“Recent 401(k) plan fee litigation has been successful not under ERISA section 406 but under ERISA section 404, ERISA’s prudence standard,” one reader recently reminded PLANADVISER, following a difficult week of news for retirement industry service providers.

A third lawsuit had just been filed against J.P. Morgan Chase Bank, all three arguing the company improperly favored its own investment options within the retirement plan offered to workers and otherwise failed to control costs and conflicts of interest. The firm, far from being the only provider finding itself in this boat, flatly denies the underlying allegations.

According to Michael Barry, a PLANSPONSOR magazine columnist and president of the Plan Advisory Services Group, as new cases emerge it is important to remember that, as he puts it, “Where the 401(k) plan fee litigation has been successful is not under ERISA Section 406 but under ERISA Section 404, known as ERISA’s prudence standard.” 

Many of the legal challenges emerging may appear similar on their face, but the underlying allegations can vary significantly in terms of how they actually apply and test the Employee Retirement Income Security Act’s (ERISA) various standards. “My understanding is that the lawyers are fighting out in the courts—right now—what exactly is prudence when it comes to fees,” he notes. 

The distinction between litigating fees and litigating prudence may seem subtle, Barry says, but it is important. The “reasonable compensation” standards so often discussed in the media coverage of new cases are established by ERISA section 406, known as ERISA’s prohibited transaction standards. Questions about how these standards should be applied in practice are murkier. 

“There is language in John Deere [at this point, eight years old and questioned on a number of points] that some courts and all defendants’ lawyers cite,” Barry explains. “The suggestion is that ‘nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund.’”

He observes that the demand for such a truly exhaustive search in itself may lead to higher plan operating costs. “But there are also cases like ABB and Tibble, where courts seem to be saying, ‘Where there is a cheaper service provider/fund that does the same thing [and is easily obtainable], prudence requires that you buy that service provider/fund, or at least consider it.’”

Barry believes that “plaintiffs’ lawyers are trying to push this principle as far as they can.”

“And when you think about it, what justification is there for paying, say, 35 bps for an S&P Index fund when you can get one off the rack from several providers for fees that are in the single digits?” he asks. “How could that possibly be prudent, even if it is ‘reasonable?’ And where do you draw the line—if your Vanguard S&P 500 fund charges 4 bps and Vanguard has an identical fund that you could use that only charges 2 bps, is that imprudent?”

This has been claimed, in fact, for example in Oracle. “There are obviously lots of nuances that the courts haven’t even gotten to,” Barry adds. “For instance, is there securities lending in the 2bps fund and not in the 4bps fund?”

Barry offers the conclusion that the industry is still having an “as-yet unresolved argument over whether fiduciaries should have to get a merely good deal or the best available deal, after discounting for search costs. Emphasis on as-yet unresolved.”