A New York district court recently summarily dismissed, with prejudice, a 401(k) plan participant’s putative class action complaint alleging breaches of fiduciary duty.  Falberg v. Goldman Sachs Grp., Inc., No. 19-cv-9910, 2022 U.S. Dist. LEXIS 167064 (S.D.N.Y. Sep. 14, 2022).  The Plaintiff alleged that the Plan fiduciary-Defendants breached their duties of prudence and loyalty under the Employee Retirement Income Security Act of 1974 (“ERISA”) by (1) failing to adopt an Investment Policy Statement (“IPS”), and (2) making decisions regarding the choice to remove or retain certain underperforming investment options based on their own self-interest. The Plaintiff further alleged that Plan fiduciary-Defendants engaged in a prohibited transaction by failing to claim “fee rebates” in the form of revenue sharing on behalf of the Plan. 

First, the Court rejected Plaintiff’s claim that the Plan’s lack of an IPS was a breach of the fiduciaries’ duty of prudence.  To the contrary, the Court found that the Defendants had robust policies and procedures in place for monitoring and evaluating the Plan’s investment options.  In doing so, the Court reiterated that not adopting an IPS is not a per se ERISA violation.  

Second, the Plaintiff argued that the Defendants breached their duty of loyalty when they allegedly (1) failed to acknowledge an alleged conflict of interest; (2) retained certain underperforming investment funds; (3) gave preferential treatment to certain investment funds; and (4) removed investment options to avoid litigation.  The Court summarily dismissed this claim, holding that there was no conflict of interest with the Plan offering investment options managed by the Defendants’ asset management group. Specifically, the Plaintiff had the burden of establishing that the Defendants acted for the purpose of providing benefits to themselves or someone else.  The Court held that no Defendant committee member had a personal financial incentive to prefer the investment funds held by Defendants’ asset management group and there was no evidence that the Defendants applied a different standard to the investment funds held by Defendants’ asset management group.  Likewise, the Court found unpersuasive the Plaintiff’s argument that the inclusion of the allegedly underperforming investment funds amounted to a breach of the duty of loyalty.  This is because the court found that the company had well-vetted and unbiased processes to evaluate investment options, including an established investment option rating system, monthly and quarterly performance reports, quarterly and ad hoc meetings to discuss the Plan’s investment options, and that the Defendants reasonably relied on their retained investment advisors.  In addition, the Court found no merit in the allegation that the removal of investment options to avoid litigation amounted to an ERISA violation.   

Third, the Court analyzed Plaintiff’s argument that the Plan’s failure to collect fee rebates in the form of revenue-sharing payments on every investment option constituted a prohibited transaction.  Having noted that the Plan’s recordkeeper was ineligible to receive revenue sharing payments from the subject investment funds, the Court found that the Plan was treated no less favorably than similarly situated plans with respect to fee rebates, and dismissed Plaintiff’s prohibited transaction claim. 

Finally, the Court held that the claim for breach of the duty to monitor was not viable because duty of loyalty claims are derivative in nature, and that Plaintiff could not maintain any of the underlying fiduciary breach claims.

This decision is important because the Court points to specific practices and aspects of the Plan’s management that allowed Goldman to prevail in the lawsuit.  Employers can adopt such practices to avoid or combat the wave of more than 220 similar class action lawsuits that have been filed around the country since 2020. 

A New York federal court recently held that a service provider for employer-sponsored retirement plans was not liable as a fiduciary under the Employee Retirement Income Security Act (“ERISA”) when it used participant information to encourage certain plan participants to roll over assets into its more expensive managed account program.  Carfora v. Teachers Ins. Annuity Ass’n of Am., No. 21 Civ. 8384, 2022 U.S. Dist. LEXIS 175613 (S.D.N.Y. Sept. 27, 2022).

Plaintiffs are participants in defined contribution retirement plans for which Defendant Teachers Annuity Association of America and TIAA-CREF Individual & Institutional Services, LLC (“TIAA”) provides recordkeeping and administrative services.  TIAA also offers managed account services for an additional fee through a program called Portfolio Advisor.  According to Plaintiffs, TIAA used their personal information to encourage them to roll over assets from their employer-sponsored plans into Portfolio Advisor.  Portfolio Advisor, despite being more expensive, allegedly performed worse than the employer-sponsored plans.

