While the plan fiduciaries in the case chose to settle, the investment consultant for the plan took the case to trial—and won.
The former participant/plaintiff here (one Benjamin Reetz) claimed that the defendants here (Lowe’s, the Administrative Committee of Lowe’s Companies, Inc. and investment advisor Aon Hewitt Investment Consulting) violated ERISA by limiting the menu of investment choices available to Plan participants and moving over $1 billion in Plan assets[i] to one of Aon’s own investment funds, “resulting in a substantial loss of investment gains ($100 million, according to the suit) in the retirement accounts of the current and former Lowe’s employees in the class.”
More specifically, the suit charged that the fund retained was a new and largely untested fund at the time it was added to the plan, that it underperformed its benchmark, that it was not utilized by fiduciaries of any similarly sized plans and was “generally unpopular” in the marketplace.
After three years of hard-fought litigation, roughly 18 months ago, the plaintiff and Lowe’s Companies, Inc. settled for a cash settlement of $12.5 million (“a fair and reasonable settlement amount considering the nature of Plaintiff’s claims, which focus on Aon’s self-interested conduct, and Aon’s ultimate role as a ‘delegated’ investment manager with unilateral decision-making authority over Plan investments”)—and “one thing Aon can’t provide: prospective relief,” and some procedural changes.
Which brings us to the current case.
In a massive 120-page opinion (Reetz v. Lowe’s Cos. Inc. et al., case number 5:18-cv-00075, in the U.S. District Court for the Western District of North Carolina), U.S. District Judge Kenneth Bell determined that “Aon acted loyally and prudently with respect to its recommendations to change the plan’s investment choices—which were consistent with its industry research and the thinking of other financial consultants—as well as its selection and retention of the Aon Growth Fund in the plan, which was similarly reasonable based on Aon's investment expertise and legitimate strategic choices.”
Importantly, Judge Bell acknowledged that “…although the Aon Growth Fund that Aon selected as the Plan’s delegated fiduciary investment manager did not generate as much investment gains as other investment options that, in hindsight, would have fared better, it did not breach its fiduciary duty to the Plan in selecting and maintaining the Aon Growth Fund as the primary actively managed ‘equity’ investment option in the Plan.”
The decision amounts to being largely a blow-by-blow recitation of the events that led up to the decisions that, arguably, led to the suit in this case. At its core, the plan committee was trying to increase engagement/participation, and were (eventually) persuaded that part of the solution lay in simplifying the fund menu and providing an option that would provide participants with a more diversified choice than they would likely be able/willing to do so for themselves.
Delegated DC
At the heart of the issue in the case was Aon’s role in recommending its delegated investment management service (“Delegated DC”) specifically in this case to Lowe’s as one of its large clients. However, Judge Bell determined that “Aon did not breach its fiduciary duty as an investment advisor to the plan in proposing and encouraging Lowe's to change the plan's investment structure and menu of investment options nor did it violate ERISA in its efforts to ‘cross-sell’ its delegated fiduciary services, which Lowe’s—a large, sophisticated corporation—independently decided to engage.”
Indeed, Judge Bell concurred with the testimony of witnesses that, in fact, the plan fiduciaries did understand and appreciate that distinction.
Moreover, “While Aon had limited experience as a delegated services manager for defined contribution plans, it had extensive experience and resources as an investment advisor, so it was not imprudent for Aon to suggest that Lowe's consider using Aon’s delegated services,” Judge Bell wrote.
Growth Fund Challenge
Judge Bell also rejected the argument that Aon breached its fiduciary duty to the plan based on the fact that the Aon Growth Fund did not generate as much growth as other investment options, explaining that the “Plaintiff's hindsight attacks on the fund based on historical results are unpersuasive and, as noted, the dynamics of the market could have changed at any time making the Aon Growth Fund not only reasonable but likely more profitable for plan participants.”
He also noted that neither Lowe's nor its “well-qualified” fiduciary consultant, Arthur J. Gallagher & Co., ever suggested that Aon should remove the fund. “If an independent investment consulting fiduciary (with its own fiduciary obligations which have not been challenged) did not view the inclusion of the Growth Fund in the Lowe’s plan’s during the relevant period as improper, then it is difficult for the court to conclude that Aon should, as a matter of law, have removed the Growth Fund from the plan lineup,” Bell wrote.
“There can be little doubt that Aon was pleased to see a billion dollars of Lowe’s assets going into the Aon Growth Fund, which in turn allowed Aon sales employees and others to promote the fund more effectively to potential clients,” he said. “However, the court must be careful to distinguish the reason for selection of the fund with the inherent effects of that selection, including the facts that putting Lowe’s plan assets in the fund would likely make it more attractive to other plans and reduce Aon’s required ‘subsidy’ of the fund's expenses.”
