The US Court of Appeals Squarely Rejects the Argument that Plan Fiduciaries Must Choose Less Expensive Index Funds Over Actively Managed Products. Smith v. CommonSpirit Health. June 21, 2022

  • In this case, the investment lineup included the actively managed version of the Fidelity Freedom Funds. The plaintiffs argued that the fiduciaries violated their various duties under ERISA by failing to utilize the less expensive index version of these funds. The District Court granted CommonSpirit’s motion to dismiss. A motion to dismiss is granted only if the court believes there will be no basis to grant relief even if the plaintiffs prove all the facts alleged in the complaint. The District Court’s decision was upheld by the Court of Appeals.
  • This case is yet another example of plaintiffs arguing that a better outcome could have been achieved if the plan fiduciaries had followed their preferences rather than arguing that the fiduciaries utilized a defective process in reaching their decisions. The District Court made it clear that merely pointing to funds with better performance is not sufficient to prove a violation under ERISA.
  • The Court of Appeals’ in rejecting the plaintiffs’ arguments, stated that “the Employee Retirement Income Security Act . . . does not give the federal courts a broad license to second guess the investment decisions of retirement plans. It instead supplies a cause of action only when retirement plan administrators breach a fiduciary duty by, say, offering imprudent investment options.”
  • The Court was comfortable with the fact that actively managed products are more expensive. The Court stated “Investors today have the option of using index funds, which create a fixed portfolio structured to match the overall market or a preselected part of it, which require little to no judgment, and which have grown in popularity as an alternative to active management, . . .  Little surprise, actively managed funds, which require considerable judgment and expertise, charge more than passively managed funds, which require little judgment and expertise.” The Court added that it could be imprudent for a plan not to offer active choices.

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 ACR# 4849008 07/22