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Plan participants' charge that single equity investment funds offered under a plan, rather than plan investments as a whole, were insufficiently diversified, did not state a claim under ERISA for fiduciary breach, according to the U.S. Court of Appeals in New York (CA-2) in Young v. General Motors Investment Management Corp. In addition, the participants did not allege sufficient facts to sustain a claim that fees charged by funds under the plan were excessive relative to the services rendered.
Background
Participants in an employer's defined contribution plans brought suit under ERISA, alleging that the named fiduciary and trustee of the plans breached their fiduciary dues by failing to diversify plan investments and investing in funds that assessed excessive fees. A federal trial court dismissed the participants' class action complaint as time barred. On appeal, the Second Circuit did not address the lower court's ruling with respect to the statute of limitations, but focused, alternatively on whether the participants had stated a substantive claim on which relief could be granted.
Investment in single equity funds
The participants charged that the fiduciaries offered undiversified single equity funds that they "knew or should have known" were too risky and volatile as investments for a pension plan designed to provide retirement income. According to the participants, the offering of single equity funds was inconsistent with modern portfolio theory, which prescribes diversification across and within assets classes as the best way to balance risk and return.
Initially, the appeals court explained that a violation of the ERISA §404(a)(1) requirement that a fiduciary diversify plan investments occurs when the plan as a whole is not sufficiently diversified. Thus, the court indicated that an ERISA violation does not arise if a specific fund is not diversified (e.g., single equity funds) as long as the plan as a whole offers a range of diversified options.
The court, however, noted that the participants alleged only that specific funds within the plan were not diversified. The failure of the complaint to address the diversification of the entire plan, rather than narrowly focusing on a few individual funds, was not sufficient, the court ruled, to state a claim for lack of diversification.
Excessive fees
The participants further charged that the fiduciary "knew or should have known" that the fees and expenses assessed by certain mutual funds offered under the plan were excessive, as compared to alternative investments, because similar investment products were available with substantially lower fees and expenses. However, the participants failed to allege either that the fees were excessive relative the services rendered or other facts relevant to a determination of whether the fees were excessive under the circumstances.
Accordingly, the court concluded that the participants did not provide a basis upon which to infer that the fiduciaries breached their duties under ERISA by offering and retaining the suspect mutual funds in the plan.
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