The fiduciary defendants in another of the BlackRock LifePath target-date fund suits have successfully fended off litigation claiming they chased low fees and disregarded poor performance.
The defendants here are the fiduciaries of the Cisco Systems Inc. 401(k) plan (Cisco’s alleged failure of oversight of those fiduciaries). You will likely recall that the suits have been filed on behalf of participants in about a dozen 401(k) plans that had investments in the BlackRock Lifepath target date funds, including Citigroup Inc., Genworth, Capital One, Booz Hamilton Allen, Stanley Black & Decker Inc., Marsh & McLennan Cos., Advance Publications, and Wintrust Financial Corp. Representing the plaintiffs in each of these suits is the law firm of Miller Shah LLP.
Case History
And while these suits have generally argued that the fund choices (including TDFs) were both underperforming and overly expensive, this class of suits focuses solely on the former. Indeed, approximately half of the 47-page filing (in the case of the Cisco Systems suit, Bracalente v. Cisco Sys., Inc., N.D. Cal., No. 5:22-cv-04417, complaint filed 7/29/22) was taken up with charts and graphs making the case versus various competitors. At a high level, the suits allege that “BlackRock TDFs are significantly worse performing than many of the mutual fund alternatives offered by TDF providers and, throughout the Class Period, could not have supported an expectation by prudent fiduciaries that their retention in the Plan was justifiable.”
Thus far the plaintiffs in these suits are 0-4, with dismissals for failure to make plausible arguments—and dismissals with prejudice of amended suits in two of those four.
The Current Case
United States District Court Judge Edward J. Davila noted that Cisco has moved to dismiss the Complaint under Rule 12(b)(6), and that two amicus briefs have also been filed in support of Cisco’s Motion. “Having reviewed the parties’ briefs, the amicus curiae briefs [which the American Retirement Association was a party to], the statements of recent decision, and parties’ arguments at hearing, the Court GRANTS Cisco’s Motion to Dismiss with LEAVE TO AMEND.”
Judge Davila noted from the ruling in Smith v. CommonSpirit Health that “Merely pointing to another investment that has performed better in a five-year snapshot of the lifespan of a fund that is supposed to grow for fifty years does not suffice to plausibly plead an imprudent decision—largely a process-based inquiry—that breaches a fiduciary duty. . .” and then, adding emphasis, he quoted from that ruling, “Any other rule would mean that every actively managed fund with below-average results over the most recent five-year period would create a plausible ERISA violation.” He also referenced the ruling in Davis v. Washington Univ. in St. Louis, quoting “fiduciaries are not required to pick ‘the best performing fund.’”
He then noted “With this backdrop of considerable case law holding that underperformance alone does establish an ERISA imprudence claim, the Court finds that the allegations here likewise fail to create a reasonable inference that Cisco breached its duty of prudence. The Supreme Court has recognized that “the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.”
‘Underperformance-Only’ Theory
He continued, “Plaintiffs’ ‘underperformance-only’ theory, however, would flatten this nuanced prudence evaluation into a one-dimensional comparison that considers only the funds’ three- and five-year performance data. Despite asserting that a ‘simple weighing of the merits and features of all other available TDFs’ would reveal the BlackRock TDFs to be imprudent investments, the Complaint never discusses or revisits what other ‘merits and features’—besides the funds’ performance over a specific period—would support imprudence.” He went on to note that, “In short, Plaintiffs ask this Court to infer that—just because the BlackRock TDFs were underperforming—Cisco’s decision to continue offering those funds fell beyond the ‘range of reasonable judgments a fiduciary may make based on her experience and expertise.’”
Judge Davila continued that, “It is also worth noting that at least two other district courts have recently dismissed ERISA complaints with near-identical allegations also relating to the same BlackRock TDFs and their disappointing three- and five-year performance data” (specifically citing rulings in cases involving Microsoft and Capital One), explaining that “the Court has undertaken its own analysis of the Complaint’s allegations here but nonetheless finds these decisions’ reasoning to be sound and observations accurate.”
