Not long after I first started writing this blog, the Seventh Circuit began trying to preemptively squelch excessive fee litigation by, at heart, insisting that the invisible hand of the market would never have allowed the type of overcharging of fees claimed by the plaintiffs in those cases and that plan fiduciaries therefore could not have acted imprudently if they offered market rate products in a plan. At the time, I took objection to this line of thinking (see here, here and here, for instance) and eventually the world would move on from the belief that, somehow, the invisible hand was all that was necessary to protect plan participants from paying far too much for the privilege of buying mutual funds in a 401(k) plan.
But although then and still now – as you can see – I make some fun of the premise, the Court was on to something, although it would require more nuance and the further refinement of judicial thinking on the excessive fee theory to get there. I pointed out at the time that the problem with the Court’s thesis was that it needed to be tested by the evidence, by the clash of experts, and by what – to quote a cliché – Wigmore called “the greatest legal engine ever invented for the discovery of truth,” cross-examination. My point was that it might actually have been the case that the investment products at issue were not overpriced because the market had acted upon them already, but one could only learn whether that was true by testing the thesis through discovery and, if necessary, testimony at trial: you could not properly do it simply by relying on blind faith in the alleged power of markets, as the Court did initially.
Since that time, discovery and trials have established that sometimes, the pricing of 401(k) investment options is appropriate, even when it was only marketplace pressures that were holding down the price rather than any thoughtful engagement by a plan’s fiduciaries, but that other times, plan fiduciaries should have acted to get a better price and that in those instances it was imprudent not to have done so. There is no blanket rule one way or the other, as the earliest judicial rulings in this area suggested that there might or should be, and instead time has shown that fiduciaries do sometimes act imprudently because a better priced product that would serve the same investment purpose was available and the fiduciary failed to learn and act upon that knowledge.
I think of this today because one of the themes of many excessive fee suits is that the inclusion of particular products in plans is, in and of itself, evidence of a fiduciary breach, when the real question in such a suit, even if a product was overpriced, should be whether it was imprudent for the fiduciary to have included that product. As the cliché goes, you get what you pay for, and a plan fiduciary’s job is to assemble a prudent collection of investment options, not to just assemble the cheapest one possible.
The Fid Guru blog has a detailed analysis of whether, as recent cases have begun alleging, it was a fiduciary breach to include BlackRock LifePath target-date funds in plans, arguing that allegations to that effect should not be enough to sustain a plaintiff’s burden. What I like about the post is that it relies on a deep dive into the evidence to make a detailed case to that effect, which I have long advocated is the only proper way to determine whether a fiduciary erred by including a particular product in a plan’s investment options.
Anyway, I like both the approach and the thoughtful conclusions reached by the post for that reason, and recommend it to anyone interested in the sort of broader question of what is and is not an actionable fiduciary breach in the area of investment selection.