Yet another 401(k) excessive fee suit has been dismissed for failing to allege a “plausible” claim of injury.
The most recent—a suit filed against Fluor Corp.’s 401(k) a little more than a year ago by former participants Deborah Locascio and David Summers. Represented by Miller Shah LLP and Vitullo Law Firm, the suit alleged breaches of the plan fiduciary defendants (and those responsible for appointing them) by “imprudently offering and retaining Custom Fluor Target-Date Funds (‘Fluor TDFs’), a Custom Large Cap Equity Fund, a Custom Small/Mid Cap Equity Fund, and a Custom Non-U.S. Equity Fund (collectively, the ‘Challenged Funds’).”
In a Nutshell
Yet another court has ruled that mere allegations of imprudence based on comparator plans based solely on size (participant count and/or asset size) does not suffice to establish a plausible inference of a fiduciary breach. This court also embraces a stance (not uniformly adopted by all courts) that a participant-plaintiff must have invested in the funds they challenge as imprudent decisions).
More specifically (and in a ruling that, for them, started with the ominous acknowledgement that “Sometimes stocks underperform” by Judge Brantley Starr), these plaintiffs claim that when they “…recognized that the Plan was underperforming—at least according to their standards—they decided to sue. They claim that competent fiduciaries would not have retained the investments challenged in the complaint.”
Motion(s) to Dismiss
In considering the Fluor defendants’ motion to dismiss the suit, Judge Starr noted (Locascio v. Fluor Corp., N.D. Tex., No. 3:22-cv-00154, docketed 1/19/23) that one the one hand, “to survive a motion to dismiss, the plaintiff must allege enough facts ‘to state a claim to relief that is plausible on its face,’” and that “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct.”
The Fluor defendants had challenged the plaintiffs’ standing to bring suit in the first place, and Judge Starr commented that in order “to establish Article III standing, a plaintiff must show (1) an injury in fact, (2) a sufficient causal connection between the injury and the conduct complained of, and (3) a likelihood that the injury will be redressed by a favorable decision.” Of course, he also reiterated that “the burden of proving these elements is borne by the party invoking federal jurisdiction,” and that “even in class actions, the putative class representatives “must allege and show that they personally have been injured, not that injury has been suffered by other, unidentified members of the class to which they belong.” Now, as it turns out, that focus will have a large impact in the ruling.
As noted above, standing—the right to bring suit because you suffered injury—was an issue, and Judge Starr noted that “Fluor challenges Locascio’s standing because she did not invest in any of the Plan’s twelve options,” while plaintiff Summers’s standing was questioned because he hadn’t invested in (and thus hadn’t suffered personal injury) nine of the funds in question. Leading Judge Starr to comment that “the performance and fees of the investments not selected by a participant had no effect on the value of the participant’s selected plan. However, even if they did, to establish Article III standing, Plaintiffs need to allege personal injury by each challenged fund”—and he then commented that “by her own admission, Locascio cannot do this.”
However, that still left plaintiff Summer. Turning to that aspect, Judge Starr noted that “the Fifth Circuit has not yet answered the question of whether personal investment is necessary, but it has left guideposts to inform an answer.” Specifically, he commented that the Fifth Circuit recognized that “[a] plaintiff must demonstrate standing for himself or herself, not just for others he or she professes to represent.”
At this point, I need to acknowledge that the courts have not been of a single mind in terms of requiring that the plaintiffs suing need to have suffered direct injury in the funds in which they had investment, or on behalf of the plan generally. The more restrictive view—and the one taken by Judge Starr (and the Fifth Circuit generally)—has also been taken in cases involving 401(k) plans at Deloitte, Capital One, and Mitre. On the other hand, other cases have taken the broader view.
Here, Judge Starr noted that “an injury to the Plan and its participants generally is insufficient under Article III to establish standing—Plaintiffs must allege an individualized and particular injury.” Moreover, he concluded that the plaintiffs here did not meet that standard, as “they fail to demonstrate any injury to Locascio and only some injury to Summers.” He continued that “Locascio suffered no injury, and therefore has no standing, because she invested in none of the twelve options of the Plan. So she pled her way out of court. Summers only has standing for claims involving the three Plan options in which he invested”—on his way to granting the dismissal of the former’s claims, and Summers’ claims, at least regarding the nine funds in which he did not invest.
