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Share Class Choice Criticized in 401(k) Excessive Fee Suit


For the fourth month in a row, a relative newcomer to excessive fee litigation has brought suit against a multi-billion-dollar 401(k) plan.

The allegations are familiar—that the fiduciary defendants breached their duties under ERISA by “selecting and retaining imprudent share classes and investments for the plan”—in this case the $2 billion Old Dominion 401(k) Retirement Plan and on behalf of its 24,000+ participants. 

The suit was filed in the U.S. District Court for the Middle District of North Carolina by participant-plaintiff Harvey L. Davis—who, in turn, is represented by Wenzel Fenton Cabassa PA (as well as Morgan & Morgan PA, Matthew Norris of Wake Forest, N.C., and Michael McKay of Scottsdale, AZ), which has recently filed excessive fee suits against Knight-Swift Transportation Holdings, Inc. (October), the NCLC 401(k) Plan (September), Laboratory Corporation of America Holdings Employees’ Retirement Plan (August), as well as Allegiant Travel (October), and Lennar Corp. (October).

That said, you have to wait till page 16 of the 25-page suit (Davis v. Old Dominion Freight Line, Inc., M.D.N.C., No. 1:22-cv-00990, complaint 11/18/22) to find any allegations specific to this plan—and that to reference that the plan participants had nearly $500,000,000 (five hundred million dollars) invested in the imprudent share classes—comparing the plan’s holdings of JP Morgan Smart Retirement funds R5 share class to the identical offerings, albeit via the R6 share class. 

‘No Good-Faith Explanation’

“There is no good-faith explanation for selecting and retaining the higher-priced and poorly performing share classes when the lower-priced and better performing share classes are/were available,” the suit notes. It goes on to affirmatively state that, “the Plan did not receive any additional services or benefits based on it stagnate continuation of the more expensive share classes. The only difference between the two was a higher price and lower returns,” though the basis for this claim is not referenced.

Beyond that, the suit argues that “JP Morgan offers virtually the same funds identified in Paragraph 56, except instead of being ‘actively’ managed funds the funds are managed with a ‘blend’ of active and passive management techniques”—more specifically, “while the JP Morgan funds in the Plan charge roughly 55 basis points to Plan participants—the JP Morgan Smart Retirement Passive Blend Funds charge on average 20 basis points. And the JP Morgan Smart Retirement Passive Blend Funds out-perform the JPMorgan funds in the Plan.”

“Defendant should have anticipated such underperformance given the wealth of data showing that actively managed funds do not outperform their passively managed counterparts,” the suit asserts.  “Defendant failed to undertake any analysis when it selected and retained the actively managed funds (at imprudent share classes) discussed above. Defendant provided these fund options without conducting a prudent analysis despite the acceptance within the investment industry that active managers typically do not outperform passive managers net of fees over the long-term. And worse yet, for Defendant, the JP Morgan Smart Retirement Passive Blend Funds are actively managed but priced as passively managed funds. Defendant’s imprudence and failure to select the proper funds from JP Morgan resulted in another $3 million of damages during the Class period.”

Will the court be persuaded? Stay tuned.

NOTEIn litigation there are always (at least) two sides to every story. However factual it may turn out to be, the initial lawsuit in any action is only one side, and one generally crafted toward a particular result. In our coverage you'll see descriptions of events qualified with statements such as “the suit says,” or “the plaintiffs allege” and qualifiers should serve as a reminder of that reality.