Recent Litigation Continues to Provide Lessons for Fiduciaries
The Supreme Court’s Hughes v. Northwestern University holding has already revealed its expected impacts: (1) retirement plan fee lawsuits are more likely to survive a motion to dismiss; and, as a result (2) retirement litigation continues to accelerate. A recent collection of litigation activity provides another opportunity for plan fiduciaries to identify helpful protective steps and best practices. Taken as a whole, for vigilant fiduciaries, things aren’t so bad. For other fiduciaries? Well, that could be another story.
Damned if You Do, Damned if You Don’t 1. Over the last few weeks, a plaintiffs’ firm has taken aim at one particular low-cost index target date fund suite (BlackRock LifePath). Just last week, the firm filed its 11th lawsuit alleging that plan fiduciaries had imprudently selected a target date fund suite demonstrating “consistently deplorable performance.” The pleadings include a significant amount of comparable data reflecting superior performance from other target date fund suites, including the Fidelity Freedom, T. Rowe Price Retirement, and Vanguard options. That approach is not terribly unique. However, the lawsuits have caught our attention because the plaintiffs have alleged that fiduciaries only “chased the low fees” charged by these funds. That criticism conflicts with the plaintiffs’ typical playbook, which seems to place low cost as the highest priority.
Lessons for Fiduciaries: As a general rule, plaintiffs’ claims have failed when centered around 20/20 hindsight performance allegations. Precedent suggests that the plan fiduciaries will prevail on these claims and avoid liability. However, the allegations and supporting information are a wonderful reminder for plan fiduciaries that low cost is not synonymous with prudent. Low cost need not be viewed as categorically inconsistent with prudence, but fiduciaries serve participants better and more strongly protect themselves when they seek value and reasonableness.
Go to the Doctor, Call a Plumber, Engage an Investment Manager. Boeing maintains an ESOP that has permitted employees to own company stock by holding the “Boeing Stock Fund” within the Plan. In late 2018 and early 2019, two Boeing 737 MAX airliners crashed. Employees filed a class action lawsuit alleging that Boeing had concealed material facts relating to the jets that caused the price of Boeing stock to be artificially inflated before the airline crashes. They argued that the plan fiduciaries breached their fiduciary duties because their failure to disclose safety issues caused employees to acquire company stock at an inflated price and suffer losses when the stock price tumbled.
Fortunately for those fiduciaries, Boeing had made a significant decision many years before. In December of 2007, Boeing’s Investment Committee had delegated to an outside investment manager the “exclusive fiduciary authority and responsibility, in its sole discretion, to determine whether the continuing investment in the Stock Fund is prudent under ERISA . . . .” The court of appeals held that the delegation of investment decisions to an independent fiduciary means that neither Boeing nor the other defendants acted in an ERISA fiduciary capacity in connection with the continued investments in Boeing stock.
Lessons for Fiduciaries: The delegation of investment authority to an ERISA 3(38) fiduciary investment manager appeals to plan fiduciaries for three key reasons: (1) it shifts responsibilities; (2) it shifts any related fiduciary liability; and (3) those responsibilities and related liability are then borne by an organization that must meet statutory requirements. In our everyday lives, we delegate important decisions and responsibilities to experts in many fields. Boeing’s decision to do so likely saved its fiduciaries from millions in liability.
We’re Responsible for That? One large company offered up a recordkeeper’s asset allocation service (GoalMaker, made available by Prudential) to its participants. A group of employees filed a class action lawsuit against the company’s plan fiduciaries. They asserted that the fiduciaries used a “flawed fiduciary process” when choosing an asset allocation service that resulted in a portfolio dominated by the recordkeeper’s proprietary high-cost, poorly performing, actively managed funds. The United States District Court for the Eastern District of Michigan denied the defendants’ motion to dismiss. It found that plaintiffs had met their pleading burden by identifying better-performing, non-proprietary funds that could have been used.
Lessons for Fiduciaries: As noted above, performance-based claims have not been successful. They may very well fail in this case. In any event, this case is noteworthy because it reminds plan fiduciaries that they bear responsibility for decisions within those asset allocations decisions unless they delegate that responsibility to another party. The recordkeepers, in large part, do not accept fiduciary responsibility, particularly when their proprietary funds are available. Much like the Boeing case, though, plan fiduciaries do have options for transferring asset allocation and/or account management responsibilities to an independent investment manager fiduciary.
Value Still Matters. In Hughes, the Supreme Court was not terribly kind to the lower court – the Court of Appeals for the Seventh Circuit. For example, when assessing the lower court’s decision, the Supreme Court exclaimed: “That reasoning was flawed.” That criticism raised interest in the Seventh Circuit’s handling of a subsequent case in which plaintiffs alleged the company fiduciaries had breached their responsibilities by permitting high recordkeeping fees, offering imprudent investment options, and overpaying investment advisors. The plaintiffs supported their arguments, in part, with fee information from nine similarly sized plans’ Form 5500 filings with the Department of Labor.
On the numbers alone, that information seemed to support the plaintiffs’ arguments. However, even with the possibility that the Supreme Court would be closely watching the Seventh Circuit’s reaction, the court reiterated that “cheap” is not the fiduciary standard. It reminded us that it had “repeatedly emphasized that the cheapest investment option is not necessarily the one a prudent fiduciary would select.” The court then extended that logic to the selection of service providers and upheld the trial court’s dismissal.
Lessons for Fiduciaries: This outcome should be welcome news for plan fiduciaries. ERISA does not require that a plan use the cheapest version of anything. ERISA’s duty of loyalty hinges on the reasonableness of fees, which in turn considers the value provided. As we’ll discuss during the upcoming Fiduciary 15 webinar, meeting minutes are a great place to memorialize fiduciaries’ appreciation of this standard and consideration of the value an investment option, service, or service provider may bring to participants.
We hope you’ll join our Fiduciary 15 webinar for an expanded discussion on this topic.
– Matthew Eickman, J.D., AIF®
1After we’d written this month’s newsletter, we encountered a Faegre Drinker Spotlight that used the same phrase. Out of deference to Faegre Drinker’s thought leadership, we wanted to share a link to its write-up.