Defendants Say Advisor’s ‘Actual Knowledge’ Precludes Plaintiff Role in 401(k) Suit

The fiduciary defendants in a proprietary fund excessive fee case are pushing back—claiming that the advisor and former participant who seeks to represent the class action had knowledge that preludes his role in the suit.

More specifically, the “straight-forward reason” for dismissing the case is that “by 2017, Mr. Waldner, the named plaintiff seeking to represent the class, had actual knowledge of the essential facts alleged in the Complaint that the Court deemed sufficient to state a claim.” And that, the Natixis fiduciary defendants say, means that his claims are “therefore barred by ERISA’s three-year statute of limitations, making his claims atypical and rendering him an inadequate class representative.”

Limitations ‘Limitations?’

Now for those of you who recall (or think you recall) that ERISA has a SIX-year statute of limitations,[i] the suit points out that there’s a difference here, and that it “applies for reasons specific to Mr. Waldner and based on his personal knowledge.” Plaintiff Waldner who, according to the response, “…was, and is, a sophisticated and experienced investment professional” is said to have “detailed knowledge of the Plan’s investment options, including every proprietary fund, every unaffiliated fund, and every fund in which he actually invested, including their fees and expenses and their investment performance,” as well as actual knowledge about other retirement plans, the investment options they offered, and other funds in the marketplace. The petition states that “he knew Natixis earned revenue from including proprietary funds in the Plan and believed it to be self-serving for Natixis to do so. Armed with this knowledge, he nonetheless affirmatively chose to invest 30% of his Natixis retirement savings in Natixis funds, and 70% in an unaffiliated Vanguard fund”—and “he knew and did this all in 2017, more than three years before filing the Complaint.”

And in view of this “overwhelming” evidence of Brian Waldner’s “actual knowledge of the core factual allegations pleaded in the Complaint,” Natixis said (Waldner v. Natixis Investment Managers LP et al., case number 1:21-cv-10273, in the U.S. District Court for the District of Massachusetts) that “if the Court were to grant summary judgment on this basis, that will leave the litigation without a named plaintiff and a class—were one certified—without a representative. If, on the other hand, material factual disputes precluded summary judgment on statute of limitations grounds (and if summary judgment were not granted on other grounds), resolving those factual disputes—which are specific to Mr. Waldner rather than common to the class—would dominate a substantial part of trial.”

How We Got Here

The participant-plaintiff here is one Brian Waldner,[ii] who brought suit against Natixis Investment Managers, L.P., its Retirement Committee, and the committee members (here referred to as John and Jane Does 1–20). The suit claimed that the plan—which they said included more than 30 investment options (though they counted the suite of target-date funds as a single option) and somewhere between 12 to 15 proprietary options—used “high-cost proprietary mutual funds” that “led to participants incurring excessive fees, substantially more than the average of comparator funds with similar investment styles.” 

Plaintiff Waldner also claimed that the plan’s proprietary funds “underperformed in comparison to prospectus benchmarks and other funds,” that the Natixis defendants “failed to prudently monitor and remove them out of self-interest,” and that the defendants “employed an imprudent and disloyal fund selection process through only adding proprietary funds to the Plan since 2014.” Oh, and that Natixis itself “failed to monitor the performance of its fiduciaries, such as the Committee and its members.”

Background and Access

The petition proceeds to spend some time outlining Waldner’s background as a “sophisticated financial professional with extensive knowledge and experience regarding retirement plans and mutual funds,” including his attainment of Chartered Financial Analyst (“CFA”) charter holder and Certified Financial Planner (“CFP”) credentials, his work history prior to joining Natixis where he not only was employed at five different asset management firms, but “was himself both a fund manager and the head of a prior employer’s investment committee.” The petition cited his “extensive experience with mutual funds, portfolio management, fund selection, and investment manager selection,” explaining further that he “had advised plan sponsors about retirement plans and had drafted retirement plan investment policy statements,” as well as possessing “training and skills to advise an individual on how to invest their retirement savings in a retirement plan” and “on which [plan] investment options to choose.”

