The U.S. District Court for the Northern District of California recently approved a $6.75 million settlement of a class action filed by current and former LinkedIn employees regarding their investment options in the company's 401(k) plan.

The settlement covers more than 17,000 people participating in the organization's retirement plan from August 14, 2014, to July 01, 2020.

The employees alleged that LinkedIn breached its fiduciary duties as the plan administrator under the Employee Retirement Income Security Act of 1974 (ERISA) when it included some target date funds that performed poorly, were riskier, and charged higher fees than comparable funds.

"Federal Court Approves $6.75 Million Settlement of LinkedIn ERISA Class Action Lawsuit" www.lexology.com (Mar. 26, 2024).

Commentary

29 U.S.C. Section 1104 imposes the "prudent man standard of care" and states in part:

 "a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—

(A) for the exclusive purpose of:

(i) providing benefits to participants and their beneficiaries; and

(ii) defraying reasonable expenses of administering the plan;

(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;

(C) by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so …."

ERISA thus requires plans be managed using investment choices that avoid large losses for plan participants. Under ERISA, LinkedIn had an ongoing duty to monitor investments and fees and remove any investments that become imprudent.

The 2022 U.S. Supreme Court case of Hughes v. Northwestern University reiterated that duty. Regardless of whether a plan administrator offers hundreds or thousands of investment options, classes, or prices, or invests in a single company's stock, the duty to review remains the same. Even in defined contribution plans where participants choose their investments, plan fiduciaries are required to conduct an independent evaluation to determine which investments may be prudently included in the plan's menu of options. If the fiduciaries fail to remove an imprudent investment from the plan within a reasonable time, they breach their duty of prudence.

A way to prevent fiduciary breaches is for plan sponsors to have a well-trained, diverse committee that approves investment options for the plan.

This committee should monitor the options continuously, periodically review and compare fees, and gather proposals from multiple service providers. The committee should document their efforts to compile information and make reasonable decisions based on the information and solid reasoning.