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The lowest share class available won’t be the magic bullet one day

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Federal courts like to keep their dockets moving and I’m sure there will be a time soon where they will try to move out the glut of 401(k) class action lawsuits by simply throwing out cases that are short in details on whether a plan sponsor breached their fiduciary duty. I think the plaintiff’s counsel is going to have a tough time in their cases where they are short on detail and just say the defendant plan sponsor breached their fiduciary duty didn’t pick the cheapest funds out there. If the defendant isn’t using the cheapest share classes available, that is certainly not prudent. But I think there are many situations where there is nothing wrong with using an actively managed fund because index funds aren’t great for every class and every sector.

 

401(k) litigation is a legal concept that evolves, many of the cases that were winners over the last 10 years would have been laughed out of court 20 years ago. I’m no legal scholar when it comes to litigation, but I think there will be a certain point in time where judges will decide that unless there is a full indication of a fiduciary breach that they won’t second guess 401(k) plan sponsors on which funds to pick. Plaintiffs and their counsel will have to show how not picking the cheapest funds is an actual breach because plan expenses are all about reasonableness and not about finding the cheapest provider and I think that includes funds as well.

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