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Legal insights: Passive does not reduce fiduciary liability

Recent Department of Labor (DOL) emphasis on fees combined with numerous 401(k) plan fee-related lawsuits have led some plan fiduciaries to question whether offering actively managed funds is riskier than passive funds that are typically less expensive.

Groom Law Group, a leading ERISA firm, has concluded that passive strategies do not reduce fiduciary liability:

ERISA does not mandate, and the DOL has not opined, that any particular investment strategy is prudent or imprudent.

  • No court has ruled that actively managed funds are inherently less appropriate for 401(k) plans than passively managed funds.
  • Excessive fee litigation has been about whether less expensive alternatives exist for the same investment strategy, a claim that could be made regardless of whether the strategy used is active or passive.
  • Plan fiduciaries may reasonably conclude that a particular actively managed fund could be expected to deliver better investment results net of fees.
  • Plan fiduciaries may consider other relevant facts, including that actively managed funds do not need to “track” an index down in a bear market.
  • Plan fiduciaries who prudently select and monitor an investment fund are not liable for any loss or underperformance of the fund.

"Court decisions do not support the view that actively managed funds are inherently less appropriate for 401(k) plans than passively managed funds, or vice versa," Groom Law Group's Stephen Saxon and Jason Lee note in a white paper.

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