The class, if certified by the District Court, could be as large as 100,000 people. The Whole Foods Market Growing Your Future 401(k) Plan’s assets during the period in question ranged from $1.6 billion to $1.9 billion. Rather than risk a jury award, the defendants, which include Whole Foods Market, Inc. the company’s board of directors, multiple committees charged with overseeing the management of the plan and 50 John Does, will likely settle for something similarly jaw dropping.But ultimately, the issue is whether the fiduciaries of the plan failed in their legal duty under ERISA to manage the participants’ retirement savings wisely. And what is wise, or “prudent,” in the language of law, requires a close look at the advantages that the managers could have, but failed to take advantage of because of the plan’s size.
Yes, size matters when it comes to the cost of managing investments. The giants benefit from economies of scale. Small employers and their employees – sadly not so much.
Mismanagement
As is usual in ERISA 401k excessive fee lawsuits, the plaintiffs allege:
- That the plan was very large (technically known as a “jumbo” plan);
- That its size as a jumbo plan should have enabled it to bargain for a better deal than it got for participants; and
- That their failure to do so constituted a breach of the fiduciary duties owed to the plan and participants.
The lawsuit alleges that there is no evidence that a Request for Proposal was ever issued, and that Fidelity had been the recordkeeper since 2011. Plaintiffs infer from this that plan fiduciaries failed to seek a competitive market rate for administrative fees and thus failed to act in the participants’ best interests. Further, Winkelman notes that Fidelity charged a per participant rate of between $31 and $34 from 2016 to 2020 and that these rates exceeded the reasonable rate for a plan of similar size.
Duty of Prudence
The primary responsibility of ERISA fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses.. The 2023 Seventh Circuit decision in Hughes v. Northwestern University restates the established principle that plan fiduciaries have a continuing duty to monitor their expenses to make sure that they are not excessive with respect to the services received.
In a defined contribution plan, like the Whole Foods plan, fiduciaries are not required to guarantee a certain rate of return or a defined benefit at the time that a participant retires. As a result, there is always a speculative element in 401k breach of fiduciary lawsuits that focus on the harm caused to participants and beneficiaries by excessive fees. The litigants tend to focus on the process the fiduciaries used to review third-party fees.
The court’s decision, should the lawsuit go to trial, may depend on how long the plan retained Fidelity as the recordkeeper and the relative frequency (or infrequency in the facts alleged) with which the fiduciaries sought competing bids from third party recordkeepers.
Far reaching implications
The ERISA landscape has witnessed its fair share of high-stakes litigation, but few cases have garnered as much attention as Winkelman. The size of the potential class and the amount of money involved are enormous. The consequences and implications are also huge, not only for the plaintiffs but for the broader ERISA community.
If the plaintiffs ultimately prevail, it could embolden other plan participants to file similar lawsuits, alleging excessive fees and imprudent investment decisions. This could lead to increased scrutiny of retirement plan fiduciaries and a higher standard of care. Additionally, the case could have a chilling effect on plan sponsors, who may be more hesitant to take on fiduciary responsibility for fear of litigation.