The U.S. Department of Labor (DOL) filed an amicus brief supporting plan fiduciaries in a case arising from the Sixth Circuit (Parker-Hannifin 401(k) plan), challenging the notion that plaintiffs can plead a prudence breach based on relative underperformance without identifying a meaningful benchmark for comparison. The DOL’s position stresses that:
- Plaintiffs must define a benchmark that is truly comparable — not just any market index — to support claims about alleged imprudence due to underperformance.
- Treating broad market composites (e.g., generic target date indexes) as inherently meaningful benchmarks can lead to “apples to oranges” comparisons and erode the utility of motions to dismiss.
- Allowing minimal allegations of underperformance to survive could make prudent fiduciary decisions liable based on hindsight performance alone, contrary to ERISA’s standards.
The DOL urges the Supreme Court to resolve this conflict among circuits to restore consistency in excessive fee/underperformance litigation.
Key Implications for Plan Sponsors
- Benchmark Selection Matters
Courts (and now the DOL) expect plaintiffs to plead comparisons only against benchmarks that reflect comparable investment strategy, risk profile, and objectives. Generic market indexes are unlikely to meet that bar. - Fiduciary Process Over Results
The focus remains on the fiduciary process — demonstrating a prudent decision methodology is more important than purely outperforming broad indexes. - Litigation Environment Still Active
Even with heightened pleading standards in some circuits, insurers and ERISA litigators expect litigation against plan sponsors to continue aggressively.
Action Items for Plan Sponsors
1. Document Benchmark Rationale
- Establish and document clear criteria for selecting comparative benchmarks in investment reviews.
- Ensure benchmarks align with each fund’s investment strategy, risk profile, and participant usage.
2. Maintain Robust Process Documentation
- Archive reviews of plan investments and fees, including:
- Benchmark comparisons with rationale.
- Committee meeting minutes describing deliberations.
- Evidence of ongoing monitoring and review.
3. Review Fee Structures and Share Classes
- Confirm record keeping and investment fees are competitive and documented.
- Evaluate whether lower-cost share classes or institutional pricing were considered.
4. Plan for Fiduciary Defense Preparedness
- Incorporate litigation risk assessment into annual fiduciary reviews.
- Evaluate whether fiduciary liability insurance limits and terms are adequate given ongoing litigation trends.
5. Consult ERISA Counsel on Pleading Standards
- Work with counsel to verify that your documentation would meet even stringent pleading standards in circuits requiring meaningful benchmarks.
The Parting Glass
The DOL’s intervention reflects a positive trend for plan sponsors by reinforcing the process standard over performance outcomes. Remember, the Department of Labor wants all funds evaluated by a defendable and repeatable process. A retirement plan is not asked to have the lowest fee investments or the best performing. If that were the case, a retirement plan would be switching investments every quarter as there is likely an investment that outperforms for one quarter.
In addition, when comparing investments, make sure you are comparing like-categories to like-categories (ie, Large Cap Value versus Large Cap Value).
Of course, given ongoing litigation volume and evolving standards among circuits, sponsors cannot be complacent. Rigorous documentation and defensible benchmarking are now essential fiduciary practices.