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Advisor Now Embroiled in Excessive Fee Suit

ERISA

An investment advisor – enjoined in an excessive fee suit after discovery revealed their role – will have to defend its actions in court.

The advisor in this case is AON Hewitt Investment Consulting, Inc., and the excessive fee suit involves Safeway and its recordkeeper (now Empower, by way of Great-West, by way of J.P. Morgan Retirement Plan Services) who has been sued by plan participant Dennis M. Lorenz for selecting target-date funds (JPM Smartretire Passiveblend Funds) affiliated with its recordkeeper, challenging the use of funds when there were other alternatives that “charged substantially lower fees,” and also taking issue with the plan’s use of revenue-sharing.

SOL ‘Stance’

In considering the motion to dismiss the plaintiff’s claim, Judge Jon S. Tigar of the U.S. District Court for the Northern District of California noted (in Terraza v. Safeway Inc., 2019 BL 135915, N.D. Cal., No. 3:16-cv-03994-JST, 4/9/19) that Aon argued that “ERISA's six-year statute of repose bars all claims against Aon based on its conduct before March 31, 2011,” since the first complaint that named Aon as a defendant and included allegations of misconduct against it, was filed on March 31, 2017, and ultimately agreed with that premise – meaning that, as a consequence, Aon could not be liable for its “2010 actions in allegedly failing to consider conflicts of interest in Safeway’s 2010 selection of the JP Morgan SmartRetirement PassiveBlend target date funds, or in recommending the selection of those funds without adequate historical performance information,” nor for “its role in selecting the Wells Fargo Advantage Strategic Large Cap Growth Fund in January 2011.”

However, citing Tibble v. Edison Int’l., Judge Tigar agreed with the plaintiff’s assertion that “by continuing to offer underperforming investment options with excessive fees until at least 2015, just one year before Terraza filed suit,” those claims remained timely even though three of the investment options were initially added to the plan before 2010. 

However, Judge Tigar said that while Aon might potentially be liable for its actions in allowing Safeway to maintain the JPM TDFs in the plan after they were initially selected, “but the only criticism Plaintiff offers on that score directed at Aon is that the JPM TDFs underperformed the Dow Jones Target Date Benchmark Index during an unspecified number of unspecified quarters,” and that “these facts are insufficient to sustain a claim against Aon, and all of Aon's other actions that Plaintiff challenges pertain to the selection process,” granting Aon’s motion for summary judgement as to the JPM TDF funds.

Trial ‘Able’

That said, Judge Tigar found that there were, in fact, “triable issues of fact” with regard to the following issues.

  • The remaining funds, noting that there was evidence in support of the allegation that “Aon's persistent and relatively consistent ‘advice’ was to retain the existing investments in the Plan” and Aon “recommended that the other Defendants do little or nothing to improve the investments offered by the Plan and the expenses paid by the Plan and its participants," even when those investments were significantly underperforming.
  • Whether Aon met its duty of prudence to monitor the performance of the Interest Income Fund and determine whether to recommend its replacement as a plan asset, in that Tigar noted that it underperformed both a stable value fund managed by Vanguard and the Hueler Index, and also underperformed the Rolling 5-Year Constant Maturity Treasury Index, which Aon used as a benchmark in its own monitoring materials, for all but one of the 16 quarters beginning with Q1 2010 (also as to whether Aon should have placed this fund on a “watch list” as required by the Investment Policy Statement).
  • Whether Aon met its duty of prudence to monitor the performance of the SSgA S&P 500 Index Fund and determine whether to recommend its replacement as a plan asset. (It underperformed a comparable Vanguard index fund for more than six consecutive quarters, on more than one occasion, during the relevant period.)
  • Whether Aon met its duty of prudence to monitor the performance of the Wells Fargo Advantage Strategic Large Cap Growth Fund and determine whether to recommend its replacement as a plan asset. (The fund underperformed the Russell 1000 Growth Index during the relevant period.)
  • Whether Aon met its duty of prudence to monitor the performance of the RS Partners Fund and determine whether to recommend its replacement as a plan asset. (The plaintiff's expert testified that an investment option offered by the plan should have been removed if it was not within the top quartile of its peer group for six consecutive quarters.)
  • Whether Aon met its duty of prudence to monitor the performance of the Chesapeake Core Growth Fund. (The plaintiff's expert noted that “the [Chesapeake] fund ranked in the bottom 96% versus peer funds on a 3-year basis and in the bottom 97% versus peer funds on a 5-year basis.”)

Judge Tigar ultimately granted Aon’s motion for summary judgment with respect to actions taken before March 31, 2011, including its role in selecting the Wells Fargo Advantage Strategic Large Cap Growth Fund in January 2011, and with respect to allegations of any kind concerning the JP Morgan SmartRetirement PassiveBlend target date funds. However, “in all other respects,” the motion was denied.

The case is scheduled to go to trial May 7.

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