Class Action ERISA Fiduciary Lawsuit Survives Motion to Dismiss

The fiduciaries had directed employer contributions to participants’ accounts into an underperforming proprietary fund. The strategy was good for the bank, but participants arguably earned millions less in income and gains than they would have had their retirement savings been prudently invested.

Millions of dollars lost

Kyle Chrupcala worked for Firstrust between 2021 and 2024 and participated in the Plan. He received a distribution of his Plan account balance in 2024 when he left his job at Firstrust. Chrupcala alleges that his balance was negatively affected by poor investment allocation.

The design of the Firstrust Plan has been described as an “extreme outlier.” Unlike many other 401k plans, Firstrust does not allow participants to manage the investment of employer contributions to their accounts. Instead, plan managers direct 100 percent of that money into proprietary certificates of deposit and savings accounts (collectively the “Firstrust Cash Fund”). Importantly, the Firstrust Cash Fund is the Plan’s single largest holding.

Risk/reward profiles

Individuals who participate in retirement plans, especially those that permit self-directed investments, have nearly an infinite number of ways to manage risk and reward. Much of the strategy depends on the participant’s age.

Participants who are close to retirement generally opt for safer, less volatile investments. Younger participants often have greater risk tolerance. The average participant in the Firstrust plan, like the average participant in most ERISA plans, is roughly 20 years from retirement. That profile argues for a relatively balanced mix of more and less volatile investments.

Stocks and real estate tend to generate the highest long-term average returns, although with the highest short-term volatility. Cash-equivalent accounts, like the CDs and savings accounts making up the Firstrust Cash Fund, generate the lowest long-term returns, but they are very stable.  

Loading a plan with cash equivalent investments could be a smart choice if most participants are very close to retirement. This is simply not the profile of the participants in the Firstrust Plan. They have a much longer investment horizon.

But, the heavy investment in CDs and savings accounts could have bolstered the bank’s balance sheet.

ERISA duty of prudence and loyalty

Section 404 of ERISA requires fiduciaries to discharge their duties with respect to the plan solely in the interests of the participants and beneficiaries and with care, skill, prudence, and diligence. As Chrupcala notes, however,

“Pursuant to the prudent investor rule, fiduciaries must invest plan assets in a manner that is “reasonably designed . . . to further the purposes of the plan, taking into consideration the risk of loss and the opportunity for gain … fiduciaries must pursue ‘an overall investment strategy which . . . incorporate[s] risk and return objectives reasonably suitable to the trust.”

Investment allocations must be tailored to the participant population. Another way to handle this would, of course, be to permit participants to choose how to invest their own funds from a balanced menu of options.

ERISA prohibited transactions

Sections 406 and 408 of ERISA also contain a list of transactions in which plan fiduciaries may not engage (predictably called “prohibited transactions.) In general, these amount to forms of self-dealing, either for the fiduciaries’ personal benefit, or for the employer’s benefit.

What’s next for Chrupcala?

Surviving a motion to dismiss simply means that a lawsuit can move on to the next stage of litigation. The Eastern District’s Memorandum decision notes that:

“While it may ultimately turn out that defendant’s arrangement with respect to employer contributions is prudent under the circumstances, at the pleading stage, plaintiff’s allegations are sufficient to support the reasonable inference that the prudent man standard of care may have been breached.”

The court also described the prohibited transaction allegations as “plausible.” In other words, on both counts, there’s enough “there” there to go ahead.

Th next steps may involve notifications to the class of participants to be included in the class action lawsuit. Discovery proceedings that focus on the fiduciaries’ decision-making process is another next step.

At the same time, settlement negotiations will probably begin. Many ERISA fiduciary breach lawsuits settle, as both parties decline to risk the time and expense that a trial would entail. Watch this space for settlement news.