On August 5, three Named Plaintiffs sued TIAA and Morningstar in the S.D.N.Y., claiming Defendants engaged in a “scheme to enhance corporate profits” by counseling participants to invest in two of TIAA’s most lucrative investment vehicles. Plaintiffs target ERISA and non-ERISA plans.  The Complaint alleges TIAA and Morningstar developed an investment advisory tool – the Retirement Advisor Field View (RAFV) – deliberately inducing participants to transfer account balances into TIAA’s Traditional Annuity and/or Real Estate Account, TIAA’s two most profitable investment products.

Notably, no plan nor plan sponsor is named as a fiduciary nor a Defendant.  TIAA and Morningstar are the sole Defendants.  The case is brought as a broad class action.  The class definition includes all participants and beneficiaries of all ERISA-covered defined contribution plans and plans not subject to ERISA, who initiated or increased their allocation of assets in the TIAA annuity or real estate funds based on advice received through the RAFV tool.  The claims include breach of fiduciary duty and loyalty under ERISA and New York state law (as to non-ERISA plans sponsored by public universities) and claims under ERISA’s prohibited transaction rules.  Additionally, Plaintiffs seek trial by jury or an advisory jury.

The Complaint weaves together contentions of an unlawful TIAA “scheme” developed to recover losses from its core retirement services business.  Plaintiffs’ theory is that because TIAA was losing market share, it developed this new business model – RAFV – that induced participants to move their investments to the TIAA Traditional Annuity and TIAA Real Estate Account.  According to Plaintiffs, RAFV was designed to show participants they were failing to meet their retirement income goals based upon their current allocations.  Representatives provided new investment recommendations, and those TIAA and Morningstar recommendations channeled participant funds into TIAA’s annuity and real estate accounts, even though Morningstar purported to be an “independent financial expert.”  According to the Complaint, these two investment funds were TIAA’s most profitable investment products, in large part due to continued revenue flows from this “scheme.”  In this sense, these allegations borrow heavily from prior proprietary fee cases. 

Defenses

The chief defense to the case is whether TIAA and Morningstar’s conduct is fiduciary conduct.  The alleged advice is provided to participants as they exit the plan, either because they are retiring, or because they are moving their assets into an investment vehicle that is no longer an ERISA plan.  The Department of Labor’s fiduciary rules may or may not govern such situations in the future, but those rules, to the extent that they were in effect, have been enjoined nationally.

The Complaint is interesting also because it ignores the touchstone between TIAA and Morningstar’s alleged conduct and the activity/presence of a plan sponsor or a more traditional plan fiduciary.  Typically, this type of claim would be centered on a plan fiduciary and the allegations cast as a fiduciary failing to recognize how the service provider takes advantage of plan participants.  Instead, this Complaint bypasses a specific plan or plan fiduciary and takes direct aim at the service provider.  Will that strategy succeed before regulatory rules govern such service provider conduct?

Takeaways

Financial services entities weathered the proprietary fee litigation cases when many such entities were sued for offering their proprietary investment products to their employees in their own 401(k) Plans.  This case has elements of proprietary fee litigation in that it attacks TIAA for marketing proprietary products to participants to “feather its own nest.”  Given the past 401(k) Plan litigation history and the analogous prior proprietary fee cases, if this case survives a motion to dismiss as to fiduciary status, we may see more of these cases filed in the future against other financial services entities.

If you have any questions, the Jackson Lewis ERISA Litigation Practice Group members are available to assist.  Please contact a Jackson Lewis ERISA litigation team member if you have follow-up questions.

In its recent decision in State of Utah v. Su, the Fifth Circuit remanded a challenge to the Department of Labor’s (DOL) environmental, social, and governance (ESG) rule for investing in defined contribution retirement plans after the Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo.  In Loper Bright, the Supreme Court overturned the 40-year-old Chevron doctrine, which required courts to defer to agency interpretation of ambiguous language in statutes within the agency’s purview. 

