A class-action lawsuit alleging participants paid excessive fees for actively managed mutualfunds in a $1.3 billion 401(k) plan has been dismissed in the U.S.District Court for the District of Connecticut.

The complaint alleged that plan fiduciaries of Ferguson Enterprises, aVirginia-based wholesaler of plumbing supplies, breached itsfiduciary obligations by offering an investment menu laden withexcessively expensive mutual funds. Of the plan's 16 investmentoptions, 11 were actively managed funds. The suit also alleged thatthe plan's service provider, Prudential, engaged in prohibitedtransactions in administering the plan and received “kickbacks” inthe form of revenue-sharing payments.

The plaintiff, a former employee of the company, also allegedCapTrust Financial Advisors breached its fiduciary obligations byallowing Ferguson to build out the menu with the actively managedfunds.

In the original complaint filed in December of 2015, attorneysfor the plaintiff alleged that Prudential's receipt ofrevenue-sharing payments was “fraudulently and deceptivelyconcealed,” according to court documents.

Like scores of other previous and pending claims againstservice providers, the suit also claimed Prudential did not providethe services to warrant its revenue-sharing profits and that thefirm served as a fiduciary to the plan, given its discretion inmanaging plan assets in separate accounts.

Prudential argued that it at no time served as a fiduciary tothe plan in its role as a service provider, and therefore could notbe liable for breaches of the Employee Retirement Income SecurityAct.

Prudential's contract with Ferguson said it “shall have no dutyor responsibility to determine the appropriateness of any planinvestment.” Fiduciaries at Ferguson, and its advisor, CapTrust,were responsible for the plan's investment design, Prudentialargued.

In dismissing the claim against Prudential, Judge Victor Boldensaid Prudential's influence in negotiating its agreement withFerguson did not make Prudential a fiduciary, noting otherdecisions in the Second Circuit.

Ultimately, Bolden found the language in Prudential's trustagreement with Ferguson as reason to dismiss the claims that theservice provider was acting as a fiduciary.

“The Trust Agreement thus demonstrates that Prudential did notpossess the authority to be considered a fiduciary under ERISA.Accordingly, Prudential cannot be held liable under ERISA forbreach of fiduciary duties,” Bolden wrote.

Ferguson, CapTrust offered sufficient range of investmentoptions

The expense ratios in the Ferguson plan ranged in cost from 4basis points to 102 basis points, according to court documents.

Along with the actively managed funds, the plan offeredparticipants a Vanguard institutional index fund and a Prudentialstable value fund.

“The inclusion of these lower-cost alternatives underminesPlaintiffs' assertions that Ferguson and CapFinancial (CapTrust)breached their fiduciary duties by charging excessive fees,” Boldensaid in dismissing the claims against the sponsor and advisor.

The plaintiff's claim that both failed their fiduciaryobligations to monitor the plan's investment options was notsupported by facts, Bolden said.

Revenue sharing still kosher under ERISA

In dismissing the case, Bolden denied the plaintiff theopportunity to further amend the claim, saying that would be“futile,” given the existing insufficiencies of the presentedarguments.

During oral arguments, attorneys for the plaintiff argued thatthe case was one of the many ongoing claims across the country thatintend to move the 401(k) industry to a zero revenue-sharingmodel.

“These goals, however worthwhile they may be, are not compatiblewith the purposes of ERISA,” Bolden said.

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