15.5 Integrated Case Study: Assessing Fiduciary Concerns Under Threat of Litigation

Integrated Case Study: Assessing Fiduciary Concerns Under Threat of Litigation

Quick Answer: ERISA judges process, not outcomes. When a demand letter arrives, the committee's exposure is already largely fixed by what is in the minutes. The immediate steps are a litigation hold, an honest record reconstruction, and a claim-by-claim assessment of recordkeeping fees per participant, share class and vehicle selection, and imprudent retention. After Hughes v. Northwestern, the defense that the menu also contained cheap options does not dispose of the case.

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1. The Scenario

Calder Industries sponsors a $740 million 401(k) plan with 9,200 participants. Its retirement committee receives a demand letter from plaintiffs' counsel alleging three theories:

1. Excessive recordkeeping fees — the plan paid an effective $94 per participant through asset-based revenue sharing while comparable plans paid $35 to $45.
2. Imprudent share classes — the plan held Investor-class shares of several funds when the plan's asset level qualified it for institutional (R6) shares priced 22 to 34 basis points lower.
3. Imprudent retention — an actively managed large-cap fund underperformed its benchmark and its peer median for seven consecutive years and remained in the lineup.

The committee's first instinct — to argue that total plan cost was "in line with the market" — is the wrong instinct, and understanding why is the point of the case.

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2. First Moves: Preserve, Then Assess

Issue a litigation hold immediately. Suspend routine destruction of committee minutes and materials, investment consultant reports, recordkeeper fee analyses, RFP files, benchmarking studies, emails among committee members, and calendar entries. Spoliation converts a defensible fee case into an indefensible one, and the hold must reach individual custodians, not just the shared drive.

Engage ERISA counsel and preserve privilege. The fiduciary exception to attorney-client privilege means that advice given to a fiduciary about plan administration is generally discoverable by participants, because the fiduciary obtained it for their benefit. Advice about the sponsor's own liability exposure after a claim arises is generally protected. Segregating the two workstreams from day one — separate engagements, separate files, separate distribution lists — preserves a distinction that is very hard to reconstruct later.

Reconstruct the record honestly. For each of the three theories, assemble: what the committee knew, when it knew it, what it considered, what it decided, and where that is documented. Gaps found now can be addressed prospectively. Gaps papered over now become credibility problems at deposition.

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3. Assessing the Claims

Claim 1 — Recordkeeping Fees

Recordkeeping cost is driven by participant count, not by assets: servicing a $400,000 account and a $4,000 account costs about the same. Fee reasonableness is therefore evaluated per participant, against plans of comparable participant count and service scope.

At 9,200 participants, an effective $94 per head is high on its face. The relevant questions are: When was recordkeeping last competitively benchmarked or bid? Was the fee asset-based, so that it rose automatically with market appreciation without any corresponding increase in service? Did the committee ever consider converting to a per-participant fee or rebating revenue sharing through a revenue credit account? Is any portion of the $94 attributable to services the plan actually elected — managed accounts, participant advice, enhanced call center — that a bare benchmark excludes?

The defense is process. A committee that benchmarked every three years, bid the contract twice in a decade, negotiated fee reductions, and documented why it retained the incumbent is in a strong position even if its fee is above median. A committee that renewed for eleven years without a benchmarking study is not, regardless of the fee level.

Claim 2 — Share Classes and Vehicles

This is the cleanest of the three claims because it is nearly arithmetic. If the plan qualified for a lower-cost class of the identical portfolio and did not use it, participants paid more for the same asset. The standard responses fail:

• "Revenue sharing from the retail class offset recordkeeping costs." Possibly, but the committee must show it knew that, quantified it, and concluded the net arrangement was reasonable — and that participants in the revenue-sharing funds were not disproportionately subsidizing everyone else's administration.
• "Total plan cost was reasonable." Reasonableness in the aggregate does not excuse paying more than necessary for a specific identical asset.

The expected defense is a documented periodic share class and vehicle review — checking eligibility thresholds at each review cycle and evaluating collective investment trust versions of the same strategy where available.

Claim 3 — Imprudent Retention

Underperformance alone is not a breach; ERISA does not require successful investments. What it requires is a documented monitoring process: an investment policy statement with objective criteria, a watch list with defined triggers and time limits, and a recorded decision at each review. Seven consecutive years of underperformance is a problem only if the minutes show the fund was reviewed and retained without stated reasons, or was never placed on watch at all. If the record shows the committee placed the fund on watch in year two, evaluated the manager against its stated philosophy and an appropriate benchmark, considered the tax and transition costs of removal, and documented its reasoning each cycle, the claim is materially weaker.

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4. The Pleading Standard After Hughes

In Hughes v. Northwestern University (2022) the Supreme Court rejected the reasoning that a plan defeats an imprudence claim merely by offering a diverse menu that includes some prudent, low-cost options alongside the challenged ones. The Court reaffirmed Tibble v. Edison International (2015): fiduciaries have a continuing duty to monitor plan investments and to remove imprudent ones, and each challenged investment must be evaluated on a context-specific basis with due regard for the range of reasonable judgments a fiduciary may make.

The practical effects for Calder:

• The "we offered index funds too" defense does not dispose of the case.
• The continuing duty to monitor means the six-year statute of limitations generally runs from each failure to monitor and remove, not only from the date the investment was first added, which limits the timeliness defense.
• Because Hughes remanded rather than announcing a bright-line pleading test, courts of appeals have diverged on how specific a meaningful benchmark comparison must be to survive dismissal — a genuine uncertainty a committee should not plan around.

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5. Who Pays, and What Actually Responds

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6. The Prospective Remediation List

Whatever happens to this case, the committee's forward work is settled: adopt or refresh a charter defining membership, authority, meeting cadence, and training; benchmark recordkeeping per participant on a fixed cycle and formally bid it periodically; convert asset-based recordkeeping compensation to an explicit per-participant fee or implement a revenue credit account; conduct a documented share class and vehicle eligibility review at every cycle; maintain an investment policy statement with objective watch-list criteria and follow it; record reasoning, not conclusions, in contemporaneous minutes; deliver annual fiduciary training and document attendance; and confirm that fiduciary liability limits and indemnification actually match the plan's size and exposure.

Every item on that list is something a committee can do before a demand letter arrives — which is the entire lesson of the case.