Beyond that, Natixis notes that “his job responsibilities at Natixis gave him daily hands-on experience and actual knowledge regarding the Plan’s proprietary funds.” They go on to note that not only had he advised clients regarding retirement plans prior to starting at Natixis in 2017, but that he also had already participated in at least three other 401(k) plans sponsored by previous employers—and then, as noted above, despite being armed with all that background, experience and knowledge, “Mr. Waldner chose, in 2017, to invest 70% of his Plan retirement contributions in a Vanguard fund unaffiliated with Natixis, and the remaining 30% divided among three Natixis affiliated funds: AEW Real Estate Fund, Oakmark International Fund, and Gateway Fund.”

Prudence Pushback

Not that the defendants were conceding ground as to the prudence of their plan design, noting that “The Plan offered (and still offers) many outstanding features that benefited participants. It included a wide variety of investment options, including more than 30 passively and actively managed funds from a variety of asset managers.” The petition goes on to (re)state the involvement and oversight of the plan and its investment menu by outside counsel, and that “More than half of the investment options were managed by unaffiliated advisers such as Vanguard, State Street, SEI, Artisan, and Winslow…”

The defendants here also note that while the Plan offered Natixis-affiliated funds, “participants were not steered into them. To the contrary, unless they chose otherwise, participants were automatically invested in an unaffiliated Vanguard fund.” Indeed, they note that “the only participants who invested in Natixis-affiliated fund were those who, like Mr. Waldner, affirmatively chose to do so.” Moreover, they comment that while “participants in most plans must indirectly pay for a plan’s recordkeeping expenses, Natixis has instead paid the Plan’s recordkeeping expenses itself since 2017, rather than have participants bear that cost”—and that they also allocate back to participant accounts fund revenue credits from Schwab, the Plan’s recordkeeper.

As for the allegations regarding fund performance, Natixis refutes the notion that there was no oversight, and classifies Waldner’s comments as “Monday morning quarterbacking” that ignores (though acknowledging in the original suit) that different fund strategies will perform differently in different market cycles. "Picking funds that performed well in the past is easy, but predicting what funds will perform well in the future is much harder,” they comment. “A plan committee's failure to remove a fund that, in retrospect, underperformed over some cherry-picked period is not evidence of a fiduciary breach.” 

Committee ‘Call’

Anticipating a potential response, Natixis comments that “Mr. Waldner may argue that the statute of limitations did not begin to run in 2017, because he did not have actual knowledge of the Committee’s process or its internal deliberations,” but they point out that “Waldner had no more knowledge of the Committee’s process or internal deliberations in 2021, when he filed this lawsuit, and the Complaint included no nonconclusory allegations about them. The knowledge he did have in 2017—about the funds, their fees and expenses, their performance, and the potential conflict from Natixis’s earning revenue from having proprietary funds in the Plan—were allegations he could have used to draft essentially the same complaint in 2017 that he filed in 2021. Indeed, if knowledge of the Committee’s internal deliberations were necessary, then the Complaint, which contained only conclusory allegations about the Committee’s process, would have been dismissed. Even today, with discovery ongoing, Mr. Waldner still lacks “actual knowledge” of what the Committee did or did not do.” Regardless, the defendants note that when he filed the suit he did, in fact, “have actual knowledge of the outcome of the Committee’s process and of the funds that were available to him as a result of that process”—and that other courts have said “it is sufficient if a plaintiff knows the outcome and ‘need not have had actual knowledge of the plan’s eligibility criteria to start the statute of limitations running.’”

In essence, the filing notes that Waldner had actual knowledge in 2017 that he could have used to make the same core factual allegations in 2017—that “he did not like the Plan because of its inclusion of proprietary funds, which he knew generated revenue for Natixis,” and that “he knew all these things in 2017 when he invested 30% of his Plan retirement account in Natixis-affiliated funds—and 70% in an unaffiliated Vanguard fund.” 

The motion here concludes by noting that Waldner isn’t the only one in his position (there are other participants barred by the statute of limitations), that there are participants included in the proposed class that are “uninjured” in that they weren’t invested in the proprietary funds, and that the review that will be required to ascertain actual knowledge (or lack thereof) means that a class cannot be certified.

Stay tuned.