Plaintiffs allege that TIAA acted as an ERISA fiduciary and violated its fiduciary duties by using Plaintiffs’ personal information to encourage them to switch to TIAA’s more expensive Portfolio Advisor product.  The District Court did not reach the question of whether TIAA breached any fiduciary duties because the Court held that TIAA was not an ERISA fiduciary in the first instance.

Under ERISA, one may become a fiduciary in one of two ways.  First, one may be specifically named a fiduciary in the plan document.  Second, one can be a de facto or functional fiduciary if he acts in a fiduciary capacity by, for example, rendering investment advice for a fee on a regular basis, or holding discretionary authority in the management or administration of the plan.

Plaintiffs argued that TIAA was a de facto fiduciary.

Plaintiffs first argued that TIAA was equitably estopped from arguing that it was not a fiduciary, based on a representation in a 2012 marketing brochure that it would “meet[] a fiduciary standard” in providing investment recommendations.  The District Court rejected this argument because Plaintiffs did not allege that they personally relied upon TIAA’s representations in the decade-old brochure.  Noting that equitable estoppel is only appropriate in “extraordinary circumstances,” the District Court concluded that the doctrine did not apply.

Plaintiffs next argued that TIAA could be held liable as a de facto fiduciary because it “render[ed] investment advice for a fee” and “on a regular basis” when it encouraged Plaintiffs to roll over assets to Portfolio Advisor.  Complicating this argument was the Department of Labor’s evolving and conflicting guidance on the matter.  In 2005, the DOL issued an opinion letter which stated that advice regarding distributions does not constitute “investment advice.”  In 2020, the DOL rescinded this letter and issued a contrary opinion that rollover advice is investment advice and can be advice “on a regular basis,” a requirement to create a fiduciary relationship.  The Court ultimately concluded that TIAA was not a fiduciary by virtue of its rollover advice, declining to give retroactive effect to the DOL’s 2020 opinion.

Plaintiffs further argued that TIAA’s use and access to plan participants’ confidential information created a fiduciary relationship.  The Court rejected this argument, concluding that plan participants’ data are not “plan assets,” and that TIAA’s actions did not create a fiduciary relationship.

Finally, the Court opined that the plan sponsors, who contracted with TIAA for recordkeeping services, were the proper fiduciaries under ERISA, and that Plaintiffs cannot transform “a grievance they might have against their plans for utilizing TIAA into a claim that TIAA was itself a plan fiduciary.”

Takeaways  

Although the Court declined to impose ERISA’s fiduciary obligations onto TIAA, the decision proved informative.  First, the plaintiffs’ bar is targeting service providers, and potentially plan sponsors, for representations and fees relating to rollovers.  Second, much of the Court’s reasoning was based on whether to apply retroactive effect to current DOL guidance, and had that guidance applied, the outcome may have been different.  Employers may be well served by reviewing service agreements and participant communications with ERISA counsel.

Plaintiffs must plead a “sound basis for comparison—a meaningful benchmark” — to sustain their claims of imprudent investment and excessive fee against a 401(k) plan, the federal appeals court in St. Louis has held, dismissing a class action lawsuit for breached of fiduciary duties under ERISA. Matousek v. MidAmerican Energy Co.No. 21-2749 (8th Cir. Oct. 12, 2022).

Click here to read the full article on our website.

The U.S. Court of Appeals for the Eighth Circuit recently affirmed a District Court’s finding that Principal Life Insurance Company (“Principal”) did not breach its fiduciary duties regarding its stable value contract for 401(k) plans.  Rozo v. Principal Life Ins. Co., No. 21-2026, 2022 U.S. App. LEXIS 24803 (8th Cir. Sept. 2, 2022).

In Rozo, the plaintiff, on behalf of retirement plan participants who invested in Principal’s Principal Fixed Income Option (“PFIO”), sued under ERISA asserting that Principal breached its fiduciary duty of loyalty by setting low interest rates for participants, and engaged in a prohibited transaction by using the PFIO contract to make money for itself.  The PFIO is an annuity that Principal offers and manages.  In managing the PFIO, Principal sets a guaranteed interest rate, which it calculates by subtracting “deducts” from the return it expects to earn on the assets.  Principal is only compensated for the positive spread between the amount it promises to participants and what its investments actually yield. 

