The Sixth Circuit’s Parker-Hannifin Decision Allows a Performance Standard to Judge the Fiduciary Prudence of 401k Plan Investment Decisions

On November 20, 2024, the Sixth Circuit issued a surprising decision in Johnson v. Parker-Hannifin Corp. allowing fiduciary imprudence claims asserting that the Northern Trust Focus target-date funds in the Parker-Hannifin jumbo 401k plan were imprudent because they underperformed the S&P 500 index and the three most popular target-date funds on the market.  The decision reverses the Ohio district court’s decision which had rejected the fiduciary-breach investment performance claims because they failed to compare Northern Trust’s conservative investment strategy to a meaningful investment benchmark with a similar strategy or objective. 

In what is easily the worst and most damaging ERISA judicial decision of 2024, the Sixth Circuit panel held that investment performance claims do not require a meaningful benchmark.  Plaintiffs can sustain a fiduciary-breach claim merely by comparing any 401k investment option to top-performing funds or the S&P 500 index benchmark, even if the challenged fund has a completely different investment mix or objective.  As the dissent notes, the Sixth Circuit’s decision “breaks new ground” in its disappointing implications.  If allowed to stand, it is open license for plaintiff lawyers to challenge any 401k investment option that lags behind – in hindsight – the top performing and most popular funds in the market.  To make matters worse, the time period of alleged underperformance in which plan fiduciaries were supposed to replace the challenged funds was only 11 months – well before any prudent fiduciary would make investment changes in a long-term investment strategy. 

Like they have in other cases attacking conservative investment strategies sponsored by NFP FlexPATH, Wells Fargo and Northern Trust, the Schlichter law firm has cynically alleged fiduciary breaches for investment underperformance compared solely against the top-performing funds of the last five to ten years.  The higher performing investments achieved those returns with higher equity allocations and by taking higher risk.  The fiduciary-breach complaint that the Sixth Circuit is allowing to proceed in the Parker-Hannifin case tells you nothing about the absolute returns of the challenged Northern Trust Focus funds, nor does it compare the equity mix of the Northern Trust funds to the top-performing Vanguard, T. Rowe Price or TIAA target-date funds.  Plaintiffs are treating every investment option as the same, with no differences in investment strategy – just differences in performance results.  The plaintiff lawyers behind these cynical lawsuits are seeking what the dissent calls a “golden ticket” to discovery and settlement leverage with no meaningful proof of fiduciary imprudence or underperformance.    

The must-read dissent from Judge Murphy makes the critical point that the Sixth Circuit has created new law and a circuit split compared to the appellate courts that require meaningful benchmarks to allege fiduciary-breach performance claims.  If allowed to stand, it greenlights speculative ERISA fiduciary breach lawsuits that are expensive to defend.  The litigation abuse now sanctioned by the Sixth Circuit is exactly what has happened in hundreds of cases in the last eighteen years.  The same logic applies to excess fee cases that attempt to compare the recordkeeping fees of challenged plans to a few random and out-of-context comparator plans.  As the dissent by Judge Murphy notes, “[t]his holding weakens an ‘important mechanism” to stop costly litigation over ‘meritless claims’:  motion to dismiss complaints.”  Plaintiff lawyers can challenge any investment option that trails any popular fund in the market without having to compare the risk level needed to achieve higher returns. 

The dissent reminds other judges that ERISA was not intended to serve as a lottery ticket to sue plan sponsors, but that is what is has become.  ERISA imposes standards of conduct, not standards of performance of investments.  Nevertheless, the Parker-Hannifin case is part of a growing list of breach-of-fiduciary duty performance cases filed by the trial bar challenging conservative investment strategies as imprudent.  These illogical challenges are premised on a theory that conservative investment strategies are flawed if they somehow do not match the returns of more aggressive and higher-risk strategies.  Under this damaging decision, all investments are treated the same:  the only difference is the investment performance results.  But not all investments are the same.  If allowed to stand, plan fiduciaries will be forced to offer higher risk, aggressive investment strategies to avoid fiduciary litigation and liability – a perverse incentive that is not consistent with ERISA fiduciary law under which preservation of investment capital is a legitimate investment goal. 

