Prudential Cleared in 401(k) Pay-to-Play Lawsuits

Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...

By Jacklyn Wille

Prudential Retirement Insurance & Annuity Co. defeated a pair of lawsuits accusing it of operating a “pay-to-play” scheme for the mutual funds offered through the 401(k) plans it services ( Rosen v. Prudential Ret. Ins. & Annuity Co. , 2016 BL 436738, D. Conn., No. 3:15-cv-01839-VAB, 12/30/16 ).

Prudential, which provides 401(k) plans with access to menus of investment options, didn’t qualify as a fiduciary under the Employee Retirement Income Security Act for purposes of the claims raised against it in two combined lawsuits, the judge concluded in a Dec. 30 order. The judge found that Prudential didn’t have unilateral authority to set its own compensation or to add or delete funds from the plans’ investment menus.

This decision follows a string of cases declining to impose fiduciary status on 401(k) service providers including American United Life Insurance Co., John Hancock Life Insurance Co. and Principal Life Insurance Co. The Department of Labor has argued against this trend forcefully, filing amicus briefs in each of thosecases.

The twolawsuits against Prudential were brought by participants in the 401(k) plan for Virginia-based plumbing wholesaler Ferguson Enterprises Inc.

All Claims Dismissed

In addition to clearing Prudential of fiduciary responsibility for its fees and investment menus, the judge also considered the company’s GoalMaker program. The Ferguson employees claimed that GoalMaker, which assists individual investors in choosing their asset allocation, directed investors toward higher-fee funds that earned more compensation for Prudential.

The judge declined to hold Prudential liable for GoalMaker, explaining that the company was forthcoming about the program’s details. Further, it was Ferguson—and not Prudential—that had ultimate authority over the investment selections with respect to the program, the judge said.

Finally, the judge dismissed ERISA claims brought against Ferguson and its investment adviser, CapFinancial Partners LLC.

According to the judge, the Ferguson plan’s investment menu offered 14 mutual funds, including three passively managed funds, with expense ratios ranging from 0.04 percent to 1.02 percent. This menu was reasonable and undermined the allegations of excessive fees, the judge concluded.

In dismissing all claims, the judge noted that the lawsuits were part of a series of cases aimed at moving the entire 401(k) industry away from certain compensation structures that are frequently challenged in court. The judge said that while the lawsuits “seek to transform the market itself,” ERISA protects investors’ "reasonable expectations in the context of the market that exists.”

Judge Victor A. Bolden of the U.S. District Court for the District of Connecticut wrote the decision.

Sheperd Finkelman Miller & Shah, Bottini & Bottini Inc. and Berlandi Nussbaum & Reitzas LLP represented the 401(k) investors.

O’Melveny & Myers LLP and Pullman & Comley represented Prudential.

Morgan Lewis & Bockius LLP represented Ferguson.

Sidley Austin LLP and Halloran & Sage represented CapFinancial.

To contact the reporter on this story: Jacklyn Wille in Washington at

To contact the editor responsible for this story: Jo-el J. Meyer at

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