ERISA Litigation Update

Key Takeaway: The Second Circuit affirmed summary judgment on fiduciary breach and prohibited transaction claims made against Goldman Sachs concerning certain proprietary investments offered in its 401(k) plan.

On February 14, 2024, the Second Circuit Court of Appeals issued a nonprecedential summary order affirming summary judgment for Goldman Sachs on all claims brought by participants in Goldman Sachs’s 401(k) plan. The plaintiffs alleged that the plan’s fiduciaries breached their duties of loyalty and prudence by retaining certain funds in the plan for the benefit of Goldman Sachs, purportedly engaging in a less rigorous selection process for selecting funds managed by Goldman Sachs Asset Management and failing to establish a formal criteria for selecting and monitoring plan investments. The plaintiffs further alleged that the defendants engaged in prohibited transactions by retaining proprietary funds without securing rebates from Goldman Sachs. Following the completion of discovery, the defendants moved for summary judgment on the plaintiffs’ claims, and the US District Court for the Southern District of New York granted summary judgment to the defendants. The plaintiffs then appealed.

The Second Circuit first affirmed the District Court’s grant of summary judgment on the plaintiffs’ fiduciary-breach claims. With respect to the loyalty claim, the Second Circuit agreed that the plaintiffs failed to introduce evidence that the defendants retained the challenged proprietary funds for the purpose of advancing their own interests. In so holding, the Second Circuit highlighted the facts that the committee members responsible for overseeing the plan were required to participate in fiduciary training sessions; the committee retained an independent investment consultant and committee members testified that they applied the same process and standards to all plan investment options. The Second Circuit also noted that the committee ultimately removed all of the challenged proprietary funds in consultation with its investment adviser following periods of underperformance. With respect to the prudence claim, the Second Circuit noted that the plaintiffs did not dispute the committee members’ experience or qualifications; rather, their claim was that because the committee did not adopt a formal investment policy statement, the committee was not able to properly scrutinize the plan’s investment options. But, as the Second Circuit held, an investment policy statement is not required for a fiduciary committee to act prudently, and because the undisputed evidence showed that the committee had a deliberative and rigorous process for selecting and monitoring plan investments, the Second Circuit affirmed summary judgment for the defendants.

The Second Circuit also affirmed the district court’s grant of summary judgment on plaintiffs’ prohibited transaction claim. The Second Circuit agreed that the shareholder services agreement between Goldman Sachs and the plan’s recordkeeper, which applied equally to the plan and other plans kept by the recordkeeper offering Goldman Sachs funds, provided that no fee rebates were available for the challenged proprietary funds. Thus, the plan was ineligible for fee rebates and was not treated any differently than other retirement plans using the same recordkeeper and offering the same investment options.

The case is Falberg v. Goldman Sachs, No. 22-2689, in the Second Circuit Court of Appeals. The decision is available here.

Key Takeaway: A district court found that a plan sponsor and its committee acted prudently when selecting and monitoring a Section 3(38) investment manager, and that the investment manager acted prudently and loyally when selecting and monitoring target-date funds it managed.

On February 23, 2024, after a nine-day bench trial, the US District Court for the Central District of California entered a verdict in favor of Wood Group Management Services, the committee responsible for the investments in Wood’s 401(k) plan, and flexPATH Strategies, LLC. The case principally challenged the Wood defendants’ decision to hire flexPATH as the Section 3(38) investment manager responsible for selecting and monitoring the Wood plan’s default investment and flexPATH’s subsequent decision to select target-date funds it managed as the plan’s default. The court had narrowed the case at summary judgment, including by dismissing all claims against NFP Retirement, Inc. (the plan’s investment consultant and an affiliate of flexPATH).

The court entered judgment for the Wood defendants and flexPATH on all remaining claims after trial. With respect to the Wood defendants, the court found that they had met their duty of prudence when hiring flexPATH as the plan’s investment manager, including because they had received information about flexPATH from NFP’s request for proposal response when hiring NFP as the plan’s investment consultant. The court rejected the plaintiffs’ argument that the Wood defendants were required to conduct another request for proposal when hiring flexPATH. The court also found that the Wood defendants had satisfied their duty to monitor flexPATH because the committee had met regularly to review the plan’s investments. With respect to flexPATH, the court found that flexPATH acted loyally in selecting its target-date funds for the Wood plan because the flexPATH employees believed them to be the best options for the Wood plan and flexPATH did not receive any additional compensation from the plan’s investments in the funds. The court also found that flexPATH acted prudently because it had followed a diligent process when designing the target-date funds and then when monitoring the funds’ underlying manager.

Key Takeaway: After another trial challenging the selection and monitoring of the same target-date funds at issue in the Lauderdale v. NFP Retirement case (reported above), but in connection with a different plan, the defendants prevailed where the plaintiffs had failed to demonstrate loss.

On March 20, 2024, after a six-day trial, the US District Court for the Central District of California entered judgment for Molina Healthcare, Inc., the committee responsible for the investments in the Molina Healthcare 401(k) plan, and flexPATH Strategies LLC. As in the NFP Retirement case, the plaintiffs alleged that the defendants breached their fiduciary duties of prudence and loyalty by selecting and maintaining flexPATH target date funds as the default investment in the plan. The plaintiffs had also alleged that the defendants engaged in a prohibited transaction by using the flexPATH target-date funds in the plan.

