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Advisor Dodges Class Action Claim in Fiduciary Breach Suit

Litigation

A federal court has weighed in on a new lawsuit alleging mismanagement of a 401(k) plan – and the role of the plan advisor regarding target-date fund recommendations.

In another case where the plaintiffs are represented by Schlichter Bogard & Denton LLP, Judge William J. Martinez in the U.S. District Court for the District of Colorado (Ramos v. Banner Health, D. Colo., No. 1:15-cv-02556-WJM-NRN, 4/23/19) recently ruled on a motion for summary judgment (basically a judgment without an actual trial) in a suit brought by plaintiff Lorraine Ramos and six others against “Banner Health and certain current and former employees,” as well as advisor Jeffrey Slocum & Associates, Inc., alleging that defendants breached their fiduciary duties under ERISA.

The plaintiffs here had earlier moved for class certification, which was granted as to the Banner plan fiduciaries – but denied with regard to the plan’s investment advisor, Slocum.

Case Background

Until August 2014, the Banner 401(k) Plan offered three “levels” of funds to participants: (1) “Level 1: Ready-mixed Investment Options” or target-date funds that allowed a participant to invest in a single fund based on a desired retirement date; (2) “Level 2: Core Investment Options” described as “8 core investment options to help you create and manage a diversified portfolio”; and (3) “Level 3: Expanded Investment Options” – basically a mutual fund window, intended as “[a]dditional investment opportunities for more sophisticated investors.” The 33,000 participant plan offered more than 400 investment options through at least 2014 (not an issue in this case, but in its suit against the Banner plan defendants, plaintiffs claimed that defined contribution plans “usually provide only 14 investment options, excluding target date funds” – a configuration that the plaintiffs said was an “excessive number of options” that “confused Plan participants, who in turn make more conservative, less informed choices.”

To assist the RPAC in carrying out its investment responsibilities, Banner hired Slocum to serve as an independent investment consultant, and Slocum served as an independent investment consultant until Oct. 24, 2016, when it was purchased by Pavilion Financial Corporation. Slocum was hired under agreements that state that the investment-related responsibilities of the RPAC and plan service providers, including Slocum, would be defined in the plan’s “Statement of Investment Objectives and Policies,” and also outlined other contractual obligations of Slocum, including “reviewing investment performance of current investment options in (among other things) the Plan, helping to evaluate and select additional or replacement investment managers, providing written investment performance evaluations on a quarterly basis, and giving asset allocation and asset liability advice.”

The plaintiffs in this case claimed that both the plan committee and the advisor (Slocum) breached their fiduciary duty by continuing to offer the Fidelity Freedom Funds, and a particular Level 2 fund, the Fidelity Balanced Fund. Specifically, the plaintiff’s expert contended that “the performance gap [between the Freedom Funds and other alternatives] was so glaring by the end of second quarter 2011 that a prudent fiduciary could no longer ignore the need to replace the Fidelity Freedom Funds,” and that the failure to timely remove the Freedom Funds resulted in $40.7 million in losses to the plan.

Summary ‘Judgments’

In considering the motion for summary judgment, Judge Martinez noted that the court must review the evidence and reasonable inferences “in the light most favorable to the nonmoving party,” and “must resolve factual ambiguities against the moving party.” Moreover, that to “…survive summary judgment, a nonmoving party must set forth specific facts showing that there is a genuine issue for trial as to those dispositive matters for which he carries the burden of proof.”

Noting that plaintiffs “contend that Slocum was a fiduciary and breached its duty of loyalty” by (1) providing imprudent investment advice, and (2) failing to monitor and advise Banner defendants of excessive recordkeeping and administrative fees, Judge Martinez stated that those plaintiffs therefore bore “the burden of proving that (1) Slocum was a fiduciary with respect to the challenged conduct; (2) Slocum breached its fiduciary duties; and (3) those breaches caused Plaintiffs to incur losses.”

Fact Findings

With regard to the Balanced Fund, in that the plaintiffs admit that “the Plan did not suffer losses as a result of the imprudent retention of the Balanced Fund” and “…therefore cannot show a breach of fiduciary duty resulting in a loss…” Judge Martinez said there was no need to discuss the facts related to that option.

With regard to the target-date funds, as it turns out, Judge Martinez noted that Slocum had recommended removing (both the Fidelity Balanced Fund and) the Fidelity Freedom Funds as early as 2011, and recommended reviewing alternatives as early as 2009. However, in November 2013, Slocum “did not recommend an immediate change,” but in August 2014 Slocum recommended that the RPAC “consider other target date fund options to ensure that the Freedom Funds remain the most appropriate option for Banner,” and later that year recommended that the RPAC hear presentations from each target-date fund provider and gather additional meeting, eventually (February 2015) setting up meetings with Fidelity, J.P. Morgan, and Vanguard, which resulted in a recommendation from Slocum, and decision by the RPAC to replace the Freedom Funds with the J.P. Morgan target-date funds. 

Judge Martinez noted that Slocum’s Plan Reviews in 2008, 2010, 2012, 2013, 2014, 2015, and 2016 each calculated the total recordkeeping compensation received by Fidelity and identified the sources of that compensation, as well as the fees charged by each of the Level 1 and 2 Funds relative to benchmarks or industry averages, and that it “also compared recordkeeping fees on a per-dollar-invested or per-participant basis, provided comparisons to per-dollar or per-participant fees charged to other Slocum clients, and included input on different practices for the RPAC to consider in evaluating the structure and level of recordkeeping fees paid by the Plan.”

