Biogen ERISA Lawsuit Slams 401k Fiduciaries for Poor Investments, High Costs

Boston, MAOn August 31, participants in the Biogen, Inc. 401(k) Savings Plan filed a class-action ERISA lawsuit, alleging that plan administrators mismanaged employees’ retirement savings in ways that will leave them poorer in retirement.

More specifically, the lawsuit charges that the plan’s administrative committee and other fiduciaries breached their legal duty under ERISA by offering poor investment options for participants to choose among; failing to disclose the risks and expenses of those options; and  permitting unreasonable costs to be charged to the plan.

The allegation is basically that fiduciaries broke the law by wasting the participant’s money. That’s the money they were counting on for their later years. The defense will likely be that the participants are just second-guessing fiduciary decisions that were perfectly reasonable at the time. When all is said and done, that’s what fiduciary breach lawsuits are about.

401k savings loom large

All we know about Sarah Gamble, the lead plaintiff in Gamble v. Biogen, Inc., is that she lives in Garner, North Carolina; she worked for Biogen and participated in the 401k plan. Presumably she, like many other 401k plan participants, counted on that money for retirement. 

In 2019, more than 55 million Americans participated in 401k plans, which held an estimated $5.67 trillion in assets. The growth of 401k plans, when combined with the decline of the traditional defined benefit plan and fears about the adequacy of Social Security, make these savings vehicles increasingly important for many of today’s workers.

So, it matters that this money is (or should be) protected by law. The stakes are enormous.

The primary way that ERISA protects 401k savings is by requiring those in charge of managing the money  to adhere to a certain standard of conduct. The enforcement of these rules, however, is left largely to individuals, like Sarah Gamble, who are willing and able to participate in class-action lawsuits.

Fiduciary prudence 

       
Section 404a1B of ERISA requires those who manage the assets of a defined contribution retirement plan to use care, skill, prudence and diligence, and to act as someone familiar with such matters would act. Further, a fiduciary must act solely in the interest of plan participants and beneficiaries.

Together, that section of the law describes three kinds of obligations –a duty of loyalty, a duty of care and the requirement that the individual act with a reasonable level of expertise. Loyalty is not really the issue, here. The other two obligations are. A pure heart and an empty head is not enough for someone entrusted with the responsibility of managing someone else’s money.

Weighty obligations, major money – but no guarantees

The Biogen 401k plan had huge assets; as of December 31, 2018, there were 6,720 participants with account balances and assets totaling over $1 billion, placing the plan in the top 0.1 percent of all 401k plans. With this amount of money at stake, the appropriate duty of care and expertise required seems especially weighty.

But the legal requirement is about conduct, not investment results in an individual’s account. So Gamble, if it goes to trial, will likely feature much expert testimony about whether the fiduciaries’ choices were reasonable and prudent enough, and how much about conduct can be inferred from individual account performance. The participants’ three lines of argument are likely to depend heavily on investment performance statistics.

Argument 1:  The fiduciaries’ decision to offer investment opportunities in actively-managed funds, rather than focusing on index funds, decreased the participants’ return.

Although actively-managed fund may outperform index funds over the short run, they rarely manage to do so over the long run, which is a more appropriate horizon for long-term investors saving for retirement. Actively managed funds also tend to charge higher fees than index funds (which are passed on to the target date fund investor through higher expense ratios). This raises an interesting question of whether actively-managed funds can ever be considered prudent.

Argument 2: In addition to volatile and expensive actively-managed funds, the fiduciaries did not remove investment opportunities that performed badly.

The Complaint names four funds that were poor performers. These include:

• The Mainstay Large Cap Growth Fund;
• The Allianz NFJ Small Cap Value Fund;
• The Harbor International Fund; and
• The MFS New Discovery Fund.

Each of these is exhaustively compared with other similar funds.

Argument 3: The fiduciaries failed to monitor the average expense ratios charged to similarly-sized plans.

It is important to realize that very large plans, like the Biogen 401k plan can often negotiate more favorable rates for administrative and investment management services. From 2014 through 2018, however, the plan paid out investment management fees of 0.49-0.50 percent of its total assets, considerably more than those paid by plans of a comparable size. According to a study cited in the Complaint, the investment management fees for the Biogen 401k plan exceeded the average total plan cost (inclusive of all fees) for similar plans by a factor of 43 percent. Although circumstantial, this kind of evidence suggests a failure to exercise the legally required care and expertise.

In terms of the arguments that it advances, Gamble is like many other of the 401k fiduciary breach lawsuits pending in courts throughout the country. They can be dry and highly technical for those not steeped in investment performance statistics. These cases are important for the ongoing health of the retirement system, however, because of the huge numbers of individuals who will affected by any interpretations of ERISA that reduce the protection of participants and beneficiaries.