The following is an analysis of the Sixth Circuit’s Parker Hannifin decision, and a closer study as to why a meaningful benchmark is necessary to properly and fairly judge fiduciary prudence. 

The Imprudent Investment and Share-Class Excessive Fee Claims in the Parker-Hannnifin Amended Complaint 

The First Amended Complaint alleges that Parker-Hannifin sponsored a jumbo 401k plan with 32,000 participants and over $4b in assets.  In February 2014, plaintiffs allege that plan fiduciaries switched $800m of assets from Fidelity Freedom target date funds to the Northern Trust Focus Funds.  Plaintiffs claim that this was imprudent based on several theories.  First, the Northern Trust Focus Funds “were relatively new,” with no performance history until 2009.  Second, plaintiffs claim that the Focus funds “performed poorly” from their inception, as they “significantly underperformed industry-standard benchmarks, such as the S&P target date fund benchmark.  The Focus Funds also allegedly “underperformed similar target-date funds managed by Vanguard, T. Rowe Price, and TIAA-CREF,” each of which “had excellent long-term performance and used a ‘Through’ strategy, like the Focus Funds.”  “[I]n addition to poor performance,” a third reason the complaint alleges fiduciary imprudence is that the Focus Funds had “extremely high turnover” in the underlying index funds in the target-date offering.  The complaint alleges that these “objective criteria” demonstrate that the “Focus Funds were inferior to similar ‘Through” target-date funds from established managers.” 

The Complaint never mentions that the Focus Funds have an intentional conservative investment strategy.  Instead, the complaint implies that all target-date funds are fungible, and that the only purpose in choosing plan investing is to achieve the highest possible return.

The Complaint alleges that the Focus Funds remained in the plan for over five years [NOTE that they were removed two years before the lawsuit was filed] “despite persistent and ongoing underperformance.”  Specifically, the complaint alleges that throughout 2014, the Focus Funds “continued to drastically underperform the S&P target-date index on a three-year rolling basis.”  Thus, “a fiduciary prudently monitoring the Focus Funds’ severe 2014 underperformance would have replaced them by early 2015.”  This is only 11 months after adding the Focus Funds to the plan.  [NOTE:  plaintiffs want to allege that the Focus Funds were objectively imprudent and never should have been added to the plan, but they have statute of limitation problems because the funds were added more than six years before they sued, so they are stuck with the weaker claim that Parker-Hannifin fiduciaries should have been immediately removed the funds just three short quarters after choosing them.] 

Until the Focus Funds were removed on September 30, 2019, the Focus Funds allegedly caused significant harm to the Plan:  in 2015, the funds underperformed allegedly prudent alternatives by 10 to 17%; 5 to 11% in 2016; from 2015 to 2017, the 2030 Focus Fund underperformed peer 2030 funds, including Vanguard, T. Rowe Price and TIAA-CREF by 4 to 17% [but note that there are no actual results – just percentage comparisons without perspective].  The Complaint alleges that the failure to monitor and remove the focus Funds by 2015 caused the plan to lose $45 to $73 million compared to what the plan would have earned by investing in a prudent alternative target-date option.

Plaintiffs also allege a second prudence claim that the plan fiduciaries caused damage by failing to leverage the $4b size of the plan to seek lower-cost share classes and excessive investment fees.  The complaint does not allege that the plan qualified for lower-cost and identical share classes, but that the plan could have levered its size and asked for a waiver from Vanguard and Northern Trust of the investment minimums.  The Focus Funds K shares had a .07% fee, and plaintiffs claimed that the plan should have received a lower .02% fee.  Plaintiffs claim that Vanguard would have waived the investment minimums and offered .01 to .03% lower fees on the three Vanguard index funds offered in the plan. 