In Utah v. Su, 26 states along with other interested parties sued the DOL, claiming that the ESG rule conflicted with the plain language of ERISA and was invalid under the Administrative Procedure Act.  The DOL ESG rule allowed plan fiduciaries to consider ESG factors when selecting investments when competing investment options “equally serve the financial interests of the plan.”  The DOL did not argue that it was entitled to deference regarding its rulemaking but instead asserted that the ESG rule was consistent with the plain language of ERISA.   

A Texas federal district court relied on Chevron when it deferred to the DOL’s analysis in finding that the ESG rule was properly promulgated.  Plaintiffs appealed the district court’s decision to the Fifth Circuit.

The Fifth Circuit did not decide whether the DOL properly promulgated the ESG rule.  Instead, the court noted that Loper Bright “upended the legal landscape” by eliminating Chevron deference and it could not consider the merits of the case because the district court relied on Chevron in deferring to the DOL’s rulemaking process.  With the removal of the Chevron duty to defer, the Fifth Circuit held that it was required to remand the case to the district court to make an independent determination of whether the rule was within the DOL’s authority to pass.

While the district court is reviewing whether the DOL validly issued the ESG rule, the rule remains in effect.  A final decision on the validity of the ESG rule will likely not occur soon, as another appeal to the Fifth Circuit is certain to follow the district court’s decision. 

Takeaways

Utah v. Su is the first ERISA test case for review of agency rulemaking in the post-Chevron environment.  The district court will reconsider the case without any deference to the DOL’s analysis and make an independent determination based on its examination of the plain language of ERISA, which both sides previously argued supports their respective positions on appeal. 

Jackson Lewis continues to monitor the impact of Loper Bright.  Click here to read more.

A New Jersey federal district court recently granted summary judgment in defendants’ favor in an ERISA excessive fee case accusing Evonik’s 401(k) plan fiduciaries of keeping imprudent investments in the plan and of allowing participants to pay excessive recordkeeping fees. Harris, et al. v. Evonik Corp., et al., No. 20-02202, 2024 U.S. Dist. LEXIS _____ (D.N.J. Jun. 28, 2024).  

At the core of the decision was the court’s finding that Evonik’s fiduciaries followed a rigorous, prudent process for reviewing plan investments and fees. Specifically, with regard to investments, it was undisputed that the fiduciaries reviewed quarterly reports, engaged an investment consultant, used an investment policy statement and watch list to guide decisions, and discussed underperforming funds. With regard to the recordkeeping claim, the court credited the undisputed facts that the fiduciaries annually benchmarked fees though their investment consultant, resulting in several fee reductions during the relevant timeframe. From there, the court held that the “concerns” with the process that plaintiffs raised did not create any issues that require resolution at trial. 

  • Plaintiffs argued that the investment policy statement was impermissibly vague for various reasons, such as a lack of specific time constraints for keeping underperforming funds in the plan. The court found that a “vague” IPS does not negate an otherwise prudent process – as was the case here – and in any event, the alleged gaps in the policy statement were filled by the quarterly investment reviews.
  • Plaintiffs argued that the plan’s “high” total plan cost was evidence that the plan’s investment fees were imprudent. But the court found that it was undisputed that the plan’s total plan cost was higher because the plan offered actively managed funds, which tend to be more expensive, and which are not imprudent simply due to their cost. The court further held that plaintiffs could not challenge investment fees without a fund-by-fund fee analysis, especially because it was undisputed that the total plan cost data included recordkeeping fees and other fees that were not at issue and did not account for the plan’s use of revenue sharing to lower plan costs.  
  • Plaintiffs further argued that the fiduciaries kept two underperforming investments in the plan for too long but, again, the court pointed to the strength of the process and undisputed facts that the fiduciaries discussed the funds’ performance regularly and followed the advice of their consultants. Moreover, simply alleging investment loss is not enough to prove a breach.
  • On the recordkeeping claim, Plaintiffs faulted the fiduciaries for failing to adopt a $23 per participant recordkeeping fee proposed by a competing recordkeeper in a request for information. But it was undisputed that the fiduciaries would have had to switch recordkeepers and change the plan’s default investment option and stable value fund to obtain that rate. The court held a fiduciary does not need to accept such “drastic changes” to a retirement plan simply to negotiate a lower recordkeeping fee. 

