So, if you had a court hearing with the same judge on the same day, ruling on suits involving identical allegations — what result would you expect?
Well, if you said the same result — you’d be correct. The suit here was brought by Michael Tullgren, an employee of Booz Allen Hamilton Inc. and a former participant in the plan in question. At issue were allegations that the “BlackRock LifePath target date funds ‘are significantly worse performing’— both in terms of total and risk-adjusted returns — ‘than most of the mutual fund alternatives offered by TDF providers’ throughout the Class Period” — and that “Booz Allen, the Board of Trustees of Booz Allen Hamilton Inc., the Administrative Committee of the Booz Allen Hamilton Inc. Employees’ Capital Accumulation Plan (together, the ‘Defendants’) ‘employed a fundamentally irrational decision-making process’ and ‘breached their fiduciaries by imprudently selecting, retaining, and failing to appropriately monitor the clearly inferior BlackRock TDFs.’”[i] To buttress those claims the plaintiff here pointed to a comparison with four of the six largest TDF suites against the best and worst performing Comparator TDFs for the three-year and five-year annualized returns for each quarter from the second quarter of 2016 through the third quarter of 2019.”
In early December, this suit (Tullgren v. Booz Allen Hamilton Inc. et al., case number 1:22-cv-00856, in the U.S. District Court for the Eastern District of Virginia) — and one that mirrors it in nearly every regard involving Capital One[ii] — were dismissed for failing to present a “plausible” case, but allowed them two weeks to right those shortcomings. Here this plaintiff — as did the plaintiff (and plaintiff’s counsel) in the Capital One case — “fixed” their suit by adding as comparator benchmarks “data regarding the S&P Target Date Indices and Sharpe ratio.” As for the former, U.S. District Judge Michael S. Nachmanoff (who ruled in the original case, as well as the one involving Capital One) described as “a composite of the disparate strategies and styles present in the broad universe of investable alternative TDFs,” commenting further that “the S&P Indices ‘include a separately calculated index for each target date,’ each of which measures the performance of sub-indices purporting to represent a ‘consensus of the opportunity set available in the U.S. universe of target date funds.’” As for the latter, he noted that “the Sharpe ratio is a measurement of investment performance that considers ‘risk-adjusted return[s],’” and in so doing purportedly “accounts for differing levels of risk by measuring the performance of an investment, such as a TDF, compared to the performance of similar investments, after adjusting for risk.”
That said, and after a recitation of the history of the suit and responses in this case, Judge Nachmanoff summed up the current (re) arguments thusly; “Plaintiff alleges in conclusory fashion that the ‘fiduciaries here employed a fundamentally irrational decision-making process (i.e., inconsistent with their duty of prudence)’” — and then went on to comment that the Amended Complaint “is completely devoid of facts about the particular decision-making process undertaken by Defendants with respect to the Plan at issue here.”
He then commented that the plaintiff here “relies on solely circumstantial allegations. Specifically, Plaintiff argues that the ‘significantly worse performing’ BlackRock TDFs ‘could not have supported an expectation by prudent fiduciaries that their retention in the Plan was justifiable.’” Moreover, he noted that while the plaintiff charged that if the plan fiduciaries had “objectively evaluated” the BlackRock performance, they would have selected “a more consistent, better performing, and more appropriate TDF suite” — they based that allegation “solely on quarterly performance data of the four Comparator TDFs, the S&P Indices, and the Sharpe ratio” — which, of course, suggests that in his assessment that was insufficient. In fact, he concurred with the defendants’ argument that “allegations of underperformance alone fail to state a plausible claim and that Plaintiff fails to allege any meaningful benchmarks by which this Court can assess the BlackRock TDFs.”
Judge Nachmanoff continued by noting that when the last suit was dismissed, the court (which was, of course, this same Judge Nachmanoff) “concluded that Plaintiff failed to set out circumstantial factual allegations from which the Court could reasonably infer that the decision to retain the BlackRock TDFs was the product of a flawed decision-making process,” and also “concluded that Plaintiff failed to allege that the BlackRock TDFs severely underperformed the Comparator TDFs or that the Comparator TDFs were appropriate, meaningful benchmark comparators.” And then, as he did with the Capital One case the same day, commented that “the addition of the S&P Index and the Sharpe ratio to Plaintiff’s Amended Complaint fails to resolve these deficiencies.”
Said another way, he noted that “Plaintiff asks this Court to infer Defendants’ fiduciary breach based solely on the circumstantial allegation that the BlackRock TDFs “fail[ed] to outperform” a composite index (the S&P Index) and the four Comparator TDFs based on the annualized returns for fourteen quarterly periods.” But he continued, “to survive a motion to dismiss, however, Plaintiff must set forth some additional factual matter from which this Court can reasonably infer misconduct under ERISA,” and — as he did in the Capital One case — relied on as “instructive” the decision in Smith v. CommonSpirit Health that a claim of imprudence cannot “come down to simply pointing to a fund with better performance.”