NOTE:  It is important to remember that the complaint never alleged that the plan met the investment minimums for any of the index funds, including the Focus TDFs, only that the plan should have leveraged its jumbo size to seek a waiver from both Northern Trust and Vanguard.  The fees at issue are really low for 2014.  The allegation that Northern Trust would offer its target-date funds for just 2 bps in 2014 is absurd.  Judges would not know that, but it doesn’t pass the smell test.  We do not know of any investment provider even today that offers its target-date funds for just 2 bps.  But the Schlichter firm alleged that Northern Trust would have waived its investment minimums and offered $800m of invested assets for just 2 bps – ten years ago, and before a decade of significant fee compression.  Again, this demonstrates the absurdity of the result:  Parker-Hannifin plan fiduciaries who negotiated super-low 7 bps target-date fund fees in 2014 are having to defend a fiduciary breach claim, all because they opted for a more conservative investment strategy.

The District Court’s Decision in Johnson v. Parker-Hannifin Corp.

Parker-Hannifin filed a motion to dismiss the amended complaint, which was granted on December 4, 2023 by the judge in the Northern District of Ohio.  The district court followed the Sixth Circuit’s precedent from Smith v. CommonSpirit Health, 37 F.4th 1160, 1162 (6th Cir. 2022), which requires that fiduciary breach claims of investment underperformance must contain “sufficient context” showing that the challenged funds underperformed relative to their stated goals.  If the plaintiff chooses to do so through comparator funds, “she must show that the challenged funds and the comparator funds share the same investment ‘strategies,’ ‘risk profiles,’ and ‘objectives’” – that the challenged funds underperformed related to a “meaningful benchmark.”  The court rejected the comparison to the S&P target-date benchmark because it is a not a fund, but a statistical data composite created from a universe of target date funds.  Other courts have held that such an index cannot serve as a meaningful benchmark for a real fund with unique investment strategies, goals, and asset allocations.  The court rejected the comparison to the T. Rowe Price active TDFs because actively managed funds cannot, as a matter of law, serve as meaningful benchmarks to passively managed funds.  The court rejected the comparison to the Vanguard and TIAA passive TDFs because plaintiffs failed to allege that the passive funds shared the same investment strategy.  Plaintiffs had made no effort to respond to Parker-Hannifin’s assertion that the Focus Funds had a “uniquely conservative investment strategy.”  The complaint never attempted to address or compare investment strategies. 

On the share-class claim, the district court followed the Sixth Circuit’s admonition in Forman v. TriHealth, 40 F.4t 443,446 (6th Cir. 2022) that its decision was not a “universal golden ticket past a motion to dismiss” when a fiduciary-breach complaint alleged a lower-fee share class claim.  According to the court, “[p]laintiffs essentially ask this Court to find that any time a plaintiff alleges a large plan did not obtain the lowest-fee chares, plan beneficiaries and participants have stated viable ERISA fiduciary duty claim[s].”  The court rejected plaintiff’s waiver theory, stating that “[r]ubber-stamping this view is inconsistent with binding authority.” 

The Sixth Circuit’s Reverses the District Court’s Decision 

The Sixth Circuit’s opinion starts with a summary of the amended complaint’s theory of liability that the Northern Trust Focus Funds should have been replaced before even one calendar year, because:  (1) the Focus Funds were untested with just five years of experience; (2) high turnover in the underlying index funds in the target-date funds; and (3) the Focus Funds allegedly otherwise underperformed the S&P 500 target-date benchmark and three high-performing alternatives from Vanguard, T. Rowe Price, and TIAA-CREF. 

The Court then reviewed the Sixth Circuit’s groundbreaking decision in Smith v. CommonSpirit, which held that “pointing to a fund with better performance” may serve as “a building block for a claim of imprudence,” but it does not alone suffice to demonstrate imprudence.  Instead, a plaintiff who points to a higher-performing fund must also provide “evidence that an investment was imprudent from the moment the administrator selected it, that the investment became imprudent over time, or that the investment was otherwise clearly unsuitable for the goals of the funds based on ongoing performance.”  