While the plaintiff claimed that a breach of fiduciary duty was evident in Aon’s selection of the Aon Growth Fund, more specifically that that Aon did not consider any option other than the use of its own Collective Trust funds prior to making its investment decision. “While it is true that Aon never specifically considered any funds other than the Aon Growth Fund for the ‘Growth’ equity option in the Lowe’s Plan, and in fact selected the Aon Growth Fund (or a custom version of the Aon Growth Fund) for every client that used Aon’s ‘Emerging’[ii] plan structure, the full story (which must be considered) is more nuanced,” Judge Bell wrote, going on to explain that Aon did compare the Aon Growth Fund (and the other funds in the Collective Trust) to other potential investment funds and strategies, including those that Plaintiff argues should have been considered when the Lowe’s investment was approved—but did so earlier, when Aon first created the funds. “In sum,” he wrote, “the Court finds that Aon did not need to again compare the Aon Growth Fund to specific off-the-shelf offerings such as the T. Rowe Price Spectrum Moderate Growth Allocation Fund and Vanguard LifeStrategy Growth Fund to appreciate the claimed structural advantages provided by the Collective Trust, where the Collective Trust strategies aligned with a client’s desired investment mandates. Also, although Aon was aware of other providers in the ‘manager of managers’ business, such as Russell and SEI, that could have constructed a custom multi-manager growth vehicle for the Plan, Aon’s use of its discretion to hire such a provider would have added another layer of fees to the Plan’s expenses.”
IPS Language
Judge Bell also determined that the use of the Aon Growth Plan reasonably complied with the Plan’s IPS, and that the plan fiduciaries understood the IPS’ language calling for a diversified, objective-based growth strategy “utiliz[ing] a broad range of asset classes and periodic rebalancing process” to provide an appropriate mix.
Bell also commented that “while the differences between the actual performance of these asset classes and consensus expectations for these asset classes explain why the T. Rowe Price and Vanguard funds delivered higher returns than the Growth Fund over the relevant period, they do not nullify the reasonableness of Aon’s choice of asset allocation for the Growth Fund before the fact.” Moreover, he noted, “neither plaintiff nor his experts identified any basis, before the fact, for questioning the reasonableness of the Growth Fund’s asset allocation or the capital market assumptions on which Aon’s asset allocation decisions were based.”
Not that there weren’t issues. “To be clear, the Court acknowledges that at the time it was selected for the Plan, the Aon Growth Fund itself had very little performance history, and the history that it had was poor relative to its benchmarks and peers. At the time Aon added the Aon Growth Fund to the Plan (October 2015), the fund (i) had only two years of performance history, (ii) was in the bottom 10% of its peers over all periods, (iii) was included in only two other retirement plans in the country, and (iv) was not included in any similarly-sized retirement plans.” Moreover that the fund had relatively few assets under management, and was not performing well even in comparison to its custom benchmark. “However, considering the totality of the circumstances and weighing the evidence, the Court finds that Aon’s forward-looking process for developing the Aon Growth Fund and selecting it for the Lowe’s Plan was reasonable for a longer term investment and in line with industry standards, properly understood and not affected by an analysis dependent on a hindsight comparison of historical fund results or a small sample of results during a period in which the Aon Growth Fund (with relatively fewer domestic equity investments) would be expected to lag its peers.”
Peer ‘Review’
Judge Bell was dismissive of ongoing “peer group” comparisons, stating that the “bottom line regarding the performance of the Growth Fund appears to be that its performance admittedly lagged the returns of comparable growth funds and benchmarks, but that underperformance was the result of the relative mix of equity and non-equity assets (rather than incompetent investment managers)… In ‘up’ markets, the Growth Fund was expected to and did do less well, but in ‘down’ markets it was expected to do better. The difficult circumstance pervading this action is that over the class period there has not been a ‘down’ market of any significant duration to really test the Growth Fund over a ‘full’ market cycle.”
Court disagrees and finds that Aon acted loyally and prudently with respect to its recommendations to change the Plan’s investment choices—which were consistent with its industry research and the thinking of other financial consultants—as well as its selection and retention of the Aon Growth Fund in the Plan, which was similarly reasonable based on Aon’s investment expertise and legitimate strategic choices.
Ultimately he wrote that “the evidence established that Aon’s ‘operative motive,’ as reflected in the thinking and conduct of consultant Abshire, was to benefit Plan participants through a consolidated menu of investment choices that was easier to understand and led participants to more broadly diversified investments.”