Breach of Fiduciary Duty Claim

To prevail on its breach of fiduciary duty claim, the plaintiff needed to show that the Principal acted as a fiduciary, breached its fiduciary duties, and caused a loss to the plan. To make such a showing, plaintiff asserted that Principal acted at least in part to advance its own interests by increasing profits, thereby breaching its fiduciary duty.  In evaluating this argument, the Eighth Circuit acknowledged that it had yet to set forth factors for determining whether plan administrators acted “solely in participants’ interests” and noted the importance of identifying each of the parties’ interests when making conflict of interest determinations. 

To do that, the court adopted the First Circuit’s analysis in Ellis v. Fid. Mgmt. Tr. Co., 883 F.3d 1, 9 (1st Cir. 2018) and agreed with the District Court that a “tension” existed between the parties’ interests; the higher the deducts, the lower the rate paid to participants, and the higher Principal’s revenue from the PFIO.

Due to the inherent conflict, the court scrutinized Principal’s actions more closely, but nevertheless found the district court did not err in finding (1) Principal set the deducts in the participant’s interest and (2) the “deducts were reasonable and set by Principal in the participant’s interest of paying a reasonable amount for the PFIO’s administration.”  In reaching these conclusions, the court highlighted that tension does not inevitably result in the type of conflict of interest that establishes a breach of the duty of loyalty and “ERISA does not create an exclusive duty to maximize pecuniary interests.”

Prohibited-Transaction Claim

The court likewise affirmed the dismissal of the prohibited transaction claim because Principal proved that its compensation was reasonable, and therefore it is exempted from liability.

Takeaways

This decision solidifies that companies like Principal, who offer fixed-income investment products, can create fiduciary responsibilities when they deduct from investment returns and set participant rates. Accordingly, companies who offer such investment products must analyze the appropriate factors to ensure compensation is reasonable and the fund is not operated with a profit objective for the company. 

Since the Supreme Court’s January ruling in Hughes v. Northwestern University, circuit courts throughout the country have issued varying rulings regarding 401(k) fee litigation cases. These include the Ninth Circuit in Trader Joe’s Co. and Salesforce.com, Inc., and the Sixth Circuit in CommonSpirit Health, Inc. and TriHealth, Inc.  Most recently, the Seventh Circuit has weighed in, affirming the dismissal of a 401(k) fee litigation in Albert v. Oshkosh Corporation, No. 21-2789 (7th Cir. 2022).

In Hughes, the Supreme Court held that offering some inexpensive investment funds does not prevent claims of breach of fiduciary duties when that plan also offers expensive funds.  Further, the Court reiterated that ERISA requires plan fiduciaries to monitor all plan investments and remove any imprudent ones.

In Albert, the Seventh Circuit ruled in favor of Defendant Oshkosh Corporation, affirming the dismissal of Plaintiff’s claims challenging the fees charged under Oshkosh’s 401(k) plan, and, in doing so, clarified and cabined the impact of Hughes on Seventh Circuit precedent.  There, Plaintiff Andrew Albert, on behalf of himself and a putative class, alleged Oshkosh violated ERISA by (1) mismanaging its retirement plan by breaching fiduciary duties in authorizing the plan to pay unreasonably high fees for recordkeeping and administration; (2) failing to adequately review the plan’s investment portfolio to ensure that each investment option was prudent; and (3) unreasonably maintaining investment advisors and consultants for the plan despite availability of similar service providers with lower costs or better performance histories.

Dismissing Plaintiff’s recordkeeping fee claim, the Court cited to, and agreed with, the Sixth Circuit’s reasoning in Smith v. CommonSpirit Health.  The Albert court held that, as in CommonSpirit, “Plaintiff failed to state a duty of prudence claim where the complaint failed to allege that the recordkeeping fees were excessive relative to the services rendered.” (internal quotations and alteration omitted).  The Court then emphasized that Hughes does not require fiduciaries to regularly solicit bids from service providers, maintaining that Seventh Circuit precedent in that regard was “left untouched” by Hughes.

The Court also dismissed Plaintiff’s claims alleging excessive investment management fees.  Plaintiff first advanced a theory that the Plan should have offered higher‐cost share classes of certain mutual funds because the “net expense” of those funds would be lower based on the revenue sharing they offered.  The Court, recognizing that no court decision has credited this theory, held that ERISA imposes no requirement to choose investment options on this basis.  The Court also dismissed the theory that Plans must opt for cheaper, passively managed funds.

