A class-action lawsuit alleging participants paid excessive fees for actively managed mutual funds in a $1.3 billion 401(k) plan has been dismissed in the U.S. District Court for the District of Connecticut.

The complaint alleged plan fiduciaries of Ferguson Enterprises, a Virginia-based wholesaler of plumbing supplies, breached its fiduciary obligations by offering an investment menu laden with excessively expensive mutual funds. Of the plan’s 16 investment options, 11 were actively managed funds.

The suit also alleged that the plan’s service provider, Prudential, engaged in prohibited transactions administering the plan and received “kick backs” in the form of revenue-sharing payments.

The plaintiff, a former employee of the company, also alleged CapTrust Financial Advisors breached its fiduciary obligations by allowing Ferguson to build out the menu with the actively managed funds.

In the original complaint filed in December of 2015, attorneys for the plaintiff alleged that Prudential’s receipt of revenue-sharing payments was “fraudulently and deceptively concealed,” according to court documents.

Like scores of other previous and pending claims against service providers, the suit also claimed Prudential did not provide the services to warrant its revenue-sharing profits and that the firm served as a fiduciary to the plan, given its discretion in managing plan assets in separate accounts.

Prudential argued that it at no time served as a fiduciary to the plan in its role as a service provider, and therefore could not be liable for breaches of the Employee Retirement Income Security Act.

Prudential’s contract with Ferguson said it “shall have no duty or responsibility to determine the appropriateness of any plan investment.” Fiduciaries at Ferguson, and its advisor, CapTrust, were responsible for the plan’s investment design, Prudential argued.

In dismissing the claim against Prudential, Judge Victor Bolden said Prudential’s influence in negotiating its agreement with Ferguson did not make Prudential a fiduciary, noting other decisions in the Second Circuit.

Ultimately, Bolden found the language in Prudential’s trust agreement with Ferguson as reason to dismiss the claims that the service provider was acting as a fiduciary.

“The Trust Agreement thus demonstrates that Prudential did not possess the authority to be considered a fiduciary under ERISA. Accordingly, Prudential cannot be held liable under ERISA for breach of fiduciary duties,” wrote Bolden.

Ferguson, CapTrust offered sufficient range of investment options

The expense ratios in the Ferguson plan ranged in cost from 4 basis points to 102 basis points, according to court documents.

Along with the actively managed funds, participants were offered a Vanguard institutional index fund and a Prudential stable value fund.

“The inclusion of these lower-cost alternatives undermines Plaintiffs‘ assertions that Ferguson and CapFinancial (CapTrust) breached their fiduciary duties by charging excessive fees,” Bolden said in dismissing the claims against the sponsor and advisor.

The plaintiff’s claim that both failed their fiduciary obligations to monitor the plan’s investment options was not supported by facts, Bolden said.

Revenue sharing still kosher under ERISA

In dismissing the case, Bolden denied the plaintiff the opportunity to further amend the claim, saying that would be “futile,” given the existing insufficiencies of the presented arguments.

During oral arguments, attorneys for the plaintiff argued that the case was one of the many ongoing claims across the country that intend to move the 401(k) industry to a zero revenue-sharing model.

“These goals, however worthwhile they may be, are not compatible with the purposes of ERISA,” Bolden said.

Instant Insights /

Court dismisses 401(k) suit against Prudential, CapTrust

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