A suit that alleged a breach of fiduciary duty in the selection of proprietary funds that were said to be underperforming has been dismissed for failure to state a claim.
The plan in question is the $1.5 billion, 5,500 participant AllianceBernstein 401(k) plan, and participant-plaintiffs Donald S. Bloom, David C. Greenfield, Damian L. Smikle and Justin A. Sternhell who allege that the fiduciary defendants “selected for the plan and repeatedly failed to remove or replace imprudent proprietary investments (‘AllianceBernstein Options’) managed and offered by Defendant AllianceBernstein L.P. and/or its subsidiaries or affiliates.”
They went on to allege (Bloom v. AllianceBernstein LP, S.D.N.Y., No. 1:22-cv-10576, complaint 12/14/22) in a suit filed in the waning days of 2022 that “these funds were not selected and retained as the result of an impartial or prudent process but were instead selected and retained because Defendants benefited financially from their inclusion in the plan to the detriment of the Participants,” and that “by choosing and then retaining these proprietary investment funds, to the exclusion of alternative investments available in the 401(k)-plan marketplace, Defendants enriched themselves at the expense of their own employees.” Or perhaps more succinctly, “in effect, Participants (and their hard-earned retirement investments) were used as a captive investor base to effectuate AllianceBernstein’s self-serving business strategies that ran counter to the Participants’ interests.”
Before turning to the arguments, U.S. District Judge Lewis J. Liman acknowledged (Bloom et al. v. AllianceBernstein LP et al., case number 1:22-cv-10576, in the U.S. District Court for the Southern District of New York) the legal standards to survive a motion to dismiss for failure to state a claim—that the suit “must include ‘sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face,’” must “…offer more than ‘labels and conclusions,’ ‘a formulaic recitation of the elements of a cause of action,’ or ‘naked assertion[s]’ devoid of ‘further factual enhancement’”—but that the ultimate question is whether “[a] claim has facial plausibility, [i.e.,] the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” He also noted—as courts routinely do—that “the plausibility requirement ‘calls for enough fact to raise a reasonable expectation that discovery will reveal evidence [supporting the claim].’”
‘Under’ Standing
Judge Liman spent a fair amount of space in the 36-page opinion outlining the arguments made by both parties. That said, and with regard to some of the more significant allegations, he commented “Plaintiffs do not allege specific facts that directly demonstrate Count I Defendants acted for a purpose other than providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the Plan. Nor do Plaintiffs assert that it can be inferred that Count I Defendants selected and monitored Plan investments with the purpose of benefiting themselves or someone else because the proprietary funds charged Plan participants fees.”
In fact, the plaintiffs here took pains to say that their beef wasn’t with the fees—but with the underperformance of the proprietary funds in question.[i] “Here, however, Plaintiffs explicitly concede that they “exclusively seek relief for investment underperformance and do not seek relief relating to allegedly excessive fees,” Judge Liman wrote. The plaintiffs went on to connect the decision to keep those underperforming funds in the plan with a desire by AllianceBernstein to keep its own funds in the plan—even while other holders were pulling their funds. However, Judge Liman wrote that “Accepting Plaintiffs’ theory would require the Court to create an inference of disloyalty whenever an employee retirement plan offered proprietary investment options, an approach that has been rejected on numerous occasions.”
As for those allegations of underperformance, Judge Liman did note that, as of the end of 2019, roughly the midpoint of the period relevant to this action, four of the seven LIS component portfolios were underperforming the benchmarks designated for them by AllianceBernstein; those components were not, however, removed from the plan. As of March 2022, three of seven LIS components have underperformed their stated benchmark since their inception.
That said, Judge Liman stated that “Virtually any investment vehicle can be said to underperform its benchmark depending on the time frame that is chosen. ERISA protects participants against imprudence; it does not, however, accord participants an insurance policy against market losses.” He then cited “See Patterson, 2019 WL 4934834 (‘ERISA does not require clairvoyance on the part of plan fiduciaries, nor does it countenance opportunistic Monday-morning quarter-backing on the part of lawyers and plan participants who, with the benefit of hindsight, have zeroed in on the underperformance of certain investment options.’); cf. Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 345 (2005).” Accordingly, in order for underperformance to give rise to a claim for imprudence, “the underperformance must be substantial.”
Process Parsed?
Unlike other decisions rendered in similar cases, this one apparently required no assertion of a prudent process. “Plaintiffs do not include in the Amended Complaint any direct evidence regarding the investment evaluation process employed by Defendants,” Judge Liman wrote. Instead, Plaintiffs aver that the Court can plausibly infer, based upon the underperformance of certain Plan investment options as compared to alternative, better-performing investments, that the process for selecting and monitoring the menu of investment options available in the Plan was flawed, or that adequate investigation would have revealed to a reasonable fiduciary that the investment decisions were improvident.” This Judge Liman was not prepared to do.
He further noted that “the alleged underperformance is not of sufficient duration or magnitude to create an inference of misconduct. Comparable levels of underperformance have repeatedly been deemed insufficient to give rise to a claim for imprudence by courts in this Circuit.”
Having thus found that the plaintiffs failed to plausibly allege a breach of fiduciary duty, Judge Liman noted that the other claims made (failure to monitor, claims for co-fiduciary liability, prohibited transaction) must also be dismissed, though he gave the plaintiffs 30 days to amend their suit.
What This Means
Generally speaking, courts have been reluctant to second-guess the prudence of retaining investments with 20/20 hindsight, and this court/ruling is no exception. Since there were no specific allegations of imprudence in process, but rather mere inferences, the ruling unfortunately doesn’t outline whether or not there was such a process in place. Here again, the application of a “plausible” standard required more than mere innuendos/assertions about the potential conflicts of interest in a financial services firm relying on its own funds in its own plan.
On the other hand, if a firm that manages money for others was reluctant to include its own offerings in its own plan…well, that might send a bad signal, mightn’t it?
[i] AllianceBernstein waived fees and expenses in regard to the proprietary funds, according to the suit. The only other fees that were allegedly charged because AllianceBernstein funds were included in the plan's investment lineup were those associated with an insurance feature.