Turning to those issues of fiduciary breaches, Judge Starr noted that there had been some role changes over course of the period in question. Specifically, that Fluor claimed that Plaintiffs “cannot plausibly allege that Fluor breached any fiduciary duty after March 1, 2017, which is when Fluor appointed Mercer,” at which point Mercer assumed fiduciary responsibility for monitoring and deciding whether to retain or replace the Fluor TDFs and other investments, though Fluor acknowledged that it retained liability for the selection and monitoring of Mercer in that role. For their part, the plaintiffs argued that there was an exception for those who knowingly participated in a breach of fiduciary duty, and that they failed to monitor Mercer.
However, Judge Starr rejected both arguments—and once again, as it has in a recent series[i] of cases in different jurisdictions, it all came down to plausibility of their claims. “Without even addressing whether initially investing and continuing to invest in the funds was prudent, Plaintiffs fail to plausibly allege knowing participation. Plaintiffs simply say that Fluor did not take remedial action to correct Mercer’s decisions with the funds. This is not a plausible allegation of knowing participation in an act or omission they knew to be a breach of fiduciary duties. Simply put, Plaintiffs do not plead sufficient facts to plausibly allege a breach of fiduciary duty and therefore they cannot plead enough facts to plausibly allege knowing participation.”
As for that second, monitoring, argument, Judge Starr commented that “Plaintiffs’ argument again fails because it does not identify any flaws in Fluor’s monitoring process, as discussed below. Relative unsuccess (or even utter unsuccess) of the funds does not necessarily indicate to a failure to monitor.”
Regarding Fluor’s post-2017 conduct, Summers argues that the same “neglect continued” and that “Fluor failed to prudently monitor Mercer.” But Judge Starr noted that, “yet despite again making these allegations, Summers fails to point to pleadings that allow the Court to infer imprudence. Yes, the Court accepts all well-pled facts as true and construes them in the light most favorable to Summers, but it “do[es] not accept as true conclusory allegations, unwarranted factual inferences, or legal conclusions.” In fact, he continued by writing that “Summers consistently asserts conclusory allegations without directing the Court to pleadings that would allow the Court to make an inference of imprudence.”
Conduct, Not Results
With regard to the allegations regarding Mercer’s post-2017 conduct (as well as Fluor’s continuing duty to monitor), Judge Starr explained that “Summers argues much of the same, but homes in on what he alleges to be consistent underperformance of the Fluor TDFs and the other Challenged Investments. He argues that Mercer’s decisions to maintain the Fluor TDFs and other Challenged Investments (and Fluor’s roundabout duty to monitor Mercer’s decision to maintain the Fluor TDFs and other Challenged Investments) constituted breach of Mercer’s fiduciary duty.” But “based on the pleadings and relevant law, he is wrong,” he wrote, continuing “in order to demonstrate a lack of prudence, Summers must demonstrate ‘conduct, not results’ of the fiduciary’s actions towards the investments. The focus of the inquiry is ‘how the fiduciary acted,’ not ‘whether his investments succeeded or failed.’ To make this evaluation, a plaintiff must point to information ‘at the time of the investment without the benefit of hindsight.’”
But Starr concluded that he failed to “provide information that would enable the Court to evaluate Defendants’ process and conduct for selecting the investments that he did. Providing the Court with data from other investments that outperformed the Fluor investments does little to aid the Court in evaluating the fiduciary process. Put bluntly, a flawed fiduciary process can result in great returns while a diligent and complete fiduciary process can result in underperformance. For this reason, the Court cannot reasonably infer the fiduciary process was flawed based on the alleged facts.”