All good so far, as the Court is just quoting from the CommonSpirit decision, which set a high bar to plead a plausible claim of investment underperformance, because “[u]nder ERISA, prudence is a ‘process-driven’ duty.”  The Court even cites the CommonSpirit holding that imprudence claims must be viewed from a “foresight-over-hindsight perspective,” with the focus on “each administrator’s real-time decision-making process, not on whether any one investment performed well in hindsight.”  But the Court goes off the rails by stating that CommonSpirit held that “[a] meaningful benchmark may sometimes be one part of an imprudence pleading, but is not required.” 

Although holding that a meaningful benchmark is not required, the Court then nevertheless finds that plaintiffs provided a meaningful benchmark with the comparisons to the S&P benchmark index and the three most popular target-date funds in the 401k retirement plan market.  First, the Court finds that the S&P 500 target-date index was a meaningful benchmark to judge performance because the Focus Funds are essentially a fund of index funds “designed to meet industry-recognized benchmarks.”  This meant, to the Court, that the Focus Funds share the same goals, strategies, and risks as the indices they are designed to replicate.  The Court thus accepted plaintiffs’ argument that, because the Focus Funds were expressly structured to meet an industry benchmark, the S&P target date fund benchmark was the relevant “industry-accepted target date benchmark” for investment professionals offering through-retirement target-date funds.  Consequently, because the Focus Funds underperformed the S&P 500 target date benchmark through at least 2014, a prudent fiduciary would have removed the Focus Fund eleven months later by the end of January 2015. 

We have to provide an editorial comment at this point in describing the opinion, because there is no factual basis for asserting that the Focus Funds used the S&P 500 target-date index as the benchmark.  And we find nothing in the complaint that even alleges this false benchmark.  The Court appears to make this up to justify its departure from the meaningful benchmark requirement in Sixth Circuit precedent.  The Court says that “[w]here a complaint alleges that a Fund, by its design sets a benchmark for itself and repeatedly fails to meet that benchmark, it is perfectly appropriate to submit to a jury the prudence of the administrator’s process in retaining the Fund despite that failure.”  Never mind that ERISA claims do not belong before a jury.  But the Court’s assertion that the Focus Funds were designed to match generic S&P 500 target-date returns is just plain untrue:  even the complaint does not allege that the Focus Funds were designed to mimic the S&P 500 target-date index.  The Court conspicuously fails to mention that the Focus Funds were expressly designed to offer a conservative glide path.  That is completely different from a benchmark of all S&P 500 target-date index funds, many of which have more aggressive glide paths with a higher equity allocation.

The Court further states that “Northern Trust made this comparison [to the S&P 500 target-date index] all on its own when it designed the Funds, and the jury could find that this shortfall between what the Funds promised and what they delivered should have caused a prudent administrator to replace the Focus Funds.”  The Court holds that “[s]urely, whether a product, financial or otherwise, delivers the results it promises is ‘meaningful.”  That might be right, but factually, this is not true.  There is nothing in the Northern Trust Focus Funds prospectus that states it was promising to mimic or replicate the S&P 500 target-date index.  The Sixth Circuit panel has made up this benchmark comparison with nothing to back it up.  It is reversible error, and the Sixth Circuit needs to review this case en banc.

But the Court goes even further than just claiming that the Focus Funds set the S&P 500 target-date index as the performance benchmark.  The Court stated that the complaint does not have to “specifically articulate that the Focus Funds were designed to match the S&P target date fund in particular.”  The appropriate inquiry, according to the Court, is whether the complaint alleges enough facts to permit the reasonable inference that the S&P benchmark would allow a jury to assess appropriately the Funds’ performance and the prudence of the process that led to their retention.”  The Court held that the complaint met the plausibility burden of proof by alleging that the Focus Funds were designed to meet industry-recognized benchmarks, and that the S&P 500 target-date benchmark is “one such benchmark,” and that the Funds systematically underperformed that benchmark.  The court held that it is for the jury to decide whether the Funds’ failure to meet the S&P benchmark in fact meant that a prudent administrative process would have resulted in their replacement.