Takeaway

This case is a significant win for the plan sponsors and fiduciaries who continue to defend their fiduciary process in similar litigations and serves as a model for fiduciary prudence in investigating and selecting investments and monitoring the plan’s payment of recordkeeping fees.

If you have any questions, the Jackson Lewis ERISA Litigation Practice Group members are available to assist. Please contact a Jackson Lewis ERISA Litigation team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

Recently, the Second Circuit became the latest circuit refusing to enforce individual arbitration of an ERISA class action, joining the Third, Seventh, and Tenth Circuits. The Ninth Circuit, by contrast, has held that class action ERISA claims brought on behalf of plans are subject to individual arbitration, with relief limited to the individual plaintiff’s claims.

In Cedeno v. Sassson, 100 F.4th 386 (2d Cir. 2024), plan participant Ramon Cedeno sued Argent Trust Company, the trustee of his former employer’s employee stock ownership plan (“ESOP”), alleging that Argent breached its fiduciary duties by causing the ESOP to overpay for company stock. Mr. Cedeno sought relief under ERISA Section 502(a)(2), which allows a plan participant to bring a civil action for appropriate relief under Section 409(a). In turn, Section 409 holds fiduciaries personally liable for any losses to the plan resulting from their breaches.

The Plan document in Cedeno included a mandatory arbitration provision. It stated that participant claims concerning the Plan would be settled by binding arbitration, in an individual capacity (not representative or collective), and that the participant could not seek additional benefits or relief beyond their own claim.

The district court denied the defendants’ motion to compel arbitration, finding the Plan’s arbitration provision unenforceable. It reasoned that Section 502(a)(2) allowed Mr. Cedeno the right to seek plan-wide relief in a representative capacity, but the arbitration provision limited him to individualized relief and waived his statutory rights.

The Second Circuit panel majority (2-1) agreed with the district court. The Circuit Court relied on the “effective vindication doctrine,” which states that provisions in an arbitration agreement that prevent parties from effectively vindicating statutory rights are unenforceable. Because the Second Circuit determined that the Plan’s arbitration clause impermissibly barred plan-wide relief provided under Section 502(a)(2), it held that the Plan ran afoul of the effective vindication doctrine.

Judge Steven J. Menashi wrote the dissent and argued that the Second Circuit should have compelled Mr. Cedeno to individual arbitration. Judge Menashi (1) highlighted that the Federal Arbitration Act directs courts to respect arbitration agreements and parties’ chosen procedures, and (2) called into question the effective vindication doctrine as a principle with uncertain legal status which the Supreme Court has “always declined to apply … whenever litigants have asked it to do so.”

In support, Judge Menashi pointed to the Supreme Court’s 2013 decision in American Express Co. v. Italian Colors Restaurant, 570 U.S. 228 (2013), where the majority opinion declined to apply the effective vindication doctrine and called it a “judge-made exception to the FAA.” Judge Menashi’s dissent has gained traction and echoes concerns raised by other courts. Recently, Sixth Circuit Judge David W. McKeague referenced Judge Menashi’s dissent in Parker v. Tenneco, Inc.  Judge McKeague noted that the key question in Parker was “whether this effective vindication exception to the FAA even exists.” 

The Second Circuit’s decision deepened the debate over whether, under the effective vindication doctrine, benefit plan language requiring claim arbitration impermissibly deprived ERISA claimants of their statutory rights. While the majority held that such provisions cannot withstand the effective vindication doctrine, the dissent outlined a tentative path to forcing Mr. Cedeno into arbitration while suggesting that the doctrine may not even exist.  

Given the conflict between enforcing plan arbitration agreements and safeguarding ERISA’s statutory rights, this issue may soon come before the Supreme Court. Ultimately, as four circuits have now affirmed the unenforceability of plan arbitration provisions which prevent vindication of ERISA’s statutory rights, ERISA plan sponsors and fiduciaries must be deliberate when drafting such plan provisions.

