ERISA Litigation Update

Key Takeaway: On remand from the US Supreme Court’s decision last year in Hughes v. Northwestern University, the Seventh Circuit Court of Appeals reversed the district court’s dismissal of fiduciary breach claims based on two theories, and affirmed the dismissal of breach claims based on a third theory.  

On March 23, 2023, the Seventh Circuit Court of Appeals reconsidered and reversed, in part, the district court’s dismissal of a lawsuit against Northwestern University. The complaint alleged that the fiduciaries of Northwestern’s 403(b) retirement plans violated ERISA’s duty of prudence by, among other things, (i) failing to monitor and control the fees paid to the plans’ recordkeepers through a revenue sharing arrangement, (ii) offering “retail” share classes of mutual funds that carried higher fees than those charged by otherwise identical “institutional” share classes, and (iii) retaining duplicative investment options. The District Court for the Northern District of Illinois had previously granted Northwestern’s motion to dismiss, the Seventh Circuit affirmed, and the Supreme Court later vacated the Seventh Circuit’s decision, remanding the case with the instruction that the appeals court reevaluate plaintiffs’ allegations. Goodwin’s analysis of the Supreme Court’s decision can be found here.  

On remand, the Seventh Circuit focused only on the three issues identified in the Supreme Court petition. It held that to state a plausible prudence claim, a plaintiff must allege facts sufficient to eliminate “obvious alternative explanations,” not every reasonable explanation for the defendant’s choices. Applying that standard to the facts pleaded, the court found that plaintiffs had stated a plausible claim regarding recordkeeping fees due to their allegations that recordkeeping services are fungible and that Northwestern could have maintained the same level of service and reduced the plans’ recordkeeping fees by 80%, had it moved from its revenue sharing arrangement to a flat, per-participant fee. The court rejected Northwestern’s alternative explanation for sticking with the revenue sharing arrangement — that adopting a flat, per-participant fee can deter smaller investors who actually pay more under that arrangement — on the basis that it was not an obvious explanation, particularly given the fact that the plans were paying five times what plaintiffs alleged was reasonable. Additionally, the court held that plaintiffs’ claim for failure to move to cheaper share classes survived the motion to dismiss. It reasoned that the plaintiffs had plausibly alleged that Northwestern’s “failure to swap out retail-class for institutional-class shares was outside the range of reasonable decisions a fiduciary could take,” particularly where the plans were large enough to bargain for institutional shares and waivers of any associated minimum investment requirements. Finally, the court affirmed dismissal of the plaintiffs’ duplicative funds claim, reasoning that “[t]o the extent investor confusion is the injury pleaded, the [complaint] does not identify how plaintiffs were confused and personally injured by the multiplicity of funds.”

The case is Hughes v. Northwestern University, No. 18-2569, in the Seventh Circuit Court of Appeals, and is available here.

Key Takeaway: Summary judgment was granted, in large part, for the fiduciaries of a 401(k) plan because the US District Court for the District of Massachusetts found that plaintiffs could not prove that certain alleged breaches resulted in a loss to the plan, and because plaintiffs failed to provide evidence supporting their claim that the plan could have offered cheaper share classes of investment options.

On January 24, 2023, the US District Court for the District of Massachusetts granted summary judgment, in part, for the fiduciaries of a 401(k) plan, including the plan’s Section 3(38) investment manager. The plaintiffs had alleged that the manager breached its ERISA fiduciary duties of loyalty and prudence by replacing the plan’s existing Vanguard funds with proprietary collective investment trusts (CITs) that lacked sufficient performance history and were more expensive than the funds they replaced. The plaintiffs further alleged that the plan’s other fiduciaries breached their fiduciary duties because they allowed the replacement of the Vanguard funds with the manager’s CITs and failed to obtain lower cost share classes for other Vanguard funds offered in the plan’s lineup. Defendants moved for summary judgment on the majority of plaintiffs’ claims on the grounds that plaintiffs could not prove loss and because plaintiffs failed to come forth with evidence to prove that lower cost share classes were available for many of the challenged funds in the plan.

The district court granted defendants’ motions, resulting in full summary judgment for the investment manager and partial summary judgment for the other defendants. First, the court found that plaintiffs failed to prove a loss resulting from the replacement of Vanguard funds with the manager’s CITs because the evidence showed that the decision in fact benefited plan participants; the CITs outperformed plaintiffs’ comparator funds during the class period. In doing so, the court rejected plaintiffs’ “arbitrary” attempt to cut off losses at a more favorable date prior to the end of the class period. Second, the district court granted partial summary judgment on plaintiffs’ claims regarding lower-cost share classes because plaintiffs had failed to proffer any evidence that lower-cost share classes were in fact available for all but three of the plan’s funds (which were not at-issue in the summary judgment motions).  

The case is Turner v. Schneider Electric Holdings, Inc., No. 20-11006, in the District of Massachusetts, and is available here.  On February 1, 2023, the parties reported that they had reached an agreement to settle the claims not dismissed by the court. 

