The Vanguard 401(k) lawsuit won’t spark a return to actively managed funds

The Anthem class action lawsuit concerning the use of Vanguard index funds has caused a hullabaloo in the industry. IT even got a writer to pen an article suggested that the lawsuit may trigger a return to the use of actively managed mutual funds in 401(k) plans.

My response: that is utter and complete nonsense.

The Anthem case has absolutely nothing to do with the age old index fund vs. actively managed fund debate. The case is about the duty of prudence and paying reasonable plan expenses. Bottom line, Anthem is accused of using more expensive retail share classes when available cheaper institutional shares of the same funds were offered. So it doesn’t matter that the funds offered in the plan were index or active, what mattered is that according to the complaint, the plan sponsor violated their duty of prudence by not seeking cheaper share classes, which were available for this $5 billion plan.

The other concern is that Vanguard was the bundled provider for the plan and they were charging somewhere between $42-94 per participant for recordkeeping services where the complaint said $30 was reasonable. I think that you will see more and more class action lawsuits regarding bundled providers and the use of their own proprietary mutual funds offered under 401(k) plans. Just my prediction.

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