Next, the Court dismissed the Plaintiff’s claims that the fees for investment advisors were excessive because Plaintiff did not provide any basis for comparison to determine that such fees were, indeed, excessive.

The Court then dismissed Plaintiff’s duty of loyalty claims, based on the allegation that the Plan’s recordkeeper, Fidelity, encouraged the Plan to use Fidelity’s subsidiary as an investment advisor.  The Court held that no breach of duty of loyalty can be inferred on Oshkosh’s part, nor on Fidelity’s part, because Fidelity is neither a named defendant nor a fiduciary.

Lastly, Plaintiff alleged Oshkosh engaged in prohibited transactions with Fidelity by paying excessive fees for Plan services.  The Court dismissed this claim, holding that it would be “nonsensical” to read ERISA § 406(a)(1) “to prohibit transactions for services that are essential for defined contribution plans, such as recordkeeping and administrative services.”

This decision provides insight into how lower courts and the remaining circuits may handle 401(k) fee cases, post-Hughes.  As always, we’ll monitor and report on how each circuit rules on these cases.

On June 21, 2022, CommonSpirit Health defeated a putative class action brought by former employees who alleged that the company mismanaged their 401(k) plan by offering higher-cost, actively managed investment options when lower-cost index funds with better returns were available. The plaintiffs also alleged that the plan’s recordkeeping and investment management fees were excessive when compared to industry averages.

The plaintiffs argued that CommonSpirit and its retirement plan committee were imprudent for offering actively managed funds instead of cheaper index funds in the plan’s investment lineup, noting that the actively managed funds trailed the three- and five-year returns of purportedly comparable index funds. The 3-judge panel disagreed and affirmed the district court’s dismissal, reasoning that “[m]erely pointing to another investment that has performed better in a five-year snapshot of the lifespan of a fund that is supposed to grow for fifty years does not suffice to plausibly plead an imprudent decision—largely a process-based inquiry—that breaches a fiduciary duty.” The Court clarified that comparing actively and passively managed funds, without consideration for each fund’s discrete objectives, “will not tell a fiduciary which is the more prudent long-term investment option.”

The Court also affirmed dismissal of the recordkeeping and management fee claims. The plaintiffs alleged that the plan’s recordkeeping fee, ranging between $30 and $34 per participant, was excessive compared to “industry average costs” totaling $35 per person in other plans. But the Court held that the plaintiffs failed to plead that the fees were excessive relative to the services rendered, noting that the plaintiffs failed “to give the kind of context that could move this claim from possibility to plausibility.” And as to the management fees, the Court opined that this claim was merely a recast of the active vs. passive fund claim, iterating that higher investment fees alone are insufficient to state a breach of fiduciary duty claim, a process-based inquiry.

The case is Smith v. CommonSpirit Health, et al., No. 21-5964 (6th Cir. 2022)

The U.S. Supreme Court’s opinion in Dobbs v. Jackson Women’s Health Organization, No. 19-1392 (June 24, 2022), overruling Roe v. Wade and Planned Parenthood v. Casey, has far-reaching consequences across many areas. This special report examines the potential impact Dobbs will have on employee benefits litigation.

Click here to read the full article on our website.

The DOL’s cybersecurity investigation into Alight Solutions, LLC, a retirement plan recordkeeper, has queued up court rulings on the reach of the DOL’s subpoena power that may have important implications for ERISA plan sponsors and their respective recordkeepers and service providers moving forward. First, the Seventh Circuit will weigh in on whether the district court erred in compelling Alight to produce certain documents over Alight’s objections that: (1) the DOL lacks the authority to investigate a recordkeeper because its actions are not fiduciary in nature, (2) the requests are overbroad because they are not limited to cybersecurity incidents involving Alight’s clients, and (3) the requests for unredacted documents would violate Alight’s confidentiality agreements with its clients and plan participants.

In addition, while the appeal has been pending in the Seventh Circuit, the parties await another decision from the district court that will speak to the DOL’s power to share confidential documents received in an investigation across other government agencies. Alight seeks to require the DOL to attach the Confidentiality Order to any disclosure it makes to another governmental agency. However, the DOL has argued in response that the retention and sharing of documents by the United States is already highly regulated and to add additional burdens would circumvent Congress’s power.

Final resolution of these issues will be of interest to benefit plan sponsors and service providers, particularly those with ongoing DOL investigations.