Key Takeaway: In the first of nearly a dozen lawsuits challenging 401(k) plans’ use of BlackRock TDFs, the plan sponsor’s and investment manager’s motions to dismiss were granted, defeating claims of alleged imprudence based on purported underperformance compared to a handful of other TDFs.

On January 18, 2023, the United States District Court for the Northern District of Texas dismissed an ERISA lawsuit against Fluor Corporation and Mercer Investments, LLC (Mercer). The lawsuit was the first of eleven suits filed by plaintiffs’ firm Miller Shah LLP last year challenging the inclusion of BlackRock index Target Date Funds in 401(k) plans. The complaint alleged that Fluor Corporation breached its duty of prudence by maintaining BlackRock TDFs and three other investment options in the plan and failing to monitor Mercer, the plan’s Section 3(38) investment manager. Similarly, the complaint alleged that Mercer breached its fiduciary duty of prudence by failing to remove the challenged investments once it became an investment manager for the plan. Plaintiffs also claimed Mercer breached its duty of loyalty and retained the BlackRock TDFs in the plan due to Mercer’s alleged business relationship with BlackRock. Mercer and Fluor filed motions to dismiss on June 23, 2022.  

The district court granted Mercer’s and Fluor’s motions to dismiss in full. The court held that process, not performance results, dictates the prudence inquiry, and that plaintiffs had failed to state a claim because they had not alleged any deficiencies with respect to Fluor’s or Mercer’s processes. The court further held that to create an inference of imprudence, the complaint must allege meaningful benchmarks for comparison. It rejected plaintiffs’ conclusory labeling of funds as “comparable” or “peer” as insufficient to establish that those alternative investments were meaningful benchmarks against which to compare the performance of the BlackRock TDFs, especially where plaintiffs had not alleged that the funds had similar investment strategies. As to the duty of loyalty claim, the court held that simply alleging a business relationship between Mercer and BlackRock was insufficient and that plaintiffs instead must plead specific facts showing actual disloyal conduct, and not rely only on what was alleged to claim imprudence. The court’s order allowed leave to amend, but plaintiffs opted to voluntary dismiss their claims with prejudice on February 15, 2023. 

The case is Locascio v. Fluor Corp., No. 22-00154, in the Northern District of Texas, and is available here. Goodwin represented Mercer in Locascio. Following this dismissal, two other cases brought by Miller Shah and challenging the inclusion of BlackRock TDFs have been dismissed with prejudice. See Tullgren v. Booz Allen Hamilton, No. 22-856 (E.D. Va. Mar. 1, 2023); Hall v. Capital One Fin., No. 22-857 (E.D. Va. Mar. 1, 2023). And in another case, the defendant’s motion to dismiss was granted and an amended complaint was filed. See Beldock v. Microsoft Corp., No. 22-1082 (W.D. Wash. Feb. 7, 2023). 

Key Takeaway: In two recent cases, district courts granted motions to dismiss due to plaintiffs’ failure to adequately allege that recordkeeping fees charged to allegedly comparable plans were for similar recordkeeping services as those provided to the at-issue plans.   

In January and February, two courts granted motions to dismiss on similar grounds in cases alleging excessive recordkeeping fees. First, on January 13, 2023, the US District Court for the Southern District of New York granted Deloitte’s motion to dismiss a putative class action complaint filed by participants in Deloitte’s 401(k) plan. That complaint alleged that the fiduciaries of the Deloitte 401(k) plan violated ERISA’s duty of prudence by causing the plan to pay (i) higher fees for recordkeeping services than comparable plans and (ii) excessive investment management fees for six funds offered by the plan. Then, on February 3, 2023, the US Court for the Southern District of Indiana court granted Eli Lilly’s motion to dismiss, with prejudice, an amended complaint alleging that the fiduciaries of the Eli Lilly 401(k) plan had acted imprudently by causing that plan to pay excessive recordkeeping fees. 

Both courts granted the motions to dismiss due to plaintiffs’ failure to adequately plead that the recordkeeping fees at-issue were in fact excessive compared to those charged to similar plans receiving similar services. The Deloitte court held an allegation that “[n]early all recordkeepers in the marketplace offer the same range of services” failed to provide sufficient details to adequately allege that the services offered to the at-issue plan and alleged comparable plans were in fact comparable. Similarly, the Eli Lilly court, located in the Seventh Circuit, held that such an allegation did not “satisfy the directive” provided in the Seventh Circuit Court of Appeal’s decision in Albert v. Oshkosh Corp. to set forth allegations showing that recordkeeping fees were “excessive relative to the services rendered.” Goodwin’s discussion of the Albert decision is located here. Moreover, the Deloitte court rejected claims regarding allegedly excessive investment management fees, and the Eli Lilly court rejected claims premised on a failure to solicit recordkeeping bids. 

The decisions are Singh v. Deloitte, No. 21-8458, in the Southern District of New York, available here, and Probst v. Eli Lilly and Company, No. 22-01106, in the Southern District of Indiana, available here.

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