Brokerage Window ‘Break’?

The IPSs explained that the “primary objective of the self-directed brokerage accounts was to allow participants access to investments not currently available through the core investment options in the Plan,” and explicitly disclaimed any fiduciary liability for decisions made by participants within these options to the extent permitted by law.

While Slocum had no responsibility for the self-directed brokerage window (Level 3), his quarterly reports and plan review did include a high-level assessment of the total plan assets invested in that option, as well as the types of asset classes most commonly used. That said, in the 2012 Plan Review, Slocum first “recommend[ed] that Banner consider removing the mutual fund window,” referring to recent Department of Labor statements “specific to self-directed brokerage accounts have indicated that plan sponsors may have an increased fiduciary obligation to monitor investments not included in the core line-up,” – and that, with the addition of certain other options, “the continued use of the mutual fund window [is] relatively unnecessary.” This recommendation was reiterated in August 2013 – and RPAC elected to remove the Level 3 Funds in August 2013, effective August 2014.

With regard to the first point, Martinez stated bluntly that “no fact finder could conclude that Slocum was a fiduciary with respect to the Level 3 Funds because the term ‘Investment Fund’ in the IPSs did not include the Level 3 Funds, and the weight of the evidence overwhelmingly supports a conclusion that Slocum had no duties with respect to the Level 3 Funds under the Contracts,” granting Slocum’s motion for summary judgment on that point.

Target ‘Practices’?

However, he went on to note that the plaintiffs “…have, however, raised sufficient evidence to show a genuine dispute of material fact as to whether the timing and nature of Slocum’s recommendations to replace the Freedom Funds breached Slocum’s fiduciary duty.” Specifically, he noted that while “Slocum presents evidence that it carefully monitored the Freedom Funds beginning in 2009, started recommending that the RPAC consider alternatives in 2013, and finally worked with the RPAC to replace the Freedom Funds in February 2015,” he cited the presentation of expert testimony by the plaintiffs that “a reasonably prudent investment advisor would have recommended replacement significantly earlier (starting in 2011),” and to “…evidence that Slocum seemed to mildly suggest, rather than emphatically advocate, that the RPAC consider alternatives, resulting in the RPAC improperly retaining the Freedom Funds for longer than it should have, and ultimately causing losses to the Plan.” That alongside “differing views of what a prudent process would be for responding to and evaluating the Freedom Funds as of 2011” was, Judge Martinez wrote, “sufficient to create a genuine dispute of material fact that must be resolved at trial.”

Advisor Slocum argued that it recommended removal of the Freedom Funds for years before RPAC actually removed the funds, claimed that it was “hopelessly speculative” for the plaintiffs to suggest that a failure to earlier recommend removal resulted in their losses, and that it was not liable under ERISA’s co-fiduciary liability provision because “the wrongdoing is wholly beyond the control of the co-fiduciary." Judge Martinez, however, was not persuaded – noting that the co-fiduciary liability provision of ERISA, 29 U.S.C. § 1105(a), “would not exempt Slocum from liability if it independently and earlier breached its fiduciary duty by failing to recommend removal of the Freedom Funds,” and that testimony by plaintiff’s expert had indicated that “failure to advise the RPAC to remove the Freedom Funds prior to 2013 resulted in losses to the Plan.” He went on to note that, “at the very least, Slocum may be liable for losses between when it should have recommended removal and when it actually did so,” which he characterized as “a genuine dispute over the amount of losses, if any, caused by Plaintiffs’ alleged breach, which must be resolved by the trier of fact,” denying the motion for summary judgment as it relates to the Freedom Funds.

Role ‘Call’

Regarding Slocum’s role as a fiduciary with regard to the recordkeeping fees, Judge Martinez drew a distinction between the “critical role” that the plaintiffs alleged the firm played in assessing the reasonableness of those fees and actually being a fiduciary on that basis – determining that “on this record, no reasonable finder of fact could conclude that Slocum was a fiduciary with respect to the recordkeeping fees of the Plan.”

Ultimately, Slocum won on most of the motions for summary judgment; winning support from Judge Martinez on the issues raised with regard to the balanced fund, his alleged role as a fiduciary with regard to recordkeeping fees, the issue of actions taken prior to Nov. 9, 2010 (ERISA’s six-year statute of limitations), and perhaps the biggest of all – rejection of their bid for class action status on the claims against Slocum. 

However, summary judgment was rejected on the claim that Slocum’s advice on changing target-date funds came too late (and/or too little).

What This Means

Perhaps the most significant implication of this case is Judge Martinez’ failure to grant the plaintiffs class action status – because they failed to show they’d taken adequate steps to act in a representative capacity or to protect the interests of the plan’s 33,000 other investors. That significantly reduces the potential monetary recovery.

However, advisors may well want to take note of the comments regarding the degree to which the suit took issue with what was viewed as a “mere suggestion,” rather than a forceful recommendation. The decision to let the issue proceed to trial isn’t dispositive, of course – but it’s worth keeping an eye on. 

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