No Quick Exit For 401k Class Actions Over Proprietary Funds

Author:Ms Michelle Scannell
Profession:Seyfarth Shaw LLP
 
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A district court recently denied a motion to dismiss a 401k proprietary fund class action, continuing an overwhelming trend of allowing these cases to survive pleading challenges. On the bright side, however, the Eighth Circuit recently affirmed a dismissal of such a case, and the first of these cases to be tried resulted in a defense victory, which is on appeal with the First Circuit.

The plaintiffs' bar sparked a new 401k class action trend a few years ago by targeting "proprietary" in-house investment products, alleging that fiduciaries were committing a breach by including their in-house proprietary funds in plans to the exclusion of less expensive, better-performing comparable options.

In most of these cases, plaintiffs have survived initial pleading challenges. Generally courts have found that allegations underlying these cases supported an inference that the fiduciaries engaged in a flawed process (e.g., Cryer v. Franklin Templeton Res.; Urakhchin v. Allianz Asset Mgmt. of Am.).

A district court in Maryland recently continued the trend by denying a motion to dismiss a first amended complaint for a proprietary fund case (i.e., Feinberg v. T. Rowe Price Group, Inc., et al.). In Feinberg, plaintiffs alleged that fiduciaries breached their duties and committed related ERISA violations by, among other things, including in the plan retail-class versions of in-house funds even though purportedly cheaper versions of the same funds were available for commercial customers.

Notably, in addressing defendants' argument that the plan documents required that they select an exclusive line-up of proprietary funds, the court found that the decision to structure the plan that way was a settlor, non-fiduciary function, and "did not provide a blanket defense" for the fiduciaries. The court concluded that plaintiffs pled sufficient allegations to raise plausible inferences to support all of their claims.

Defendants also argued that plaintiffs' prohibited transaction claim was barred under ERISA's six-year statute of repose, because no prohibited transaction (i.e. the initial inclusion of the fund in the plan) occurred...

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