Another in the series of suits alleging that plan fiduciaries “chased low fees” and ignored investment performance has been dismissed—though there was a unique twist here.
Like most of the roughly dozen suits that were filed a little more than a year ago, this one[i] “targets” the Marsh & McLennan Companies 401(k) Savings and Investment Plan’s holding of BlackRock LifePath Index Funds—and especially their selection as the plan’s default investment option (which had, according to the suit, garnered 17% of the plan’s assets).
The Suit
The suit claimed that the Defendants breached their fiduciary duties to the Plan, its participants, and its beneficiaries in violation of ERISA by “imprudently selecting and retaining the BlackRock LifePath Index Funds, a suite of ten funds, and by imprudently and disloyally selecting and retaining the Mercer Emerging Markets Fund, despite those funds’ underperformance and citing the latter’s alleged affiliation with Marsh & McLennan.” As a result, the suit claims that this caused the Plan’s participants to incur substantial losses in the form of otherwise higher investment returns, that Marsh & McLennan and the Committees breached their fiduciary duties by failing to monitor the investments, and that—in the alternative—Defendants “knowingly participated in a breach of trust.”
The ‘Twist’
As noted above, there was an additional “twist” in this particular case; the suit also challenged the selection and retention of the Mercer Emerging Markets Fund, which “was added to the Plan in December 2014, less than three years after the investment was launched in May 2012.” The suit noted that “Mercer Investment Management, LLC, the ‘manager of managers’ for the fund, is a subsidiary of Marsh & McLennan,” and the suit commented that Mercer Investment Management “both derived significant revenues from the investment of Plan assets in the Mercer Fund and determined the structure of the investment option.”
They continued by noting that the fiduciary defendants acted “imprudently and disloyally” in selecting and retaining the Mercer Fund, “speculating that the affiliation between Marsh & McLennan and Mercer Investment Management ‘is likely the sole reason Defendants selected’ the Mercer Fund as an option for Plan participants” (the Mercer Fund was eventually removed from the Plan’s lineup in November 2019). The suit also made allegations regarding the performance of this fund—commenting that “because the Mercer Fund was not removed until November 2019, even given this performance, “the only plausible inference is that Defendants did not appropriately monitor the Mercer Fund at all during the Class Period.”
That said, U.S. District Judge John P. Cronan in the U.S. District Court in the Southern District of New York noted that “plaintiffs did not invest in the Mercer Fund, and they invested in only some of the ten TDFs within the BlackRock suite.” And that fact was a significant consideration in terms of determining whether (or not) these particular plaintiffs had the right (a.k.a. standing) to bring suit. More on that in a minute.
Standing
Considering the matter of standing to bring suit, Judge Cronan noted that “when, as here, standing is challenged based on the pleadings, a court must accept a complaint’s material allegations as true and construe the complaint in favor of the complaining party. However, when assessing a factual challenge to standing, a court may consider evidence outside the pleadings,” and that the “plaintiff bears the burden of alleging facts that establish standing.”
He further explained that “a two-part test determines whether class standing exists”: first if they “personally have suffered some actual injury as a result of the putatively illegal conduct of the defendant, and (2) that such conduct implicates the same set of concerns as the conduct alleged to have caused injury to other members of the putative class by the same defendants.” Citing the Supreme Court’s decision in Thole, Judge Cronan noted that “the derivative nature of an ERISA suit such as this one does not, on its own, allow a named plaintiff, or plaintiffs, to bring a class action with claims based on the wrongful inclusion of funds that they did not invest in.” He also commented that “the Second Circuit has affirmed a district court’s determination that standing was lacking in an ERISA case when the plaintiff’s standing theory was premised on “harm to the plan, as opposed to harm to individuals”—and denied standing with regard to the Mercer Fund.
That said, Judge Cronan did find that the plaintiffs have standing as to the entire BlackRock TDFs suite—something that even the defendants acknowledged—even though they didn’t invest in ALL of the funds in question, as they had invested in the product line.
