Bass, Berry & Sims attorney Chris Lazarini examined allegations brought by members of a company’s 403(b) retirement savings plan that the plan fiduciaries violated their duties by selecting and failing to replace higher-cost share classes when identical shares with lower costs were available, selecting and failing to replace the plan’s only stable value fund, and failing to diversify. The court denied the fiduciaries’ motion to dismiss, allowing the case to proceed to discovery.
Chris provided the analysis for Securities Online Litigation Alert (SOLA). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SOLA, please visit the SOLA website to sign up for the newsletter.
Disselkamp vs. Norton Healthcare, Inc., No. 3:18-CV-00048 (W.D. Ky., 8/2/19)
An ERISA fiduciary must discharge his responsibility with the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would use.
Plaintiffs, participants in Norton’s 403(b) Retirement Savings Plan (the “Plan”), sued Norton, members of its Board of Directors (“Individual Defendants”), and others, under ERISA. The Amended Complaint alleged, among other things, defendants violated their fiduciary duties by selecting and failing to replace higher-cost share classes when identical shares with lower costs were available, selecting and failing to replace the Principal Fixed Income Option as the Plan’s only stable value fund, and failing to diversify because the Principal product was the only fixed income product offered. The Individual Defendants moved to dismiss.
Plaintiffs supported their share class selection claims by comparing the expense ratios of multiple retail funds in the Plan with their lower-cost institutional counterparts, concluding the defendants subjected participants to over $2 million in excess costs. The Individual Defendants argued the examples existed only with 20/20 hindsight and noted the absence of allegations about specific flaws in their methodology for reviewing Plan products. The Court finds it must accept Plaintiffs’ allegations as true and determines to allow Plaintiffs to proceed to discovery, while noting it is not ruling whether the Individual Defendants prudently investigated the higher-cost share classes before placing them in the Plan. The Court similarly accepted as true Plaintiffs’ allegations comparing factors about the Principal Fixed Income Option with those of other comparable products in allowing Plaintiffs to proceed to discovery while not ruling on the ultimate issue whether the Individual Defendants prudently selected and monitored the Principal product.
On failure to diversify, Plaintiffs argued no prudent fiduciary could have analyzed the range of short-term fixed income products available to a comparable plan and selected only the Principal product. The Individual Defendants argued Plaintiffs’ focus was misplaced because they were alleging the Principal product was not diversified, while the Plan was diversified. Again, the Court sides with Plaintiffs, finding the allegations regarding the propriety of having one fixed income option raises questions of fact and law sufficient to overcome the motion to dismiss.