PLANSPONSOR - April - May 2022 - 9

said the Salesforce lawsuit may continue.
A federal appeals court judge has reversed
and remanded lower court rulings for
further proceedings. The court ruled that
the " Plaintiffs adequately alleged a claim
for breach of the duty of prudence under
the pleading standard. " A district court
had previously ruled that the plaintiffs
had not made an adequate case to state
a claim under the Employee Retirement
Income Security Act.
In Kong v. Trader Joe's Company, U.S.
District Judge Percy Anderson of the U.S.
District Court for the Central District
of California had dismissed the case in
November 2020, " following dismissal of
a substantially similar case, " according to
the court docket.
The 9th Circuit specifically pointed to
the allegation that Trader Joe's Company,
along with its board of directors and its
executive committee, failed to monitor
and control the offering of several mutual
funds in the form of " retail " share classes
that carried higher fees than those charged
by otherwise identical " institutional " share
classes of the same investments. The
plaintiffs claimed that, except for the extra
fees, the share classes were identical and
that the plan fiduciaries' choice resulted in
more than $30,464,538 in extra fees.
According to the Appellate Court,
although the plan
fiduciaries
and
providers signed a revenue-sharing agreement
that might provide some explanation
for the choice in share classes, " the
agreement shows only what could occur
in theory-not what occurred in fact. "
It also cited the Supreme Court's decision
in Hughes v. Northwestern University
in saying " the appropriate inquiry will
necessarily be context specific. "
Using the same logic, the 9th Circuit
also found that the District Court erred
in dismissing the claim for breach of the
fiduciary duty to monitor. It remanded the
case back to the lower court for further
proceedings.
In the Salesforce case, plaintiffs'
alleged that that company's retirement
plan fiduciaries breached their duty to
participants by allowing excessive fees in
the retirement plan despite the availability
of lower-cost share classes of the same
funds. The breach, they said, also included
offering actively managed funds instead of
cheaper index funds and providing participants
with mutual funds instead of available
collective investment trusts.
The court found that the plaintiffs
made an adequate claim that Salesforce
improperly failed to investigate and make
a timely switch to collective investment
trusts, which they claim had the same
underlying investment allocations as the
mutual funds' counterparts but had better
annual returns and a lower net expense
ratio. " Defendants' retention of allegedly
higher-cost target-date funds over collective
investment trusts cannot simply be
deemed reasonable as a matter of law
without further factual development, " the
court said. " Whether the different regulatory
regimes governing mutual funds
and collective investment trusts justified
defendants' delay in making the switch
earlier is itself a factual issue that cannot
be resolved at the pleading stage.
" The plaintiffs have stated a plausible
claim that defendants imprudently failed
to select lower-cost share classes or collective
investment trusts with substantially
identical underlying assets, " the Appellate
Court wrote. " Plaintiffs allege that
'the
more expensive share classes chosen by
defendants were the same in every respect
other than price [as] their less expensive
counterparts.' Accepted as true, plaintiffs'
allegations plausibly suggest that defendants
acted imprudently by failing to
switch to the lower-cost alternatives. "
The 9th Circuit continued, " When
the District Court found that plaintiffs
had not adequately alleged a breach of
the duty of prudence, the court dismissed
their duty-to-monitor claim without
further analysis. " Because the panel
of judges concluded that the plaintiffs
adequately alleged a claim for breach
of the duty of prudence, the court also
reversed the District Court's dismissal of
their duty-to-monitor claim.
Senators Ask GAO to Add
Spousal Protection
U.S. Senators Patty Murray, D-Washington,
and Richard Burr, R-North Carolina,
wrote an open letter to the Government
Accountability Office calling on the
agency to examine the need for stronger
spousal protections in defined contribution
retirement plans.
The senators noted that many Americans
plan their future around their DC
retirement accounts. However, unlike in
defined benefit pension plans, DC 401(k)
plans lack protections to prevent one
spouse from independently undermining
the couple's retirement resources.
" Under current law, one spouse
could take a withdrawal from [his/her
own] account without the other spouse's
knowledge or consent, " the senators
wrote. " This could have a devastating
effect on the unknowing spouse and
family members, especially if they are less
familiar with the household's finances. "
The senators' letter explains how, if
DB plan participants die before beginning
to draw a benefit, their pension
plan must provide a qualified pre-retirement
survivor annuity to the spouse. If
a participant dies after commencement
of benefits under the plan, then the
surviving spouse will receive a qualified
joint and survivor annuity equal to 50% of
the participant's benefit. Before a participant
can forgo either of these survivor
options, that person must first get the
special written permission of the spouse.
The same is true for participants in the
Federal Thrift Savings Plan.
Currently there are no such protections
on the DC side, the senators wrote.
Therefore, they pointed to a series of questions
they want the GAO to answer, which
may in turn lead to legislative action. -PS
For in-depth coverage of these topics and more, go to PLANSPONSOR.com/compliance.
PLANSPONSOR.COM April - May 2022 9
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