The court ruled for the defendants on all counts, finding that the plaintiffs had failed to prove any loss based on the use of the challenged flexPATH funds. The district court reasoned that the plaintiffs’ damages expert had not used reliable comparators in his damages calculations and had not selected the comparators based solely on information that would have been available to the defendants at the time of the purported breaches. Specifically, the court rejected the expert’s methodology because the expert appeared “to have been influenced in his selection of comparators by his knowledge of how the funds actually performed during the [c]lass [p]eriod, leading to his choice of the best performers as comparators.” By contrast, the court credited defendants’ expert evidence showing that the flexPATH target-date funds performed strongly against both other target date funds and multiple indices during the class period. Because the plaintiffs failed to meet their burden of showing a loss, the court did not analyze the defendants’ fiduciary processes to determine whether the defendants breached any fiduciary duties or engaged in a prohibited transaction.

The case is Mills v. Molina Healthcare, Inc., No. 22-1813, in the Central District of California. The decision is available here.

Key Takeaway: A district court dismissed an ERISA lawsuit for lack of standing where the plaintiff did not invest in any of the challenged funds and paid less in recordkeeping fees than what he alleged would be a reasonable annual per-participant fee.

On January 26, 2024, the US District Court for the Central District of California dismissed an ERISA lawsuit against CoreLogic, Inc. and the plan administrator for CoreLogic’s 401(k) plan. The complaint alleged that the defendants breached their fiduciary duty of prudence by maintaining five underperforming funds in the CoreLogic plan and allowing the plan to overpay for recordkeeping services by offering costly investment options that paid revenue-sharing. The defendants moved to dismiss both claims for failure to state a claim and on the basis that the plaintiff lacked standing to assert his claims on behalf of the putative class.

The district court granted the defendants’ motion to dismiss for lack of standing on the basis that the plaintiff had not suffered any injury from the conduct he alleged. Relying on the plaintiff’s plan account statements, the court found that the plaintiff had not invested in any of the five challenged funds and therefore could not have been injured by their inclusion in the plan. Similarly, the court found that the plaintiff paid far less than $40 a year in recordkeeping fees, which was the amount he pled was a reasonable per-participant fee. Thus, the court reasoned, the plaintiff had not been injured by the revenue-sharing arrangement he challenged.

The case is Sabana v. CoreLogic, Inc., No. 23-00965, in the Central District of California. The decision is available here.

Key Takeaway: A district court judge dismissed three ERISA cases in January 2024 but allowed two others to proceed past a motion to dismiss.

On January 19 and 22, 2024, Eastern District of Wisconsin Judge William C. Griesbach decided five substantively similar motions to dismiss in ERISA cases. In all of the cases — which are part of a spate of similar cases filed in 2020, many of which were filed in the Eastern District of Wisconsin — the plaintiffs alleged that plan participants paid excessive recordkeeping fees. In each case, the court found that allegations that the at-issue plan paid more for recordkeeping services than did comparator plans could be sufficient to state a claim when accompanied by allegations that the at-issue plan and comparator plans were similar and that the recordkeeping services they received were also similar. However, in the cases that the court dismissed — Cotter v. Matthews Int’l Corp., Guyes v. Nestle USA Inc., and Laabs v. Faith Tech., Inc. — the court held that the plaintiffs failed to allege adequate comparator plans because the comparator plans used varied significantly in size from one another and did not employ a consistent methodology for calculating the plan’s recordkeeping fees. In Nohara v. Prevea, which survived a motion to dismiss, the plaintiffs alleged that “there are no material differences between the services offered” by the recordkeepers for the comparator plans, which the court found sufficient. In Glick v. Thedacare, which also survived a motion to dismiss, the court found that the alleged difference in fees between the comparators’ and the plan’s recordkeeping fees was sufficient to state a claim (though the court noted that this was a close call).

Some cases also challenged investment management fees (and in the Faith case, the plaintiffs alleged that an automated investment selection platform chosen for the plan was excessively expensive compared to target date funds, which they claimed were similar in nature to the service). The court dismissed the plaintiffs’ claims that were based on comparisons of active plan funds to passive comparator funds as invalid “apples to oranges” comparisons. The court likewise dismissed the plaintiffs’ claims based on comparisons of active plan funds to other active funds, finding that the plaintiffs did not show that the comparator funds were sufficiently similar to plan funds or that they consistently outperformed plan funds.

The cases were all filed in the Eastern District of Wisconsin and are as follows: Cotter v. Matthews Int’l Corp., No. 20-1054 (R&R and Order); Guyes v. Nestle USA, Inc., No. 20-1560 (R&R and Order); Laabs v. Faith Tech., Inc., No. 20-1534 (R&R and Order); Nohara v. Prevea Clinic, Inc., No. 20-1079 (R&R and Order); and Glick v. Thedacare, Inc., No. 20-1236 (R&R and Order). Judge Griesbach decided many of the issues in the cases by accepting and referring to the reasoning in the magistrate judge’s report and recommendations. The reports and recommendations and orders can be viewed by clicking the relevant links above.

Speaking Engagement: ERISA Fiduciary Duty Litigation: Recent Developments and Court Rulings, Strategies for Counsel (April 9)

Christina Hennecken, Goodwin partner, will speak on this Strafford webinar about recent court cases and their impact on 401(k) plan ERISA litigation, including developments since the Supreme Court’s decision in Hughes v. Northwestern Univ.

Speaking Engagement: 401(k) Retirement Benefit Plan Litigation: Recent Cases and Issues for Plan Sponsors and Fiduciaries (March 20)