Fiduciary Breach Lawsuit Issues Explored - Topic #3: Too Many Investment Options

With more than 100 lawsuits filed against the fiduciaries of defined contribution retirement plans for breach of their responsibilities, litigation has plagued the retirement plan industry over the past decade. While the original lawsuits focused on large corporate 401(k) plans, litigation has expanded to include large healthcare organizations and higher education institutions, with more than twenty suits filed against these sponsors since 2016. Other lawsuits have even trickled down to medium- and small-sized retirement plans, rendering all plan sponsors as potential targets.

The claims in these lawsuits cover a broad range of topics and issues related to actions taken or not taken that may have limited the potential growth of plan participant account balances. Most of the claims focus on fees charged in the plan, or investments used that have not performed adequately to yield the return participants should have received.

Previously, we provided an in-depth exploration of active versus passive investments and asset-based versus per-participant fees as two of the topics alleging fiduciary breach. This month, we discuss the concern over offering too expansive an array of investments in the plan lineup.

Topic #3: Too Many Investments

A frequent issue cited in the lawsuits against healthcare and higher education institutions is that the retirement plan offers too many investment options. Some of the plans implicated have up to 100 investment options; others have as many as 300 to 400 choices. In the lawsuits where this issue has been identified, there has been a consistent claim that “Defendants provided a dizzying array of duplicative funds.”(1) Due to the origin and history of this type of plan, it is not uncommon for a 403(b) plan sponsor to offer this many investment options.

Section 403(b) plans were originally established to allow the employees of not-for-profit organizations to make voluntary contributions to a retirement saving plan. The contractual relationship was between the individual employee and the recordkeeper of the plan, typically an insurance company. The employer was simply a conduit for contributions to be deducted from the employee’s paycheck and remitted to the recordkeeper. Many employers offered two, three, ten or even more recordkeepers as options to which the employees could choose to direct their voluntary contributions.

Over time, employers began to use the 403(b) plan as the vehicle through which to provide their retirement benefit. In response, the Department of Labor established the Employee Retirement Income Security Act of 1974 (“ERISA”), which imposed minimum standards for these retirement plans in an effort to protect participants and beneficiaries. Faced with these new regulatory requirements, plan sponsors sought to have more control over their plans, and to simplify their administration. Reducing the number of recordkeepers for the plan was one mechanism through which this simplification occurred. Nevertheless, many plan sponsors of both non-ERISA and ERISA 403(b) plans continued to offer multiple providers for participant usage.

Plans with multiple recordkeepers will almost inevitably offer more investment options from which participants must select their allocations. Some plan sponsors of multiple recordkeeper plans have designed the investment lineup in each provider to be as identical as possible to reduce potential confusion and keep the number of investment options in check. However, even in these scenarios, at least a couple of investments typically differ from one provider to the next, thereby increasing the total number of choices.

More frequently, each recordkeeper in multi-provider plans offers its entire array of proprietary investment options for the plan. This could be 50-100 investments or more per provider, as occurred in some of the plans in the lawsuits. In Short v. Brown University, the claim referenced that the “Plan offered a bewildering array of 175 investment options through Fidelity Investments and offered an additional 24 investment options through TIAA-CREF.”(2) Even a plan sponsor that makes a concerted effort to streamline the investment array of each active provider is still likely to have a total of 40-50 investments or more in the plan.

Why More is Not Always Better

There are a few potential concerns with offering so many investments, as outlined in the lawsuits. One issue is that when faced with a vast array of investment choices, some participants cannot make a choice. They experience “paralysis by analysis” and ultimately do not participate in the plan. Not only does this paralysis cause participants to miss the opportunity to make tax-deferred contributions to a retirement account, it also causes them to miss out on any matching contributions from the employer.

Another concern is that with so many choices available, the plan assets become dispersed, such that very few funds accumulate significant assets. Some investment managers offer a better pricing structure to retirement plans as more assets are allocated to their investments. This was argued by the plaintiff in Larson v. Allina Health System, “because the Plans’ money was spread over hundreds of options, which lowered the amount of money for each option, only the more expensive shares of the funds were available for participant purchase.”(3) The distribution of plan assets among a large number of investment options can mean that the plan and participants do not receive the benefit of these price breaks within the funds.

Litigation Outcomes

While the results in the lawsuits on these claims have been mixed, the Courts have mostly found in favor of the defendants. The Emory University plan offered 111 funds among three different recordkeepers, but the claim of imprudence for having too many investments was dismissed.(4) As referenced above, in Short v. Brown University, the plan offered approximately 200 investments. But the Court dismissed the issue stating, “ERISA does not impose that fiduciaries limit plan participants’ investment options.”(5) In the Larson v. Allina Health System lawsuit, where there were more than 300 investments available in the plan, the judge dismissed the claim stating, “The Court finds that because ERISA ‘encourages sponsors to allow more choice to participants,’ Plaintiffs have failed to state a claim under Rule 12(b)(6) that Defendants breached a fiduciary duty by simply offering three-hundred investment options in its mutual fund window.”(6)

In many of the lawsuits where this claim has been rejected, the motion-to-dismiss ruling references Sacerdote v. New York University, which stated “plaintiffs allege that an excessively large array of investment Options confuses participants, but they do not allege that any participants were, in fact, confused or overwhelmed….nothing in ERISA requires fiduciaries to limit plan participants’ investment Options in order to increase the Plan’s ability to offer a particular type of investment (such as funds offering institutional share classes).”(7)

The primary case where the outcome on this issue leaned toward the plaintiff was in Clark v. Duke University. The Duke University retirement plan also offered a large array of investments. “Defendants provided over 400 investment options to Plan participants. Among the available investments, 40 were TIAA-CREF options, almost 100 were Vanguard options, over 200 were Fidelity options, and almost 100 were VALIC options.”(8) The plaintiff’s claim survived the motion-to-dismiss phase. As the lawsuit moved through the discovery phase and continued to be litigated, Duke University eventually settled with the plaintiffs. Part of the non-monetary portion of the settlement included the following, “Duke has agreed to provide Class Counsel with a list of the Plan’s investment options and fees, as well as a copy of the Investment Policy Statement annually for three years.”(9) While it is not directly stated that this portion of the settlement is specifically because of the number of investments offered, it seems reasonable to infer that at least part of the purpose that Class Counsel requested this provision was so that it can monitor the number of funds offered on an ongoing basis.

What Does This Mean for Plan Sponsors?

While the claims in the above mentioned lawsuits, and others, largely fail to implicate the plan sponsor for imprudent oversight of the plan, they raise reasonable questions about whether or not having too many investment options could reduce participation, or force the plan to use higher-cost share classes of investments. There was not enough evidence to assert that plan participants have been harmed by these arrangements, and thus the defendants prevailed through various Court rulings.

However, it is worth considering the potential benefits of consolidating the investments. If the plan sponsor’s objective is to provide employees with an opportunity to accumulate assets for retirement through a competitive program, finding ways to increase the likelihood of enabling participants to achieve their savings goals would enhance the participant benefit. Limiting the number of investments to a reasonable range (typically, fewer than thirty), can enable participants to have a better understanding of their options and empower them to make thoughtful allocation decisions.


(1) Cates v. Trustees of Columbia University
(2) Short v. Brown University
(3) Larson v. Allina Health System
(4) Henderson v. Emory University
(5) Short v. Brown University
(6) Larson v. Allina Health System
(7) Sacerdote v. New York University
(8) Clark v. Duke University
(9) Clark v. Duke University

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.

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