He then noted that “Plaintiffs do not dispute that their claims are primarily premised on the BlackRock TDFs’ underperformance, but their arguments in defense of the Complaint are ultimately inapposite. They first reject Cisco’s characterization of the allegations as ‘hindsight’ and contend that there is no ‘hindsight’ when Cisco should have known at the beginning of the class period that the BlackRock TDFs were already then underperforming.” Here, Judge Davila concurred with them that the suit “is not alleging underperformance by hindsight, but that is also not the crux of Cisco’s motion to dismiss. As addressed above, the issue with the Complaint is its reliance on the BlackRock TDFs’ performance data, irrespective of temporal hindsight allegations of whether the underperformance was observable in 2016 or whether the BlackRock TDF data was available to Cisco during that time.”
“In other words,” he continued, “it does not matter when the BlackRock TDFs’ underperformance was recognizable (either at the beginning of the class period in 2016 or when the Complaint was filed in 2022); the case law teaches that underperformance alone cannot substantiate an ERISA imprudence claim.”
Compari-Shuns
Judge Davila noted that the plaintiffs had suggested two other cases that they felt supported their arguments, but concluded that “both cases are readily distinguishable, and neither support the broad interpretations Plaintiffs suggest.” One (also) involved charges of “grossly excessive fees in comparison to other comparable or superior alternatives,” something he noted was “acutely absent here.” As for the second, Judge Davila commented that it (Garcia v. Alticor) “involved much more than mere underperformance—the plaintiffs there had also alleged that “the recordkeeping and administrative costs of the Plan were excessive; the majority of funds chosen by the Committee were more expensive than comparable funds . . . ; the Committee should have considered whether lower-cost comparable collective trusts were available; the Committee could and should have selected at least one identical but lower-cost share class; the Committee failed to consider materially similar but cheaper, passively-managed alternatives.” Both cases, in Judge Davila’s estimation only touched “upon the historic underperformance in the context of rejecting the defendant’s ‘hindsight’ argument”—and while they “may stand for the proposition that an investment’s historic underperformance can rebut a defendant’s argument that the ERISA claim is based on hindsight, neither case suggest that a court may infer misconduct from the BlackRock TDFs’ underperformance alone.”
All of which led Judge Davila to the conclusion that “to the extent Plaintiffs attempt to state an ERISA claim for imprudence based solely on the BlackRock TDFs’ underperformance, the Court cannot reasonably infer from underperformance alone that the BlackRock TDFs were imprudent investments”—and thus, dismissed the claim for breach of fiduciary duty under ERISA.
That said—then Judge Davila turned to whether the suit should be dismissed with prejudice (meaning it couldn’t be reasserted) or not (meaning he would give them an opportunity to “fix” the deficiencies in their arguments. “Here, the Court cannot conclude that the further factual allegations would be futile and, accordingly, will grant Plaintiffs LEAVE TO AMEND the deficiencies addressed in this Order.”
He went on to caution that “simply providing metrics or opinions further describing the BlackRock TDFs’ underperformance is not likely to cure these deficiencies”—citing parenthetically that simply adding comparisons of a Sharpe ratio and comparison with S&P Target Date Indices wouldn’t be enough. This is, of course, how the plaintiffs in several other cases had amended their claims, given a similar opportunity.
Meaningful Comparisons
As for whether the comparator TDFs are “meaningful benchmarks for evaluating the BlackRock TDFs,” Judge Davila noted that, having found that the Plaintiffs’ allegations of underperformance alone are “insufficient to render an investment imprudent, the Court need not address issues relating to the metrics of that underperformance in comparison to other TDFs”—a position he noted that other district courts had adopted as well.
Similarly, Judge Davila found no reason to consider the allegations that Cisco had failed to oversee the members of its 401(k) administrative committee and that Cisco is liable for a knowing breach of trust—as the “plaintiffs do not raise any independent basis for why these claims should survive apart from their arguments above on underperformance.”
And dismissed all the claims—but left the door open (as the courts in different jurisdictions have done) with an opportunity to amend their arguments and resubmit.
What This Means
Once again, a federal district court has held that allegations based on (under)performance alone aren’t sufficient to establish a case sufficiently plausible to more forward to discovery and trial over a motion to dismiss the suit (for failure to state a case). One difference this time; despite providing the plaintiffs an opportunity to “cure” those deficient arguments, the court has basically alerted them not to try using the amendments that other plaintiffs in different court districts have tried, albeit unsuccessfully.
We’ll have to see if those arguments can be made—and if the court, upon review, would affirm.
For more background on these suits:
Nevin & Fred: Targeting Target Date Funds?
