Participants in Anthem Inc.’s $5.1 billion 401(k) plan have sued plan fiduciaries, alleging that they have top-shelf tastes that constitute a breach of the duties of loyalty and prudence owed to participants, and that the fiduciaries should be held personally liable for all resulting losses. This case, Bell v. Anthem Inc. et al., will undoubtedly be closely watched and presents two key issues: (1) whether it is a breach of fiduciary duty for a large plan to not use its leverage to secure lower administration and investment services fees, and (2) whether the selection of higher-fee mutual funds over similar lower-cost funds constitutes a per se breach of fiduciary duty under ERISA.

ERISA imposes a duty on plan fiduciaries to act in the best interest of plan participants. The plaintiffs in Bell v. Anthem, a class action filed in the U.S. District Court for the District of Indiana, allege that Anthem plan fiduciaries breached their duties under ERISA by selecting “high-priced share classes of mutual funds, instead of identical lower-cost share classes of those same mutual funds which were readily available to the plan.” It is worth noting that most funds in the plan are offered by Vanguard, which is generally considered to be a provider of low-cost funds. Vanguard is not named as a defendant in the lawsuit.

First, the plaintiffs contend that the Anthem plan’s mutual fund options carried excessive investment management fees. Interestingly, the complaint seems to contend that paying anything less than bargain-basement fees places a fiduciary on the wrong side of ERISA, alleging that “investment costs are of paramount importance to prudent investment selection, and a prudent investor will not select higher-cost actively managed funds without a documented process to realistically conclude that the fund is likely to be that extremely rare exception, if one even exists, that will outperform its benchmark index over time, net of investment expenses.” Further, the plaintiffs allege that the defendants ran afoul of their duties under ERISA when they selected mutual funds instead of negotiating separate accounts or collective trusts that could allegedly have been managed at lower cost.

The plaintiffs also take issue with the administrative fees the Anthem plan paid to Vanguard, and allege that the plan’s “recordkeeping fees became excessive in part because Anthem failed to monitor and control the amount of hard dollar and asset-based revenue sharing amounts allocated to Vanguard.” According to the plaintiffs, anything more than $30 per participant would be excessive, and the lowest fee Anthem’s plan carried was $42 per participant.

Additionally, the plaintiffs allege that the defendants breached their fiduciary duty by offering plan participants a money market fund yielding “microscopically” low returns, instead of offering a stable value fund.

This case highlights the precarious position in which large plan fiduciaries find themselves. If selecting even a marginally more expensive investment option opens the door to liability, that marginal expense can add up to a crushing damages award when multiplied across the entire plan. Anthem’s plan is one of the largest in the United States, and has more than 59,000 participants with account balances. Would-be plaintiffs seem to be increasingly aware of this vulnerability, and cases like Bell v. Anthem could become more common as participants stake their bets on defendants’ willingness to settle for cents on the dollar, rather than take their chances in litigation.