Moreover, Bell concluded that “Aon’s advice that the Committee consider simplifying the Plan’s investment lineup was developed from its extensive experience as an investment consultant to defined contribution plans and was consistent with Aon’s May 2013 white paper, which presented a proposed approach for structuring plan investment lineups based in part on Aon’s study of 10,000 defined-contribution-plan participant portfolios.”
Said more succinctly, Bell wrote that “Aon provided the Committee reasoned advice based on substantial research into investor behavior and decades of experience as an investment consultant to retirement plans. That advice fully satisfied ERISA’s duty of prudence.”
Suitable Choices
“Here, the Court easily concludes that Aon did not breach any fiduciary duty in offering its delegated services to Lowe’s,” Bell wrote. He explained that while “Lowe’s and Aon enjoyed a longstanding and trusting fiduciary relationship, which could have allowed Aon to take advantage of its position, but Aon did not use its role as a fiduciary advisor to make any recommendation on who Lowe’s should select as a delegated fiduciary.”
Additionally, he reiterated that Lowe’s was “a very large and sophisticated company with tremendous resources which allowed it—if it had chosen to do so—to fully evaluate Aon’s delegated services offering and compare it to competitive options.” And Judge Bell found that “delegated fiduciary services were clearly suitable for Lowe’s, particularly after Lowe’s decided to change its Plan investment menu to the ‘Emerging’ structure with objective-based investment options, which encompassed underlying multi-fund investments.” Finally, and while Bell acknowledge that Aon had “limited experience as a delegated services manager for defined contribution plans, it had extensive experience and resources as an investment advisor, so it was not imprudent for Aon to suggest that Lowe’s consider using Aon’s delegated services.”
Moreover, Bell felt that “it would be wrong to conclude that Aon breached its fiduciary duty in not removing the Growth Fund from the Plan when Lowe’s and Gallagher, its well-qualified fiduciary consultant, never suggested that Aon should remove the Growth Fund. Instead, with full knowledge of the fund’s results relative to the same benchmarks and peers that Plaintiff points to as reasons the fund should have been abandoned, Gallagher appears to have judged the Growth Fund to be an appropriate investment to maintain in the Plan or at least believed that the fund should be given more time to prove itself.”
Significantly, Bell noted that, “according to the Committee’s meeting minutes, the Lowe’s Committee ‘discussed vigorously’” the information presented by Punnoose and Abshire, “posing probing questions … about the proposed ‘Alternative’ and ‘Emerging’ structures.”
Fees
Judge Bell not only concluded that “the fees charged by the Aon Growth Fund were reasonable and, indeed, beneficial to the Plan, but that “the Plan saved roughly eight to ten basis points per year in investment management fees by moving to the Growth Fund, or approximately $800,000 to $1 million per year.”
Attorney’s Fees
There was also the issue of recovering attorneys’ fees—and Aon had moved for their expenses to be paid by the plaintiffs—on this issue the judge determined that there were “several good reasons why Aon should not recover any fees or costs in this action.” Judge Bell determined that the plaintiff had not acted in bad faith in pursuing the action, that the plaintiff “a former Lowe’s non-executive hourly employee” likely lacked the means to satisfy a significant award of attorneys’ fees or costs—and that “an award of fees or costs against Plaintiff might well deter others from filing or participating in appropriate yet uncertain litigation; so, in light of the remedial purpose of ERISA this factor favors not making an award to Aon.” Oh, and finally while finding that “on balance the facts and law amply support the Court’s decision to enter judgment in Aon’s favor on all of Plaintiff’s claims, there was also support for Plaintiff’s positions…”
What This Means
While the facts here are relatively unique, Judge Bell’s reading suggests that the plan committee had in place a prudent and thoughtful process, one that was not only deliberate, but documented. That’s what ERISA requires of plan fiduciaries—and here they appear to have fulfilled that obligation. And therefore prevailed.
[i] From 2009 through Oct. 1, 2015, the Plan’s investment menu consisted of 12 investment options, which included Lowe’s company stock, a series of target date funds, a stable value fund, a fixed income fund, and eight equity options. As discussed below, the Plan’s eight equity options were later replaced by the Aon Growth Fund as part of a Plan investment menu restructuring that was recommended and ultimately implemented by Aon.
[ii] The Alternative structure reduced the number of investment options and used fund naming conventions that were easier to understand, but not to the same degree as the Emerging structure. For example, the Alternative structure presented to the Committee included active and passive U.S. and non-U.S. equity options, but it eliminated distinctions between “value” and “growth” styles within those asset classes.