Jackson Lewis continues to monitor further developments regarding enforceability of plan arbitration provisions. If you have any questions, the Jackson Lewis ERISA Litigation Practice Group members are available to assist. Please contact a Jackson Lewis ERISA Litigation team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

For the last 40 years, judges were required to defer to administrative agencies’ reasonable interpretations of ambiguous federal statutes under Chevron v. Natural Resources Defense Council. The Supreme Court upended that precedent in Friday’s 6-3 ruling in Loper Bright Enters. v. Raimondo, which overturned Chevron and instructs judges to rely on their own judgment in determining whether an agency’s regulation falls within its authority.  

Chevron’s repeal has both immediate and concrete impacts on ERISA’s interpretation, as well as the potential for significant, broader effects.  For example, challengers of the Department of Labor’s ESG Rule permitting fiduciaries to consider environmental, social, and governance factors when selecting plan investments have already pointed to Loper Bright to bolster their argument that the rule oversteps the DOL’s authority and should be invalidated now that Chevron does not require deference to the DOL.  In that pending litigation, which is currently on appeal in the Fifth Circuit, a district court in the Northern District of Texas previously relied on Chevron in upholding the DOL’s interpretation as reasonable.  And, looking more broadly, ERISA litigants often rely on administrative guidance from DOL, Treasury, etc. to interpret ERISA and advocate for their positions.  Without deference to agency guidance where appropriate under Chevron, interpretation of ambiguous ERISA provisions now rests entirely with the judiciary, with the potential for inconsistent interpretation of ERISA’s requirements from jurisdiction to jurisdiction. 

Takeaway

In the immediate wake of Loper Bright, the only certainty is the risk of uncertainty. A potentially chaotic landscape of court decisions across jurisdictions could make it difficult for Plan sponsors and fiduciaries to administer benefit plans, as a practical matter, and to comply with the law. Those responsible for benefit plan design and administration must stay on top of developing cases and know how to reconcile conflicting court decisions around the country, in addition to using the other compliance tools at their disposal — including agency guidance.

If you have any questions, the Jackson Lewis ERISA Litigation Practice Group members are available to assist. Please contact a Jackson Lewis ERISA Litigation team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

Conflicting orders on motions to dismiss from two California courts foreshadow issues for a new theory of ERISA liability. Employers have faced a recent wave of novel ERISA class actions that challenge the reallocation of defined contribution plan forfeitures.  Such plans often include provisions requiring participants to work for the employer for a defined period before their right to any employer contributions in their account vests. When a participant terminates employment before vesting, their unvested, forfeited employer contributions are swept into the plan’s forfeiture account. The recent lawsuits challenge an employer’s decision to use this account to make later employer contributions rather than defray administrative fees otherwise payable by the participants. Plaintiffs allege that this decision violates ERISA’s fiduciary duties as well as anti-inurement and prohibited transaction rules.

In Perez-Cruet v. Qualcomm Inc., a district court in the Southern District of California recently denied Qualcomm’s motion to dismiss:

  • Plaintiffs’ imprudence claim survived because ERISA’s duty of prudence supersedes plan document instructions. The fact that the plan document granted Qualcomm discretion to use forfeited money to reduce employer contributions or pay administrative expenses was not grounds to dismiss.
  • Plaintiffs’ breach of fiduciary duty claim survived because using forfeitures to make employer contributions benefited Qualcomm, and not plan participants.
  • Plaintiffs’ anti-inurement claim survived dismissal, rejecting defendants’ argument that unvested employer contributions should be treated as mistaken contributions (a statutory exception to the anti-inurement rule).
  • The court sustained plaintiffs’ prohibited transaction claim, finding that unvested employer contributions qualified as plan assets, and thus the employer’s reallocation of those funds for their own benefit was sufficient to state a prohibited transaction claim.

Conversely, in Hutchins v. HP Inc., a district court in the Northern District of California granted defendants’ motion to dismiss without prejudice:

  • This court held that plaintiffs’ theory, that an employer violates ERISA any time it uses forfeited money to make employer contributions rather than defray administrative fees, is both too broad and implausible to state a claim.
  • The court distinguished Perez-Cruet in finding that the forfeited money did not violate ERISA’s anti-inurement rule because the money never left the plan’s trust account and was used to pay benefits to plan participants.
  • And because the forfeited money never left the trust account, defendants’ decision to reallocate it was not a transaction, and plaintiffs’ prohibited transaction claim failed as well.

