Selecting The Lowest Fee Provider: Not Required Under ERISA

Wake Forest University Baptist Medical Center has agreed to settle a proposed ERISA class action lawsuit pending in a North Carolina federal district court. In Garnick et al. v. Wake Forest University Baptist Medical Center et al., former employees claimed that plan administrators had violated their fiduciary duties under ERISA in administering the $2 billion retirement plan covering about 30,000 participants.

The parties filed pleadings with the court stating they had reached a settlement in principle and agreed to a July deadline to file a motion for preliminary approval.

In their suit, plan participants claimed the administrators had failed to use the plan's size to negotiate reasonable recordkeeping fees and monitor and offer healthy investment options. More specifically, the parties alleged that while the plan charged each plan participant between $110 and $141 in annual plan management fees, other plans of similar size charged only about $40 in annual plan management fees per participant. The plan participants also alleged that they suffered significant losses because the committee that oversaw the investment options for the plan failed to seek out lower-cost investment fund options that would have resulted in better returns.

Wake Forest filed a motion to dismiss, arguing the former workers made only general allegations rather than specific claims of misconduct or self-dealing. This motion was denied by the trial court, which held that the plan participants had alleged enough specificity to maintain their claims that the defendant may have mismanaged their retirement plan. "Wake Forest Medical Center Settles ERISA Class Action Suit" (Aug. 02, 2023).




All defined benefit plans charge fees. Because all fees ultimately reduce the retirement savings of participants, one of the obligations imposed on a plan administrator under the fiduciary duty of prudence is to keep fees low.

From time to time, a plan administrator must review the fees charged by the investment house that offers the options. They must evaluate, select, and monitor each fund in a defined contribution plan to ensure that every investment fund option is prudent.

Plan administrators should from time to time ask other investment houses to submit bids to take the place of the current investment house used by the plan. This is done to be sure the fees remain competitive. Ultimately, the plan administrator must decide to keep the current investment house, replace the current investment house with another one, or renegotiate the fees charged by the current investment house.

Charging a fee, by itself, is not a breach of the duty of prudence. Moreover, an allegation that a plan administrator's job is to simply pick the cheapest option available oversimplifies the duty imposed on the administrator.

Under ERISA, merely alleging that a cheaper alternative investment exists does not prove a breach of the duty of prudence. ERISA does not require plan administrators to scour the market to find and offer the cheapest possible fund.

Further, fiduciaries should not consider costs alone when establishing an investment menu for plan participants, but must consider all relevant factors. It may be wise, for example, to choose a fund with a higher fee, if that fund includes the potential for a higher return, a lower financial risk, more services offered, or greater management flexibility. Finally, the fact an investment underperforms in the market does not make its availability imprudent.


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