Fiduciary defendants—and their investment consultant—have notched a(nother) win in an excessive fee case.
The suit—filed in mid-2020 by seven former employees of Schneider Electric Holdings, Inc.—charged Schneider Electric, the two committees that oversee the $4.5 billion plan, and Aon Hewitt Investment Consulting, Inc. (“AHIC”), the Plan’s investment manager. The suit—filed in the U.S. District Court for the District of Massachusetts—alleged that the defendants replaced well-performing funds with the Aon Trusts for their own financial gain rather than to benefit Plan participants.[i] They were represented by Schlichter Bogard & Denton LLP and Naumes Law Group LLC.
More specifically, the suit (Turner v. Schneider Elec. Holdings, Inc., D. Mass., No. 1:20-cv-11006, opinion docketed 1/25/23) claimed that since the inception of the Plan (2010), Vanguard had provided recordkeeping and managed account services, while Schneider also retained Aon Hewitt Investment Consulting, Inc. (“AHIC”) to provide investment consulting services. And then in 2016 AHIC became the Plan’s discretionary investment manager—and in February 2017, AHIC replaced several existing Plan investment options (Vanguard target date funds) with its own collective investment trusts, including the Aon Hewitt Index Retirement Solution passively managed target date funds, as well as the actively managed Aon Hewitt Growth, Income and Inflation Strategy Funds. In September 2017, Schneider added new investment options—five new Vanguard index funds.
Now, Judge Nathaniel M. Gorton noted that the plaintiffs’ damages expert (one Dr. Edward O’Neal) claimed that the investments in the Aon Trusts cost the Plan participants $111,213,865 in retirement savings between February 1, 2017, and June 30, 2020. On the other hand, the defendants had responded that: 1) Plan-level returns data indicated that by through Nov. 30, 2021, the Plan assets actually increased in value by $1,435,464; and 2) as of April 2022, the Plan in fact netted $27 million more in returns for the participants than it would have hypothetically earned in comparator funds. Remember that—it will come back up in an interesting way.
Now, the case—and the arguments—had already been reviewed by Judge Gorton in separate motions to dismiss. Last March he had already dismissed claims regarding prohibited transactions, as well as duty of loyalty claims, but claims regarding imprudence remained, specifically Count I (alleging imprudence and disloyalty as to AHIC, but only imprudence as to Schneider) and Counts II and V against Schneider.
After reciting the standards for review in considering a motion for summary judgement (determination/ruling without a trial)—Judge Gorton reminded us that the court must view the entire record in the light most hospitable to the non-moving party and make all reasonable inferences in that party’s favor and then, if, after viewing the record in the non-moving party’s favor, the Court determines that no genuine issue of material fact exists and that the moving party is entitled to judgment as a matter of law, then summary judgment is warranted—Judge Gorton turned to an outline of ERISA’s standards with regard to breach of duty claims. Specifically, he cited Brotherston v. Putnam Invs. In noting that “a plaintiff must first establish that the fiduciary failed to employ appropriate procedures and as a result the retirement plan suffered losses, then the ‘burden shifts to the fiduciary to prove that such a loss was not caused by its breach.’”
Now at this point, the plaintiffs—turning to back to that same Brotherston case—argued that the period of damages was a question of fact to be determined at trial, but the Schneider Electric defendants successfully argued that Brotherston actually focused on whether an expert witness improperly focused on damages at a particular point in time—dealt with different issues.
To which the plaintiffs responded that even if the June 2020 cutoff date was inappropriate, “its losses continued after that date because Schneider’s conduct constitutes multiple breaches.” The plaintiffs further argued that established trust law does not allow a fiduciary trustee to reduce its liability by profit earned on separate investments, and to that, Judge Gorton explained that “Schneider agrees with that legal proposition but asserts that any alleged breach is a single breach which is appropriately offset by profits.”
Now, this is where things seem to get a little odd. Judge Gorton noted that “Schneider, citing decisions from the Second and Sixth Circuits, maintains that combining gains and losses is permissible in the negligence context.” On the other hand, the participant-plaintiffs argued that “using gains from one Aon trust to offset the losses in another would lead to inequitable consequences because participants do not necessarily share ownership in the same trusts.” But Judge Gorton conflated their position that the class included all participants with the notion that since the plan as a whole gained, that the plaintiffs had failed to prove a loss that required compensation for damages.
Furthermore, with regard to allegations that the plan could/should have negotiated for lower cost shares (as a large plan), Judge Gorton concluded that “because there is insufficient evidence[ii] that lower-cost share classes were in fact available to the Plan, Schneider’s motion for partial summary judgment on plaintiffs’ claim for breach of the fiduciary duty of prudence arising from unreasonable investment management fees (Count II) is allowed”—though he left it pending with respect to the unaddressed Vanguard Developed Markets Index, the Vanguard Total Bond Market Index and the Vanguard Extended Market Index.[iii]
And with that, Judge Gorton granted the motions for summary judgement by both Schneider and Aon Hewitt—the former except for the three Vanguard funds noted above.
What This Means
In recent months, it’s become increasingly common for the courts (at least in certain federal court districts) to require more than mere allegations about fees paid my ostensibly comparable plans to establish a plausible case. However, this case is not one of those. While reference to plausibility (more precisely, lack thereof) was made, this court was not even willing to accept (without more than a plaintiffs’ expert assertion) the notion that a large plan could have negotiated for a better fund pricing. That he also saw fit to view overall gains by the plan as sufficient to forestall any arguments about plan losses suggests either very clever positioning by the defendants—or a lack of understanding/appreciation for the nature of the individual accounts.
All in all, there wouldn’t seem to be a lot of precedential value with this ruling. But one never knows…
[i] More specifically, the complaint alleged that defendants breached their fiduciary duties and violated ERISA’s prohibition of certain transactions by causing the Plan to invest in proprietary Aon Hewitt collective investment trusts (Counts I, VI and VII). Plaintiffs also contend that Schneider, specifically, failed to monitor the Plan’s other fiduciaries (Count V) and caused the Plan to pay unreasonable investment management fees (Count II), recordkeeping fees (Count III) and managed account fees (Count IV).
[ii] While the plaintiffs’ expert opined that such fee negotiations were common, he also acknowledged that they weren’t REQUIRED to do so, and that he didn’t know if Vanguard WOULD have granted a waiver, and in fact, could only recall two such instances where that had resulted…all of which, in the court’s opinion apparently constituted a lack of plausibility on the claim.
[iii] Those claims were resolved shortly thereafter—separately (Turner v. Schneider Elec. Holdings, Inc., D. Mass., No. 1:20-cv-11006, settlement notice 2/1/23)—for $200,000 cash by the parties. A settlement that allows for Schlichter Bogard Denton to seek up to a third of it for attorney’s fees.