In both decisions the courts recognized that plaintiffs’ allegations and their decisions were treading into uncharted waters. Given the novelty of these claims, and the specific details of each plan’s operations and terms, different courts are likely to reach disparate outcomes as litigants navigate the first wave of “forfeiture” cases.

If you have any questions, the Jackson Lewis ERISA Litigation Practice Group members are available to assist. Please contact a Jackson Lewis ERISA Litigation team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

The U.S. Supreme Court recently declined to hear Rose v. PSA Airlines, Inc., Case No. 23-734, which raised the question of whether a remedy known as “surcharge” falls under ERISA’s equitable remedies provision.  Surcharge, in simple terms, resembles monetary damages.  Historically, courts used it to address losses resulting from a trustee’s breach of duty or to prevent unjust enrichment. 

Plaintiff Rose brought the action back in December 2019 on behalf of her deceased son’s estate.  Rose’s complaint alleged that her son’s employer, PSA Airlines, wrongly refused to cover the cost of her son’s medically necessary heart transplant surgery until a month after his death in February 2019.  Rose filed suit under ERISA to recover the monetary value of “benefits” that were denied under her deceased son’s plan.

A federal district court dismissed Rose’s case in September 2021 and she appealed.  In evaluating Rose’s claim, both the district and appellate court analyzed whether the “catch-all” remedial provision under ERISA Section 502(a)(3) allowed for such a financial award.  Both courts held that the money relief sought in the lawsuit was not a “benefit” that could be recovered under the terms of the employer’s health plan.  In other words, ERISA would not authorize monetary compensation when such a remedy was unavailable under the terms of the health plan. 

The Fourth Circuit also clarified that it declined to follow the Supreme Court’s holding in CIGNA Corp. v. Amara, 563 U.S. 421 (2011) as dicta.  In Amara, the Supreme Court noted that certain plaintiffs might be permitted to pursue make-whole, loss-based monetary relief under ERISA Section 502(a)(3) because such relief was analogous to surcharge.  Instead, the Fourth Circuit relied on a later Supreme Court case, Montanile v. Board of Trustees of the Nat’l Elevator Indus. Health Benefits Plan, 577 U.S. 136 (2016), to set aside its own precedent relying on Amara and held that surcharge was unavailable under 502(a)(3).  

The Fourth Circuit’s decision in Rose diverges from seven other circuits (the Second, Fifth, Seventh, Eighth, Ninth, Tenth, and Eleventh), all of which have concluded in published decisions that surcharge is an equitable remedy available under 502(a)(3).  With parties relying on the surcharge remedy following Amara, the Fourth Circuit’s decision may prompt a re-evaluation of surcharge’s viability under ERISA.

Jackson Lewis continues to monitor further developments regarding surcharge as an available equitable remedy.  If you have any questions, the Jackson Lewis ERISA Litigation Practice Group members are available to assist.  Please contact a Jackson Lewis ERISA Litigation team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

A California federal court recently granted an employer win in an ERISA excessive fee case when it dismissed a proposed class action brought by an ex-employee of Schenker, Inc., a transportation logistics company.  Partida v. Schenker Inc., No. 22-cv-09192-AMO, 2024 U.S. Dist. LEXIS 58297 (N.D. Cal. Mar. 29, 2024).  In the past few years, hundreds of employers have been hit with proposed class actions challenging their “excessive” retirement plan fees.  Plaintiffs have had mixed results in court.  Here, the court reasoned that, although Plaintiff had established standing, the complaint did not state a claim because it contained no specific allegations to support its conclusory assertions.

Similar to other fee class actions, here an ex-employee alleged that Schenker breached its duties of prudence and loyalty under ERISA by: (1) not investigating available lower fee share classes of identical funds; (2) not removing underperforming investments; (3) not evaluating whether an active management strategy benefitted participants; and (4) misrepresenting material information about Plan options and expenses to participants.  In response, Schenker moved to dismiss.

