Citigroup Decision’s Warning for 401(k) Fiduciaries

U.S. District Judge Sidney H. Stein recently ruled that the participants in the Citigroup 401(k) excessive fees case had filed their action within the required time period. Judge Stein’s opinion was based primarily on a finding that absent “actual knowledge” of a fiduciary breach,” the time period for filing is six years after a fiduciary’s breach.

As an attorney, I always want to read the actual decision in a case. Judge Stein’s discussion of what is required for “actual knowledge of a fiduciary’s breach is what 401(k) fiduciaries and plan sponsors should review.

The main issue in the Citigroup case is the decision to replace ten funds in the Citigroup plan with other funds, including three Citigroup affiliated funds. As the court noted, the Citigroup funds all “charged higher fees and performed less well  than comparable unaffiliated funds.”

Citing Caputo v. Pfizer, the court stated that

[A] plaintiff has ‘actual knowledge of the breach or violation’ within the meaning of [the statute] when he has knowledge of all material facts necessary to understand that an ERISA fiduciary has breached his or her duty or otherwise violated the Act…one of ‘facts necessary to constitute [the] claim.

The court rejected Citigroup’s argument that by providing plan participants with documents disclosing both the affiliated funds’ fee and the fact that the funds’ affiliated status, the participants’ had actual notice of any breach of fiduciary duties.  In evaluating “actual knowledge” with regard to excessive fees, the court stated that

to demonstrate plaintiff’s actual knowledge of the breach. defendant must show either that plaintiffs possessed, through Plan communications or otherwise, comparisons of the Affiliated funds to the alternatives or knew in some way that the fees were excessive.

The court noted that Citigroup had not even attempted to offer any evidence that the plan participants had been provided with or possessed the necessary fee data Without such data, the court held that the plan participants “could not have known that the fees were excessive, and thus a basis for an ERISA claim.”

After reviewing the court’s decision, two points came immediately to mind. First, few, if any, 401(k) plans provide the type of fee comparison data mandated by the court’s decision. The court seems to suggest that the required fee comparison data includes comparison data on both the unaffiliated funds with a plan, but also on comparable alternative funds with similar types of assets and equivalent performance available in the marketplace.

Essential to the plausibility of plaintiff’s claims was the allegation that the Affiliated Funds ‘charged higher fees than those charged by comparable Vanguard funds-in some instances fees that were more than 200 percent higher than those comparable funds.’

There are going to be very few actively managed retirement funds that can match Vanguard’s low fee structure. Furthermore, my experience with forensic investment analysis has shown that only about fifty percent of actively managed funds provide investors with any incremental benefit at all. Even in cases when a fund provides investors with any incremental benefit, the incremental costs incurred far exceed the incremental benefit provided, raising obvious fiduciary issues.

I am a member of the Paladin Registry. I recently posted an article on the issue of retirement funds having various fee options, including various 12b-1 fee payouts. Now I realize that in some cases the higher fees reflect the costs of various 401(k) services. When people responded to point this out, even they admitted that despite new requirements for greater transparency in fee reporting, most mutual funds and service providers do not provide plan participants and,  in some cases, plan sponsors and fiduciaries with a proper breakdown to allow for an accurate evaluation of plan management fees. The reference to 12b-1 fees is especially troublesome, as ERISA prohibits such payments from third parties to those serving as consultants to pension plans.

The second point that came to mind was the court’s discussion of the requirements for “actual  knowledge,” more specifically the requirement that participants had to know “all facts necessary to constitute a claim.” As many people know, I have long been a proponent of requiring that plans provide plan participants with correlation of return data for each of the investment options within a plan.

ERISA does not currently require disclosure of such information. However, such information is obviously material to the goals of ERISA, providing plan participants with “sufficient information to make informed investment decisions” and to ensure that participants “are afforded a reasonable opportunity to materially affect the potential risk and return on amounts in their accounts…” Without such information, plan participants cannot effectively provide the downside protection that their portfolios need to protect against significant investment losses, a stated goal of ERISA.

The importance of correlation of return data is reinforced by the fat that both the Department of Labor and the courts have clearly and consistently stated that Modern Portfolio (MPT) is the applicable standard in determining whether a fiduciary has acted prudently. The cornerstone of MPT…factoring in the correlation of returns among investments options as part of the portfolio construction process.

If both the Department of Labor and the courts consider correlation of returns data to be material information with regard to an ERISA fiduciary’s duty of prudence, and “actual knowledge” requires “knowledge of all material facts necessary to understand that an ERISA fiduciary has breached his or her duty or otherwise violated the act….[knowledge] of all facts necessary to constitute a claim,” then it can be argued that the failure to provide plan participants with fee comparison data and/or correlation of return data constitutes a continuing breach of fiduciary duty by an ERISA plan sponsor and plan fiduciary, effectively preventing the application of the “actual knowledge” three-year statute of limitations.

The Citigroup decision represents the continuing trend of courts to recognize the need to protect 401(k) participants from the pre-Larue abusive practices that denied plan participants the protection guaranteed by ERISA. The sooner that plan sponsors and other plan fiduciaries realize that “a pure heart and an empty head” are no defense to ERISA breach of fiduciary claims, the better for both plan participants and plan sponsors and fiduciaries.

Note: You can review the entire Citigroup decision at




About jwatkins

I am a securities and ERISA attorney. I am a CFP Board Emeritus™ and an Accredited Wealth Management Advisor™. I am a 1977 graduate of Georgia State University and a 1981 graduate of the University of Notre Dame Law School. I am the author of "CommonSense InvestSense: The Power of the Informed Investor" and " The 401(k)/403(b) Investment Manual: What Plan Sponsors and Plan Participants REALLY Need To Know. " As a former compliance director, I have extensive experience in evaluating the legal prudence of various types of investments, including mutual funds and annuities. My goal is to combine my legal and compliance experience in order to help educate investors and investment fiduciaries on sound, proven investment strategies that will help them protect their financial security and/or avoid unnecessary fiduciary liability exposure.
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