‘No Factual Allegations’
Once again, he commented that, “Underperformance of the BlackRock TDFs is all that Plaintiff alleges. Plaintiff has provided no factual allegations from which the Court may reasonably infer that the choice of the BlackRock TDFs was imprudent from the moment the administrator selected it, that the BlackRock TDFs became imprudent over time, or that the BlackRock TDFs were otherwise clearly unsuitable for the goals of the fund based on ongoing performance. Plaintiff alleges nothing beyond data allegedly indicating the BlackRock TDFs’ disappointing performance relative to Plaintiff’s preferred alternatives over the course of a limited period of time. The addition of the Sharpe ratio and S&P Index to the Amended Complaint does not alter this analysis, as these are merely additional measurements of investment performance. That the Sharpe ratio is alleged to analyze performance on a risk-adjusted basis is therefore immaterial.”
Ultimately, he noted (again) that, “ERISA simply does not provide a cause of action for fiduciary breaches based solely on a fund participant’s disappointment in the fund’s performance. That the BlackRock TDFs were allegedly outperformed by some other TDFs at some points during a three- or five-year window, without more, does not suggest that offering the BlackRock TDFs fell outside the ‘range of reasonable judgments a fiduciary may make based on her experience and expertise.’”
He continued, “The Amended Complaint fails for the additional and independent reason that Plaintiff has not pled meaningful benchmarks against which this Court can assess his allegations of the fiduciaries’ imprudence.”
Indeed, Judge Nachmanoff offered a long list of areas[iii] in which the lawsuit was deficient. But turning back to the original suit, he noted that “because they reflect disparate investment strategies and styles, the S&P Indices are not meaningful benchmarks against which the Court can assess the performance of the BlackRock TDFs.” Nor did he find that Sharpe ratio choice any more persuasive. He noted that “the Sharpe ratio is not in itself a TDF — it is simply a metric one can use to compare the risk-adjusted returns for any two kinds of investments.” Turning back to CommonSpirit, he noted that “courts that have rejected TDF comparisons have done so not because the plaintiffs advanced the wrong metrics, but rather because the underlying investment strategies and styles were meaningfully different to start” — and then noted that “the Sharpe ratio cannot substitute making two funds comparable in the first place” — and concluded that the plaintiff here “has failed to state a claim for a breach of the duty of prudence under ERISA.”
‘Devoid of Any Factual Allegations’
As for motions that the Capital One defendants breached their duty of loyalty, Judge Nachmanoff noted that the plaintiffs “…have simply recast the alleged breaches of the duty of prudence as breaches of loyalty. They merely assert the fiduciaries breached their duty of loyalty without alleging any supporting facts,” concluding (once again citing CommonSpirit) that was “insufficient to state a claim for disloyalty.”
Beyond that, he explained that while the plaintiffs allege that “Defendants failed to ‘act in accordance with the documents and instruments governing the Plan,’ in violation of 29 U.S.C. § 1104(a)(1)(D),” their legal argument was “…devoid of any factual allegations to support their allegation. Plaintiffs, for instance, do not even specify the particular documents or instruments to which Defendants are alleged to have failed to adhere.”
And so, this time, once again the court granted the defendants’ motion to dismiss the suit — but this time with prejudice.
What This Means
Copycat arguments deserve a (near) copycat response, certainly from the same judge in the same court on the same day. So, as noted in the Capital One decision, one need have only a rudimentary understanding of ERISA fiduciary law to expect that a suit alleging a myopic focus on fees that sacrificed performance would have an uphill fight on their hands. Fiduciary suits have long reminded us that it’s about prudence and a documented process, and these suits have basically assumed that those were not possible with what they alleged were inferior results.
The bad news is that this plan — and Capital One — and the dozen others similarly sued have had to go to court to make that point — twice.
[i] More specifically, the decision breaks it down like this: “Count I alleges that Defendants’ conduct violated their fiduciary duties of prudence and loyalty under Sections 404(a)(1)(A), (B), and (D) of ERISA, codified at 29 U.S.C. §§ 1104(a)(1)(A), (B), and (D), because Defendants failed to “discharge their duties with respect to the Plan solely in the interest of the Plan’s participants and beneficiaries . . . .” Id. ¶ 75. Count II alleges that Defendants breached their fiduciary monitoring duties by “[f]ailing to monitor and evaluate the performance of their appointees or have a system in place for doing so”; “[f]ailing to monitor their appointees fiduciary processes”; and [f]ailing to remove appointees whose performances were inadequate.” Id. ¶ 84. Count III alleges that, in the event the Court finds that the Defendants are not fiduciaries or co-fiduciaries under ERISA, Defendants should be enjoined or otherwise subject to equitable relief as a non-fiduciary from further participating in a “knowing breach of trust.”
[ii] Representing the plaintiffs in each of these suits is the law firm of Miller Shah LLP.
[iii] the Amended Complaint remains silent on whether the Comparator TDFs use “through” or “to” retirement glidepaths; whether the Comparator TDFs invest only in actively managed or passively managed funds; or how the Comparator TDFs’ underlying equity and bond funds are allocated among the types and categories of possible equity and bond funds. In short, the Amended Complaint makes no factual allegations demonstrating that the Comparator TDFs are meaningful comparators to the BlackRock TDFs.