caused them to lose millions.

Columbus Regional moved to dismiss all the plaintiffs’ claims, arguing that the plaintiffs are merely second-guessing Columbus Regional’s investment decisions with the benefit of hindsight. Judge Clay D. Land of the U.S. District Court for the Middle District of Georgia said he had been awaiting the Supreme Court’s decision before making his ruling on the motion.

Land found that the plaintiffs adequately alleged that some of Columbus Regional’s investment decisions were imprudent. Citing the Northwestern University decision, Land said, “The Supreme Court has suggested that a defined contribution [DC] plan participant may state a claim for breach of [the Employee Retirement Income Security Act] ERISA’s duty of prudence by alleging that the plan fiduciary offered higher priced retail-class mutual funds instead of available identical lower priced institutional-class funds.”

He added that he is “satisfied that the plaintiffs state a plausible claim that continuing to offer underperforming mutual funds with excessive expense ratios despite a consistent history of underperformance would violate ERISA’s duty of prudence.”

Columbus Regional argued that the plaintiffs’ complaint fails to state a claim for breach of fiduciary duty because its plan offered a variety of investment options, including lower-cost passive investment options. Columbus Regional contended that because low-cost index fund investments were available, the plaintiffs cannot establish that its other investment decisions were imprudent.

However, in his order, Land noted that Columbus Regional relies on the 7th U.S. Circuit Court of Appeals’ opinion in the Northwestern University case in support of its argument, but the Supreme Court vacated that opinion and remanded the case for further proceedings because the 7th Circuit’s ruling failed “to take into account [the plan fiduciary’s] duty to monitor all plan investments and remove any imprudent ones.”

The high court opined that an ERISA fiduciary’s imprudent decisions are not excused simply because the participants had the “ultimate choice over their investments” and could have chosen lower cost ones.

Because ERISA requires a plan fiduciary to defray “reasonable expenses of administering the plan,” Land found that the complaint against Columbus Regional adequately alleges that it breached its duty to prudently manage administrative costs.