As for those target date funds, and “in line with almost all other district courts to have considered similar claims about the BlackRock TDFs, the Court finds that Plaintiffs’ allegations do not rise to the level of circumstantial evidence needed to support a duty of prudence-based theory at the pleadings stage.”
Another ‘Twist’
Judge Cronan explained that, “while a plaintiff may allege a breach of fiduciary duty based on a fund’s underperformance relative to a benchmark index, the comparative underperformance must generally be consistent and substantial to support an inference of imprudence.” He further acknowledged that “…a prudent fiduciary may—and often does—retain investments through a period of underperformance as part of a long-range investment strategy, and will not necessarily reflexively jettison investment options in favor of the prior year’s top performers because past performance is no guarantee of future success”—principles that he noted “apply to comparisons relative to other suites of TDFs.”
That said, and rather than discount the value of the comparator TDFs put forward by the plaintiffs as a suitable benchmark (as other districts evaluating these suits have), Judge Cronin simply found that there wasn’t enough difference in performance between those comparators and the BlackRock suite to warrant a concern. “Indeed, the TDFs appear to have been on somewhat of an upswing in rankings among the Comparators toward the end of the Class Period, often ranking anywhere from third to first out of the five in 2021 and 2022,” he noted.
Reflexively Jettison
Citing (and quoting from) the case of White v. Chevron Corp., Judge Cronan explained “[T]he duty of prudence does not compel ERISA fiduciaries to reflexively jettison investment options in favor of the prior year’s top performers. If that were the case, Plan sponsors would be duty-bound to merely follow the industry rankings for the past year’s results, even though past performance is no guarantee of future success.” Beyond that, and even conceding the plaintiffs’ arguments on performance, Judge Cronan commented that this argument still ignores the fact that retaining funds underperforming in the short-term can still be prudent in light of a long-term investment strategy. And looming over Plaintiffs’ allegations is the fact that—by their own admission—the BlackRock TDFs offered “low fees.”
And while that crystalized Judge Cronan’s perspective on this particular fact pattern, he went on to clarify that “to be sure, the Court does not hold today that underperformance alone can never suffice to plausibly allege a breach of the duty prudence. Rather, the underperformance alleged here, in the absence of additional indicia of imprudent decision-making, does not demonstrate dramatic enough underperformance to justify an inference of imprudence.”
Having stated that, Judge Cronan noted that if the plaintiffs chose to recast their arguments—even relying on claims related to underperformance—they could do so “provided the underperformance is of a degree by itself or in combination with other factors to plausibly allege a violation of the duty of prudence”—even though they failed to do so here.
Having made that determination, he granted the fiduciary defendants’ motion to dismiss the suit (including the related claims regarding a failure to oversee/monitor the plan fiduciaries by the board, etc.)—but left open the opportunity to amend their suit—“in the event that they believe that they can plead facts that would adequately state a claim upon which relief may be granted and which can cure the standing-related defects identified above.” So long as they do so by Nov. 1, 2023—if not, the suit would be dismissed with prejudice.
What This Means
While previous jurisdictions have consistently held that poor performance, in the absence of evidence of fiduciary malfeasance anyway, wouldn’t be enough to sustain a suit for fiduciary breach, Judge Cronan appeared to leave that door open for the plaintiffs here. In that sense, at least in this series of suits, seems to be something of an outlier. That said, while Judge Cronan articulated a performance gap that he didn’t consider sufficient to establish that gap—at this point we (still) don’t know how much he thinks would be sufficient.
[i] This suit named plaintiffs Alfretta Antoine, Shannon Cave, Christina Forney, and Judy Gallegos (current and former participants in the Marsh & McLennan Companies Savings and Investment 401(k) Plan) filed suit against Defendants Marsh & McLennan Companies, Inc., the Board of Trustees of Marsh & McLennan Companies, Inc., the Marsh & McLennan Companies Benefits Administration Committee, the Marsh & McLennan Companies Benefits Investment Committee, collectively with the Administration Committee—and “John and Jane Does 1-30.”
