Written by Jennifer Lee, Associate, Nichols Kaster
Today, the 401(k) plan is the primary vehicle for Americans to save for retirement. In 2014 there were more than 500,000 401(k) plans with $4.4 trillion in combined assets on behalf of 62.7 million active participants. However, most investors—even “sophisticated” investors—are prone to common investing mistakes or simply do not understand the nature of their 401(k) plan’s investment options or the optimal amount of risk they should bear in their portfolio to maximize their retirement success.
Given the importance of 401(k) plans to Americans’ retirement, the large amount of money held in these plans, and the gap in investment knowledge among plan participants, plan fiduciaries play an outsize role in the retirement outcomes of American workers. For this reason, the Employee Retirement Income Security Act of 1974 (ERISA) imposes on plan fiduciaries (such as employers) the “highest duties known to law.” In managing a plan (i.e., administering it and selecting investment options), plan fiduciaries owe the twin duties of loyalty and prudence. That is, they must manage the plan expertly (or seek outside advice from an expert) and loyally, with an “eye single” to the plan.
Despite being held to these twin duties, plan sponsors and fiduciaries often fail to act prudently and loyally. The large amount of money held in these plans entices misuse and abuse. In recent years many financial institutions have been sued under ERISA for allegedly mismanaging their 401(k) plan for their own personal benefit. These cases allege that the plan fiduciaries viewed their employees as a captive market for their own in-house mutual funds and effectively forced their employees to invest their retirement into the employer’s own funds. They further allege that a disinterested fiduciary would have selected alternative investment options with better performance and/or lower fees. Some of the financial institutions that have been sued for this kind of conduct are listed below:
- Putnam Investments
- Allianz Asset Management
- Charles Schwab
- Deutsche Bank
- American Century
- Huntington Bancshares
- M&T Bank
- JP Morgan
- Morgan Stanley
- American Airlines (who are affiliated with Beacon Investors)
- Massachusetts Financial Services
While it is not per se illegal to offer one’s own mutual funds in a 401(k) plan, the plan fiduciaries must still undergo a prudent and loyal process in deciding to do so. When a financial institution selects its own funds precisely because they are its own funds, that violates the twin fiduciary duties of loyalty and prudence.
Many of these cases are still pending and courts have been divided. The one such case to go to trial ended early, with the court holding that although the plan sponsors did not prudently manage the plan, the plan did not suffer losses and therefore the plaintiffs lost. That case is currently on appeal and oral argument was heard on April 2, 2018. Many other cases have survived a motion to dismiss and still others have been certified to proceed as a class action. At the same time, the Department of Labor has also investigated many employers for violations of ERISA.
As these cases continue to work their way through the courts, what is clear is that more scrutiny is being paid to 401(k) administration, and participants should educate themselves about their plan’s investment options and the performance and expenses of those options. Plan sponsors are also on notice that participants, the government, and the courts are watching their conduct closely and that fiduciaries will be held to account for their conduct.
 Employee Benefits Sec. Admin., U.S. Dept. of Labor, Private Pension Plan Bulletin: Abstract of 2014 Form 5500 Annual Reports 1, 3 (2016), https://www.dol.gov/sites/default/files/ebsa/researchers/statistics/retirement-bulletins/private-pension-plan-bulletins-abstract-2014.pdf.
 Rothstein v. Am. Int’l Grp., Inc., 837 F.3d 195, 208 (2d Cir. 2016) (citation omitted); see also Chao v. Hall Holding Co., 285 F.3d 415, 426 (6th Cir. 2002) (“Clearly, the duties charged to an ERISA fiduciary are ‘the highest known to the law.’” (citations omitted)).
 See 29 U.S.C. § 1104(a)(1) (2012).
 DiFelice v. U.S. Airways, Inc., 497 F.3d 410, 418–19 (4th Cir. 2007) (“Fiduciaries must also scrupulously adhere to a duty of loyalty, and make any decisions in a fiduciary capacity with ‘an eye single to the interests of the participants and beneficiaries.’” (citation omitted)).
 Brotherston v. Putnam Investments, LLC, Case No. 15-13825-WGY, 2017 WL 2634361 (D. Mass. June 19, 2017), appeal filed, No. 17-1711 (1st Cir. July 20, 2017).
 See Moreno v. Deutsche Bank Americas Holding Corp., 15 Civ 9936 (LGS), 2017 WL 3868803 (S.D.N.Y. Sept. 5, 2017) (certifying class in ERISA 401(k) class action); Urakhchin v. Allianz Asset Management of America, LP, Case No. 8:15-cv-1615-JLS-JCGx, 2017 WL 2655678 (C.D. Cal. June 15, 2017) (same); More v. Deutsche Bank Americas Holding Corp., No. 15 Civ 9936 (LGS), 2016 WL 5957307 (S.D.N.Y. Oct. 13, 2016) (denying in part and granting in part Defendants’ motion to dismiss); Urakhchin v. Allianz Asset Management of America, LP, Case No. SACV 15-1614-JLS (JCGx), 2016 WL 4507117 (C.D. Cal. Aug. 5, 2016) (same).
 See Employee Benefits Sec. Admin., U.S. Dept. of Labor, Fact Sheet: EBSA Restores Over $1.1 Billion to Employee Benefit Plans, Participants and Beneficiaries, https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/ebsa-monetary-results.pdf (last visited April 12, 2018); see also Jim Spencer, 3M Says Pension Plan is Under U.S. Labor Department Investigation, STAR TRIB. (May 6, 2017), http://www.startribune.com/3m-says-pension-plan-is-under-dept-of-labor-investigation/421506803/.