Failure to State a Claim

Schenker’s motion to dismiss asserted that the complaint did not state a valid claim under ERISA because it rested on conclusory assertions unsupported by detailed factual allegations.  For example, Plaintiff conclusorily asserted that the plan paid an excessively high fee for recordkeeping services, that the plan’s funds “significantly underperformed” compared to comparable investments, and that Schenker “selected and retained investment options despite the high cost” compared to comparable investments.  But Plaintiff (1) did not allege facts showing what services the plan’s recordkeeper performed or that the cost of those services was excessive; (2) did not identify cheaper or more successful funds that had the same aims, risks, or potential rewards as the plan’s investments; and (3) did not allege facts showing that Schenker engaged in a flawed process to select or retain funds for the plan.    

The Court agreed with Schenker, holding that Plaintiff failed to state a claim for imprudence because he did not plead any facts showing how the fiduciaries’ process in selecting and monitoring plan investments was flawed, did not plead any facts showing that the plan’s recordkeeping fees were excessive in relation to the services rendered, and did not identify any specific misrepresentations Schenker made.  Likewise, the court held that Plaintiff did not state a claim for disloyalty because the complaint “include[d] only conclusory allegations” that the fiduciaries had acted in their own self-interest to the detriment of the plan, without identifying any specific acts or harms.  Finally, the court held that Plaintiff did not state a claim for failure to monitor fiduciary conduct because he had not properly alleged any underlying breach of fiduciary duty.  

Takeaways

This case serves as another example of a federal court dismissing an ERISA complaint that relies on conclusory assertions unsupported by specific factual allegations.  Courts remain willing to dismiss substantively empty complaints early in the litigation, barring speculative plaintiffs from unsubstantiated “fishing expeditions” in discovery. 

If you have any questions, the Jackson Lewis ERISA Litigation Practice Group members are available to assist.  Please contact a Jackson Lewis ERISA Litigation team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

A New York federal court recently denied former hospital employees’ request for leave to file a Third Amended Complaint (“TAC”) after dismissing their Second Amended Complaint (“SAC”) for lack of standing and failure to state a claim.  Boyette v. Montefiore Medical Ctr., No. 22-cv-5280 (JGK), 2024 U.S. Dist. LEXIS 63150, at *1 (S.D.N.Y. Apr. 5, 2024). The court reasoned that the proposed amended complaint contained “substantively the same defects” as its predecessor.   

Former Montefiore employees challenged the healthcare center’s management of its 403(b) retirement plan, alleging that plan fiduciaries (1) selected underperforming funds charging excessive management fees; (2) failed to offer the least expensive share classes of funds; and (3) failed to control the plan’s recordkeeping costs.  The court found that Plaintiffs lacked standing and factual support for their claims and dismissed the SAC without prejudice.  Boyette v. Montefiore Med. Ctr., No. 22-cv-5280 (JGK), 2023 U.S. Dist. LEXIS 203442, at *3 (S.D.N.Y. Nov. 13, 2023).

Standing 

First, the court found that Plaintiffs lacked standing to assert recordkeeping claims because they failed to allege they had personally paid excessive recordkeeping fees.  Not all participants in the Montefiore plan paid the same fees because the plan employed an asset-based fee schedule under which recordkeeping fees were charged as a percentage of each participant’s account balance.  Plaintiffs asserted that plan fiduciaries could have negotiated a reasonable recordkeeping fee in the mid-$20 range per participant, but neither of the Named Plaintiffs claimed they personally paid more than this “reasonable” fee.  The court held that because Plaintiffs failed to allege they personally paid unreasonable fees, they had not pleaded any individualized harm and thus lacked standing to bring their claims.

The court found that Plaintiffs lacked standing to bring their investment claims for the same reason.  Because Plaintiffs failed to allege they invested in any of the challenged funds, they had not pleaded individualized harm associated with the funds’ performance, management fees, or higher cost share classes.

Failure to State a Claim

The court then turned to the adequacy of the complaint and found additional grounds to dismiss each claim. 