On the share-class claim, the Court compared the Parker-Hannifin complaint to Davis v. Washington University in St. Louis in which the Eighth Circuit accepted the allegation that expensive retail share class are imprudent because “minimum investment requirements are ‘routinely waived’ for individual investors in large retirement-savings plans.”  The Court held that plaintiff plausibly alleged that plan fiduciaries breached their duty of prudence by selecting a share class with a higher fee when “reasonable effort would have unlocked a class with a lower fee.”  The court held that plaintiffs in a share-class claim “need only plausibly allege facts supporting such an inference and need not establish anything at this [early pleading] stage.” 

Judge Murphy Dissents – Why a Meaningful Benchmark is Necessary to Judge Fiduciary Imprudence Based on Relative Investment Performance 

The long dissent by Judge Murphy warns that “[i]n authorizing this claim . . . my colleagues open the door to ‘speculative’ ERISA suits”; and that “[t]his holding weakens an ‘important mechanism’ to stop costly litigation over ‘meritless’ claims’:  motions to dismiss complaints.”  The key point in his dissent is that the primary claim is that the Focus Funds had worse returns than a target-date benchmark and top-performing funds, “[y]et [the] complaint tells us nothing about the Focus Funds’ risk profiles or their mix of equity and bond investments.”  Moreover, the complaint tells nothing about the risk profiles about the S&P benchmark and alternative funds.  “So [plaintiff]’s claim is analogous to suggesting that an administrator acted imprudently because the bonds performed worse than (risky) stocks during a bull market.”  Judge Murphy’s dissent states that courts should not allow such claims to proceed because courts traditionally would have required plaintiffs to show that the alternative options were “meaningful” comparators to the challenged funds.  He summarized that “[m]y colleagues break new ground by holding otherwise.” 

The key point in Judge Murphy’s dissent is that a meaningful benchmark is necessary when an imprudence claim is asserting underperformance relative to other funds.  He asked: 

“When can one security’s underperformance as compared to another security help show a violation of ERISA’s duty of prudence?  My answer:  This fact – without more – is irrelevant.  So this leads to the procedural question:  Can this relative underperformance nevertheless help allege a breach of the duty of prudence at the pleading stage?  My answer:  Likely not – but at least not without showing that the other security represents a ‘meaningful benchmark.’”

Judge Murphy gave three reasons why a meaningful benchmark is needed when a participant claims that an investment might be “imprudent” simply because it has a lower rate of return than some other option.  First, fiduciary common law’s duty of prudence imposes “standards of conduct” on fiduciaries, not standards “of performance” on investments.  Since ERISA imposes “largely a process-based” duty of prudence to adequately investigate before deciding whether to buy or keep a security, courts do not hold them liable simply because the securities fall in value.  Judge Murphy noted that the Parker-Hannifin complaint says nothing about Parker-Hannifin’s “conduct” and instead talks mainly about the Focus Funds’ performance.  “It flips the common-law duty of prudence on its head.” 

The second reason that a meaningful benchmark is necessary is that fiduciary duty of prudence law does not require fiduciaries to seek the highest return at all costs.  A fiduciary must balance the duty to preserve the trust property and the duty to make the trust property productive.  Fiduciaries “must choose investments that have a reasonable ratio between the ‘risk of loss’ and the ‘opportunity for gain.’”  The optimal ratio or balance between risk and reward has “no uniform answer,” as the “right ratio rests on ‘subjective judgments’ about the ‘appropriate degree of risk.’” If anything, the traditional duty of caution required fiduciaries to give primary consideration to “ensuring the safety of the principal at the expense of the returns.”  Thus fiduciaries  need to obtain only income that was reasonable in amount, not the maximum amount.  Indeed, the Supreme Court in the Northwestern case noted the risk-return conflict between minimizing loss and maximizing gain will “implicate difficult tradeoffs,” so court must respect the “range of reasonable” choice that fiduciaries can make.  Indeed, fiduciaries “likely” can choose from “many objectively prudent” investments that all have different risk-reward ratios.  There is no single prudent investment, and thus any alleged error “must have caused a plan to invest in a substantively ‘improvident’ security.”

