A group of participants in Bank of America’s 401(k) plan sued alleging the bank engaged in prohibited transactions and breached its fiduciary duty by selecting bank-affiliated mutual funds despite the funds’ poor performance and higher fees in comparison to other available investment alternatives. The participants conceded that the initial fund selection was outside of ERISA’s general six-year limitations period. Nevertheless, the participants argued that the bank’s failure to remove the bank-affiliated mutual funds at meetings of its benefits committee, which occurred within the limitations period, constituted new prohibited transactions and new breaches of its fiduciary duty to monitor plan investments. The 4th Circuit disagreed, reasoning that a decision to continue certain investments, or even the bank’s failure to act, cannot constitute a “transaction” for ERISA purposes; therefore, the only transaction upon which the participants could assert a prohibited transaction claim was the bank’s initial selection of the bank-affiliated mutual funds. Additionally, because the participants did not allege that the funds’ performance or fees changed in any material way after their initial selection, the participants’ breach of fiduciary duty claim was not actually based on the bank’s failure to monitor the funds but rather on the bank’s initial selection of them. Accordingly, all of the participants’ claims were time barred because they solely related to the initial selection and inclusion of the bank-affiliated mutual funds in the 401(k) plan. David v. Alphin, No. 11-2181 (4th Cir. Jan. 14, 2013).
Other circuits have also looked at the reasonableness of fees charged related to mutual fund investments offered in a defined contribution plan. Two cases are pending before the Eighth and Ninth Circuits currently that relate to mutual fund investment fees in defined contribution plans. An appeal was filed in December in both Tibble v. Edison, Intl. in the 9th Circuit and in Tussey v. ABB, Inc. in the Eighth Circuit. The Seventh Circuit previously dismissed fiduciary breach claims related to fees in Hecker v. Deere & Co. in 2009. All of these need to be watched to see how the different circuits approach the issue. With the increased disclosure of fees to participants since 2012, the analysis of these cases may begin to evolve.