The Third Circuit Court of Appeals recently held that as the plan fiduciary of Universal’s defined contribution plan, Universal Health Services Inc. and its plan investment committee (collectively “Universal”) must face a class action claiming its retirement plan included imprudent investment options charging excessive fees to more than 60,000 participants, even though the three named plaintiffs only invested in seven of the 37 plan investment options challenged by their lawsuit.

Universal had appealed a 2021 decision certifying the Employee Retirement Income Security Act lawsuit as a class action covering all of the plan’s 60,000 participants. Universal claimed that the class as certified was overbroad because the three named plaintiffs had only invested in a handful of the challenged funds in the plan and, therefore, their claims were not typical of the class. Universal also argued the plaintiffs only had standing to sue on behalf of others who had invested in the same funds.

A unanimous three-judge panel said that while the named plaintiffs only invested in a fraction of the funds offered by the plan, Universal’s alleged failure to properly evaluate investment fees affected all the funds in the Plan the same way. The appellate court focused on the investment decisions offering the suite of challenged target funds to conclude plaintiffs had a concrete stake in and typical class claims as to those decisions, even though plaintiffs had not invested in all of the funds in that suite. The appellate court applied this same analysis to plaintiffs’ claim Universal failed to follow a prudent process to evaluate investment options offered in the plan. While the appellate court acknowledged that allowing class representatives to bring claims based on funds they didn’t personally hold “may result in some inefficiency at the damages stage” of litigation, the court held that it doesn’t bar class certification under Federal Rule of Civil Procedure 23(b)(1).

This case is Boley v. Universal Health Servs., No. 21-2014, 2022 U.S. App. LEXIS 15001 (3rd Cir. June 1, 2022).

Four former employees of Eversource Energy Company recently obtained partial class certification of their claims. However, the District of Connecticut ruled that because the named plaintiffs are all former participants in the plan, they could not seek prospective relief, and only granted certification with respect to claims for retrospective relief.

Plaintiffs’ Second Amended Complaint sought prospective injunctive relief as well as retrospective relief for damages related to alleged breaches of fiduciary duty for charging excessive recordkeeping fees, investing in a suite of actively managed target date funds known as the Fidelity Freedom Funds instead of the lower cost, passively managed Freedom Index Funds, and imprudently investing in and retaining other specific investment options. Overall, 14 of 19 investment options in the plan were challenged, and all challenged options were invested in by at least one of the four named plaintiffs.

Defendants opposed class certification on the grounds that the named plaintiffs lacked Article III standing to: (1) seek prospective relief as they were not current participants in the plan; and (2) claim losses on behalf of funds in which they did not personally invest. The Court agreed with the defendants on their first argument, but disagreed as to the second.

First, the Court found that although the plaintiffs satisfied the statutory definition of “participants” in order to bring a cause of action under ERISA, they were still required to show the likelihood that they were subject to future harm when seeking prospective injunctive relief to satisfy Article III standing. Because the plaintiffs were no longer enrolled in the plan, the Court found “the defendant’s future management of the Plan does not pose a ‘real or immediate threat’ to the plaintiffs and they have no Article III standing to seek forward-looking injunctive relief.”

Second, the Court engaged in an extensive analysis of the different approaches to determine the extent of a plaintiff’s Article III standing to seek relief when suing in a derivative capacity under section 502(a)(2). One approach finds that a plaintiff has standing by simply participating in the plan and alleging injury to the entire plan, regardless of individual loss. The second approach requires a plaintiff to show sufficient injury of individual loss and then can only sue for losses for funds in which the plaintiff invested.

Here, the Court did not opine on the correct approach, but concluded the plaintiffs had constitutional standing because their Second Amended Complaint identified individual losses stemming from the defendants’ alleged breaches. Further, the Court found plaintiffs could also bring claims on behalf of putative class members who invested in the non-challenged funds (i.e., funds that none of the named plaintiffs invested in) because the alleged imprudence of defendants’ investment process implicated the “same set of concerns” of all putative class members and the derivative actions under Section 502(a)(2) are brought on behalf of the entire plan. Finally, although the Court denied certification prospectively, it did grant plaintiffs leave to amend to add a current plan participant with standing to seek such relief as a named plaintiff within thirty days.

With nearly 200 similar lawsuits filed in the past few years, this decision provides significant insight into the Article III analysis district courts undertake in the class certification context and highlights an argument all employers should make when former plan participants are seeking prospective relief.