Judge Murphy noted that the Parker-Hannifin complaint says nothing about the Focus Funds “risk and return objectives.”  The complaint contains “naked return allegations” without any risk allegations.  Plaintiff further alleges no facts about how the Focus Funds performed in absolute terms.  “For all we know, they generated an average return of 9% a year (compared to, say, a 10% return for the top performers).”  Judge Murphy doubted many could call this “return” unreasonable.  Fiduciaries should not breach the duty of prudence just because they do not pick the “best performing fund.” 

The third reason why a meaningful benchmark is needed is the common law’s duty of prudence requires fiduciaries to diversify trust property across a range of investments to reduce the harm that loss from one security can cause.  Fiduciaries thus must choose “each investment not as an isolated transaction but in its relation to the whole of the trust estate.”  Courts thus need to consider how the investment fits in with the portfolio as a whole.  “Something that looks excessively risk alone might look reasonable when held together with conservative investments.” 

Judge Murphy then asks whether an investment’s relative underperformance nevertheless helps allege a plausible breach of the duty of prudence?  He suggests that the analysis should start with the requirement that plaintiffs plead that the investment itself was “patently unsound.”  He asks rhetorically:  “Is it really the case that all securities that fall below the top (which seemingly could cover most securities) or some average (which seemingly could cover half) are substantively imprudent?  To Judge Murphy, a claim that one security underperformed another is meaningless unless the two options are “interchangeable” in all material respects but the return.  Without such details as a building block for an imprudence claim, an “obvious alternative explanation” exists for the underperformance:  the challenged fund has a lower risk (and so a lower change of return).”

When Should a Meaningful Benchmark Be Required?  Judge Murphy concludes by clarifying when a meaningful benchmark is required.  The majority opinion held that plaintiffs do not need to plead a meaningful benchmark in an investment performance case.  Judge Murphy agrees that Sixth Circuit pleading test does not technically require a meaningful benchmark in all cases.  But it does require a meaningful benchmark if plaintiffs rely on an investment’s relative underperformance.  Plaintiffs must show that an alternative investment materially resembles a challenged fund if their complaint tries to make out a case of imprudence based on an alternative’s superior returns.  Judge Murphy states that the majority decision departs from existing law and creates a circuit split if they “mean to suggest that plaintiffs need not identity such a benchmark when relying on an investment’s relative performance.”  To Judge Murphy, the instances when a meaningful benchmark are not needed are very narrow.  A complaint can try to make out an imprudence claim in other ways, such as assert direct allegations of imprudence, but it will be difficult.  He suggests, for example, a government investigation that revealed that the plan administrators did not review their portfolio for years.  His point is that nearly every performance claim pointing to a higher-returning fund must establish that the funds are worthy of a meaningful comparison.

Finally, on the share-class claim, Judge Murphy agrees that plan fiduciaries must be “cost-conscious” under fiduciary law.  Fiduciaries must not incur unreasonable expenses, and would be negligent if they selected the highest-fee “retail” share classes when lower-fee funds were available.  At the same time, however, the common-law fiduciary duty rules that ERISA incorporates requires administrators to act reasonably, not superbly.  When applied to the Parker-Hannifin plan, Judge Murphy noted that the only allegations in the complaint to support the class-share claims were that the investment providers would have waived the investment minimums because the plan is large.  Judge Murphy called this conclusory.  The complaint did not provide any proof that Vanguard and Northern Trust gave any other retirement plan clients waivers of these investment minimums.  Judge Murphy concluded that “[i]n authorizing this claim . . . my colleagues open the door to ‘speculative’ ERISA suits.”  He warns plan sponsors in the Sixth Circuit that “if their plans are big enough and if they have not obtained the least-expensive shares, they should prepare for ‘expensive’ discovery no matter the reasons for selecting the share class that they did.”

