Another of the suits challenging plan fiduciaries’ retention of the BlackRock LifePath target-date funds has been dismissed—but with an opportunity to remedy its shortcomings.
This one had been filed against Microsoft back in August, alleging, as the other dozen or so[i] such suits, that the plan fiduciaries “…employed a fundamentally irrational decision‐making process (i.e., inconsistent with their duty of prudence) contrary to basic economics and established investment theory.” The plaintiffs in this case—as in the others[ii]—are represented by Miller Shah LLP (along with a series of local law firms, depending on the jurisdiction).
After a brief recitation of the background of the case (Beldock et al. v. Microsoft Corporation et al.), U.S. District Judge James L. Robart commented that the plaintiffs had provided “nine pages of tables showing how the three- and five-year annualized returns for the BlackRock TDFs ranked against the Comparator TDFs at the end of each quarter since the beginning of the class period in August 2016.” He further noted that “for many of the quarters, the BlackRock TDFs ranked last or second-to-last among the five TDF suites that Plaintiffs compare in their complaint”—but that by 2021 “the BlackRock TDFs’ performance began to improve, and by 2022, the later vintages were among the best-performing of the TDF suites.” Moreover, he commented that “in addition, the BlackRock Retirement TDF has “regularly generated better trailing returns than the two Comparator TDFs that also offer a Retirement vintage.”
Now—and “as Defendants point out, there are some key differences between the BlackRock TDFs and the Comparator TDFs,”[iii] notably that the BlackRock series employs a “to” retirement date glidepath, in contrast to the “through” approach that the comparator funds do, and that “the BlackRock TDFs and two of the Comparator TDFs invest only in passively managed funds while the remaining two invest in actively managed funds.” Judge Robart also noted that the TDFs “allocate their assets differently among bonds and equities; and the TDFs invest in different categories of bonds and equities”—oh, and that while the BlackRock TDFs have a “Gold” analyst rating from Morningstar,[iv] only two of the four Comparator TDFs have that “Gold” rating.
Judge Robart then outlined the standard of review with a motion to dismiss the suit (without going to trial)—basically that the court must construe the complaint in the light most favorable to the nonmoving party (the plaintiffs in this case), and must ascertain whether the complaint contains “sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” As for what constitutes “facial plausibility,” he cited precedents that outlined that occurs “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged”—further that those factual allegations “must be enough to raise a right to relief above the speculative level.”
But also under consideration—do the plaintiffs have standing—the right to bring suit because they were impacted by the activities challenged—to bring suit. Judge Robart commented that the defendants argue that “(1) Mr. Beldock lacks standing to act as a plaintiff in this case because he did not suffer an injury cognizable under Article III,[v] and (2) none of the three Plaintiffs has standing to pursue prospective injunctive relief on behalf of the Plan and the proposed class because any such relief would not benefit them[vi]”—both of with which Judge Robart concurred.
Turning to claims that the defendants’ breached their fiduciary duties under ERISA, Judge Robart noted that “Plaintiffs conceded at oral argument, however, that they do not allege that Defendants failed to act in accordance with the documents governing the Plan”—and thus granted the defendants’ motion to dismiss Plaintiffs’ claim for breach of fiduciary duty under ERISA Section 404(a)(1)(D).
As for the alleged breaches of the duties of prudence and loyalty—and despite arguments from the fiduciary defendants that the so-called comparator funds are too different to be used as a comparison (to which the plaintiffs rebutted that they were the most likely alternatives to the BlackRock suite)—Judge Robart noted that he didn’t need to consider whether or not they were a meaningful benchmark “because even if they are, Plaintiffs have not plausibly alleged that Defendants breached their fiduciary duty of prudence by selecting the BlackRock TDFs, failing to monitor them, and retaining them in the Plan.”
He continued, “Plaintiffs ask the court to infer, based on the quarterly charts of three- and five-year annualized returns they present in their complaint, that Defendants must have breached their fiduciary duty of prudence when they did not divest from the BlackRock TDFs. They allege no facts, however, that would ‘tend to exclude the possibility’ that Defendants had reasons to retain the BlackRock TDFs that were consistent with their fiduciary duties.” And that, “Absent such allegations, Plaintiffs fail to raise their claim above a speculative level.”
Ultimately, therefore, he explained that “because Plaintiffs have failed to plausibly allege that Defendants breached their fiduciary duty of prudence, the court GRANTS Defendants’ motion to dismiss that claim.” In that vein, he also dismissed claims regarding breach of the duty of loyalty.
All that said, Judge Robart granted the plaintiffs here an opportunity to “amend their complaint to address the deficiencies identified in this order”—but only gave them till Feb. 17, 2023 to do so. Should they fail to do so, he noted that the court would dismiss the case with prejudice.
What This Means
Well, while it’s not over until it’s “over,” this is the latest of these suits to be dismissed—and thus far a failure to state a plausible claim seems to be the primary factor. That said, the lack of standing by these particular plaintiffs, while not unprecedented, is a new twist in this particular series.
We’ll see if the plaintiffs do, in fact, amend their suit.
[i] The suits have been filed on behalf of participants in in the 401(k) plans of Citigroup Inc., Cisco Systems Inc., Genworth, Stanley Black & Decker Inc., Microsoft, Marsh & McLennan Cos., Advance Publications, and Wintrust Financial Corp.
[ii] The American Retirement Association has joined with the American Benefits Council and the ERISA Industry Committee in filing an amicus brief in support of the plan defendants in several of these cases, including this one.
[iii] The participant-plaintiffs here—again, as in the other suits—claimed that the BlackRock TDFs significantly underperformed four of the five comparative target-date funds (Vanguard, T. Rowe Price, American Funds, Fidelity) that are the largest by market share. The suit claims that, “When evaluated against the Comparator TDFs, both individually and as a group, the returns of the BlackRock TDFs, at all stages along the glide path from aggressive to conservative, paled in comparison to those of the readily available alternatives. Accordingly, the analytical frameworks employed by prudent fiduciaries could not have supported a determination that the expected returns of the BlackRock TDFs would justify their retention in the Plan.”
[iv] Judge Robart commented in a footnote that the Morningstar Report could be considered by the court here “because Plaintiffs rely on it in their complaint.”
[v] According to Judge Robart, Beldock “was only ever invested in the BlackRock Retirement TDF, which, according to Plaintiffs, “regularly generated better trailing returns than the two Comparator TDFs that also offer a Retirement vintage.” Indeed, the complaint is devoid of any allegation that Mr. Beldock suffered any concrete injury.”
[vi] All were FORMER employees and FORMER participants—and, as Judge Robart noted, “none of the three Plaintiffs alleges that he is likely to become reemployed by Microsoft and to participate again in the Plan.”