A federal district court in Maryland recently declined to certify an interlocutory appeal to the Fourth Circuit on the issue of whether financial institutions can “hardwire” a preference for their own proprietary investment vehicles into their employees’ 401(k) plans. David G. Feinberg, et al., & all others similarly situated, Plaintiffs, v. T. Rowe Price Group, Inc., et al., Defendants, No. 17-cv-427, 2021 WL 2784614 (D. Md. July 2, 2021). In so ruling, the district court prevented, at least for now, an opportunity for an appellate court to consider an issue that could significantly impact the adjudication of fiduciary breach challenges to the offering of proprietary funds in 401(k) plans.
A group of T. Rowe Price employees who participated in the company’s 401(k) plan sued the company in 2017, alleging that T. Rowe Price breached its fiduciary duties of prudence and loyalty in its administration of the plan. The employees took issue with, among other things, T. Rowe Price’s decision to amend the plan to include “hardwiring” language requiring plan fiduciaries to exclusively offer T. Rowe Price’s proprietary funds as investment options.
Earlier this year, plaintiffs asked the court to find the hardwiring amendment void as against public policy because it “purports to relieve [the fiduciaries] from responsibility or liability” as prohibited by Section 1110(a) of ERISA. See Feinberg v. T. Rowe Price Group, Inc., No. 17-cv-427, 2021 WL 1102455 (D. Md. Mar. 23, 2021). Judge Bredar of the District of Maryland rejected this argument, finding the provision in question unlike language that has been held to violate Section 1110(a), such as language expressly limiting fiduciary liability or requiring fiduciaries to take actions that clearly violate ERISA. Plaintiffs subsequently asked the court to certify for appeal to the Fourth Circuit the narrow question of whether the hardwiring amendment violates Section 1110(a) of ERISA.
In his recent order, Judge Bredar held that the plaintiffs failed to make the showing necessary to justify the “extraordinary step” of an appeal at this stage. In particular, Judge Bredar stated that the amendment’s permissibility did not pose a “controlling question of law” because it required resolving factual disputes—such as the plan drafters’ intent as to the amendment’s meaning—at the district court level.
While this decision focused on the standard for an interlocutory appeal, the underlying litigation raises novel questions about the validity of hardwiring provisions and the extent to which they might protect plan sponsors against fiduciary breach allegations related to the inclusion of proprietary investment vehicles. The Supreme Court previously ruled that ordinary rules of prudence govern the decision to maintain employer stock in employee stock ownership plans (“ESOPs”), even though by definition the assets of these plans must be invested in company stock. Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (U.S. 2014). It remains to be seen whether the Supreme Court’s reasoning in the ESOP context applies equally to employers who, like T. Rowe Price, limit their 401(k) plan investment menus to proprietary funds.