As for the comparison benchmarks, Judge Starr noted that “…meaningful benchmarks for comparison are important, and, in similar cases, some courts have required plaintiffs alleging breach of fiduciary duty to “provide a sound basis for comparison—a meaningful benchmark” to show that a prudent fiduciary in like circumstances would have acted differently.” Well, as with standards of plausibility, Judge Starr said that “the Fifth Circuit has yet to define it exactly, but clues that guide the definition exist in different courts. For example, courts have reasoned that distinguishing between actively and passively managed accounts is important to determine a meaningful benchmark. Additionally, benchmark funds with similar investment strategy can aid in an analysis of a meaningful benchmark.”
That said, Starr noted that “the crux of Summers’s pleading issue lies in the fact that ‘simply labeling funds as ‘comparable’ or ‘a peer’ is insufficient to establish that those funds are meaningful benchmarks against which to compare the performance of’ the allegedly imprudent funds,” concluding that Summers needed to provide meaningful comparison in his pleadings to demonstrate that his selected funds are sufficiently similar benchmarks—at which point he could “more accurately analyze the process by which the Defendants selected and retained the Fluor TDFs and the other Challenged Investments.” But from where things stood now, Judge Starr aligned his decision with that of the Fluor defendants in ruling that “Summers has failed to plead sufficient factual allegations”—and, at least regarding that specific allegation, granted the motion to dismiss with prejudice—but gave Summers 28 days to remedy his arguments.
Finally, as for the duty of loyalty for both Fluor and Mercer, Judge Starr agreed with the Fluor defendants that Summers failed to plead facts showing a plausible claim of fiduciary disloyalty. He explained that “Summers simply alleges that Mercer did not remove the Fluor TDFs from the Plan because doing so ‘would conflict with its business relationship with BlackRock.’” But Judge Starr commented that “Summers must do more than conclude that because Mercer has a relationship with BlackRock it necessarily infringed on its duty of loyalty by maintaining the Fluor TDFs. To survive this motion to dismiss, Summers must plead specific facts regarding the breach of the duty of loyalty without simply recycling what he already stated regarding the duty of prudence”—and, as with the claims above, dismissed the claim with prejudice—but allowed 28 days for the plaintiff to “amend his pleadings to address these deficiencies.”
After Fluor appointed Mercer to manage the funds, its duties decreased to checking in with Mercer at reasonable intervals to ensure that it was fulfilling its duties. That said, Starr noted that “Summers’s allegations revolve around why Fluor did not question why Mercer maintained the Challenged Funds as part of the plan. However, the allegations are so threadbare that the Court cannot infer Fluor’s failure to monitor. For the Court to infer a failure to monitor, it would need to not only see facts showing instances of insufficient monitoring, but it would also need to see facts that demonstrate why sufficient monitoring would have caused Fluor to ask Mercer to replace certain TDFs. In sum, there are simply not enough facts to state a claim for relief that is plausible on its face”—dismissing the claim with prejudice, but allowing twenty-eight days to “address these deficiencies.”
What This Means
This court has—as have what appears to be a growing number of courts—been unwilling to accept at face value allegations that plans of similar size are sufficiently comparable in terms of services provided to support claims of a fiduciary breach, much less assertions that those alleged shortfalls in performance (or alleged excesses in fees) constitute a fiduciary breach in any event.
Once again it serves as a reminder that different courts and different judges on those different courts can (and do) disagree not only on legal standards, but on the requisite thresholds to move past the initial suit, and on to discovery (and, eventually trial. Unfortunately, even prevailing at this early stage in the proceedings can cost valuable time and money—but failing to prevail at this stage is, of course, even more costly.
[i] See https://www.napa-net.org/news-info/daily-news/%E2%80%98astronomical%E2%80%99-claims-come-short%E2%80%94again, https://www.napa-net.org/news-info/daily-news/another-401k-plan-fiduciary-prevails-excessive-fee-suit, https://www.napa-net.org/news-info/daily-news/judge-says-another-excessive-fee-suit-comes-short, https://www.napa-net.org/news-info/daily-news/%E2%80%98short%E2%80%99-excessive-fee-suit-struck-down, https://www.napa-net.org/news-info/daily-news/oshkosh-decision-bears-more-fruit