The Key Problems With the Sixth Circuit’s Parker-Hannifin Decision 

We now have three appellate decisions in 2024 that have ruled against plan sponsors, but this is the most damaging.  The Wesco decision in the Third Circuit and the United Surgical decision in the Fifth Circuit were excessive fee cases that arguably had high fees.  The Wesco plan offered Manning & Napier target-date funds with 2.00% fees and revenue sharing that reduced the fees to .87-88%, which represent high fees for any size plan.   The United Surgical plan is alleged to have offered T. Rowe Price target date funds at 90+ bps – that is also high for any size plan.  We do not agree with the random-plan comparators that the plaintiff law firms used in both cases are meaningful, but these complaints may allege legitimate excessive fee concerns.  We have not seen any defense lawyers explain how these cases differ from the appellate decisions in other circuits, but it is important to distinguish these precedents based on the actual fees.  The courts may not understand the fees, but they might have gotten the result correct.

The Parker-Hannifin decision cannot be explained, however, except for the damaging and unfair precedent that it represents.  Judge Murphy has articulated all of the reasons why the Sixth Circuit’s Parker-Hannifin decision is unfair and prejudicial to plans sponsors.  The decision is unfair because it sets a performance standard for fiduciary imprudence.  You are guilty until proven innocent if you failed to choose the highest performing funds in the market.  The case allows a hindsight challenge to performance without any reliable inference of a poor fiduciary process.  All plan sponsors are at risk of litigation abuse under a performance fiduciary standard.  You are judged based on your performance, not your process:  did you achieve the highest possible investment return?

The Sixth Circuit treats all investment options as if they are exactly the same:  as if all target-date funds have the same investment purpose and strategy.  But all investments are not the same.  Some target-date funds have a more conservative glide path, and others have a more aggressive glide path with a higher equity allocation.  More aggressive glide paths have been rewarded with higher returns in an unprecedented bull market with limited pullbacks.  But that does not mean it is fiduciary imprudence if plan fiduciaries chose a more conservative target-date fund. 

The tragedy is that a performance-based fiduciary standard encourages plan sponsors to pick the most aggressive and popular funds, even if they could harm plan participants in the long-run.  You will be liable if you were conservative and chose an investment with a lower risk profile.  This is perverse.  It creates the wrong incentives.  And it is not what ERISA intended.  The Sixth Circuit’s decision is wrong, and needs to be reversed by the full Sixth Circuit or the Supreme Court.  We realize this is wishful thinking.  But unless you can explain the Court’s decision on the basis that Northern Trust intended to replicate the S&P 500 target-date index – which it is not true – then the opinion is a license to sue any plan in America that failed to meet the returns of the top-three funds in the marketplace. 

Excessive fee and imprudent performance cases need to be measured by a meaningful benchmark.  If you are claiming underperformance or high fees, you need to answer the question of compared to what?  We have seen hundreds of cases alleging excessive recordkeeping fees, and courts have allowed comparisons to the relative fees of a few random plans.  But that is a performance test – not a prudence process test.  Recordkeeping fees need to be compared to a full-market benchmark, not the lowest three to five plans in the entire market.  But that is what has been allowed to happen in nearly every case.    

The same performance standard was allowed by the Sixth Circuit in the Parker-Hannifin case.  The Northern Trust Focus Funds were compared to the three highest performing target-date funds in the market.  This is a performance standard under which most plan fiduciaries will fail.  It is not what ERISA intended.  We must fight for plan fiduciaries to be judged on a process-based fiduciary standard, which requires a meaningful benchmark – not a comparison to a few random plans in fee cases, or the top-three performing investments in performance cases.  We cannot allow fiduciaries to be judged based on whether they achieved the highest possible investment return.  That might be the goal of the plaintiffs’ bar, but it not what ERISA fiduciary law intended.