Relying on its own decision in Singh v. Deloitte LLP, 650 F. Supp. 3d 259 (S.D.N.Y. 2023), the court held that Plaintiffs failed to plausibly allege the Montefiore plan’s recordkeeping fees were excessive “relative to the services rendered.”  The court explained that Plaintiffs’ assertion that all recordkeepers offer the same range of services was no substitute for specific factual allegations.

The court similarly disposed of Plaintiffs’ share class claim, finding that Plaintiffs’ assertion that “[t]here is no good-faith explanation for utilizing high-cost share classes” was undermined by public filings explaining the Montefiore plan’s use of revenue sharing from these investments to offset its expenses.

Finally, the court dismissed Plaintiffs’ investment selection claims because Plaintiffs provided no grounds to infer that the information concerning the funds’ alleged underperformance was available to the fiduciaries at the beginning of the Class Period.

Request for Leave to Amend Denied

Dropping the investment and share class claims, Plaintiffs sought leave to file the TAC to save their recordkeeping claim by alleging a Named Plaintiff paid recordkeeping fees in excess of the “reasonable” range.  But the court held that amending would be futile because Plaintiffs failed to specifically allege the recordkeeping services received by the Montefiore plan and its purported comparators, thereby failing to plead that the Montefiore plan’s fees were unreasonable. 

Takeaways

The initial Boyette decision serves as a reminder for all defendants to scrutinize the standing of Named Plaintiffs in ERISA actions.  And both Boyette decisions swell the ranks of court rulings dismissing claims for breach of fiduciary duty related to recordkeeping fees without specific factual allegations of recordkeeping services. 

If you have any questions, the Jackson Lewis ERISA Litigation Practice Group members are available to assist. Please contact a Jackson Lewis ERISA Litigation team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

The Fourth Circuit affirmed Aon Hewitt Investment Consulting’s trial victory in a 250,000-member class action suit alleging that Aon breached ERISA’s fiduciary duties.

Aon was initially the Lowe’s 401(k) plan’s investment advisor and later was engaged as the plan’s 3(38) delegated fiduciary. The plaintiffs’ fiduciary breach claims alleged that, after being retained as a delegated fiduciary, Aon transferred plan assets to an Aon fund with an unproven track record that underperformed. Plaintiffs also claimed that Aon’s sales efforts to acquire delegated fiduciary work and their recommendation to streamline the Lowe’s 401(k) plan’s investment menu were self-motivated and not in the plan’s best interest. After a five-day trial, the district court ruled in favor of Aon.

The Fourth Circuit affirmed. Regarding Aon’s sales efforts, the Court held that this conduct was not investment advice and could not violate the duty of loyalty. As for Aon’s recommendation to streamline the plan’s investment menu, the recommendation was not motivated by self-interest: Lowe’s requested the meeting to discuss a potential structural change before Aon decided to pursue becoming a delegated fiduciary of the Lowe’s plan, Aon consistently recommended a plan structure that was less likely to lead to the engagement of a delegated fiduciary, and the plan’s committee chose the structural changes after determining that the structure was more straightforward for Plan participants to understand.   The Court agreed with the district court that Aon may have received an incidental benefit from the engagement, but their recommendations were not motivated by self-interest.

Concerning Aon’s selection and monitoring of their proprietary fund after its retention as a delegated fiduciary, the Court found that Aon engaged in a reasoned decision-making process when reviewing comparable funds and continued monitoring the fund upholding their duty of prudence. The Court reiterated that the duty of prudence is based on “process, not results.”

With this decision, the Fourth Circuit reiterates that, despite many plaintiffs’ successes in earlier litigation stages, a prudent process for selecting and monitoring investments can win the day for fiduciary breach claims. In addition, the opinion is noteworthy for delegated fiduciaries – and the plan sponsors and fiduciaries that engage them – because the Fourth Circuit declined to hold that a plan service provider that is a fiduciary retains that fiduciary status when cross-selling a new product or service to the plan. Other circuits had held that initial contract negotiation and sales efforts were not fiduciary conduct, but applying those conclusions to an existing fiduciary relationship is novel. 

If you have any questions, the Jackson Lewis ERISA Litigation Practice Group members are available to assist. Please contact a Jackson Lewis ERISA Litigation team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.