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Goldman Sachs Sacks 401(k) Excessive Fee Suit


Another excessive fee suit—and this one involving proprietary funds—has been decided in favor of the plan fiduciaries.

The victor here—Goldman Sachs and its $7.5 billion 401(k) plan on behalf of some 35,000 participants, according to the lawsuit—another filed by Nichols Kaster PLLP (and MKLLC Law). The suit (Falberg v. Goldman Sachs Grp., Inc., S.D.N.Y., No. 1:19-cv-09910, complaint 10/25/19) alleged that the Goldman Sachs defendants “…retained these proprietary funds despite persistent underperformance and steep asset declines, adversely affecting participant balances while allowing Goldman Sachs to continue to draw fees and stem the consequences of losing one of the of the largest investors in the funds—the Plan.”

And while those fiduciaries did, in fact, remove those funds from the plan in 2017, the plaintiffs allege that they did so “only reluctantly and belatedly”—“after other self-dealing firms were successfully brought to court over similar practices,” when—they argue—an “objective fiduciary in the same position would have removed these funds promptly at the start of the class period, and certainly before 2017.” 

Ultimately, the suit claimed that “the circumstances of Defendants’ retention and belated removal of these proprietary funds demonstrates that Defendants’ process for managing the Plan and monitoring Plan investments was deeply flawed and improperly influenced by the interests of Goldman Sachs, in breach of Defendants’ fiduciary duties.”

The Decision

The text of the opinion issued last week by Judge Edgardo Ramos of the U.S. District Court for the Southern District of New York, was limited to “selected parties,”[i] but a docket notation indicates that Goldman Sachs’ February motion for summary judgment has been granted, while the plaintiff’s motion for partial summary judgment has been denied and the case closed.[ii] That’s the same Judge Ramos that denied Goldman Sachs’ motion to dismiss in July 2020,[iii] as well as a motion to expedite an appeal of that decision to the U.S. Court of Appeals for the Second Circuit. 

The Rationale

There was plenty of evidence presented (Falberg v. Goldman Sachs Grp. Inc., S.D.N.Y., No. 1:19-cv-09910, opinion publicly released 9/15/22) that the Goldman Sachs committee received training,[iv] met regularly (quarterly, as well as ad hoc meetings, including eight of the latter during the period in question), discussed in some detail the specific issues related to various investments[v] (assisted by investment consultant Rocaton Investment Advisors LLC), including the prudence/risk of continuing to include proprietary funds in the lineup. 

Judge Ramos noted that during the class period, “the Committee consisted of 10 to 12 sophisticated financial professionals who held senior positions at Goldman Sachs.” He went on to note that even according to the plaintiff’s expert Marcia Wagner, “the Retirement Committee members were “consummate financial professionals,” with a “deep expertise in the markets,”[vi] and that their experience “compares favorably” to those of other large plan committees.”

IPS Impact?

To Judge Ramos’ ears, the plaintiff’s arguments were largely dependent on the lack of a formal investment policy statement (IPS). Indeed, he commented that the plaintiff “Falberg’s claim that Defendants breached their duty of prudence rests on a single factor: the Committee did not adopt an IPS. Falberg argues that a prudent fiduciary in Defendants’ shoes would have ‘acted differently’ by maintaining an IPS, and that, because the Committee did not have an IPS, it had no criteria by which to evaluate and monitor Plan investments, and therefore its decisions relating to the GSAM funds were not the result of a deliberative process. Without such a process, Falberg argues, the Committee could not properly scrutinize the GSAM funds, and had it adopted an IPS, Falberg further argues, the Committee would not have retained the GSAM funds in more expensive investment vehicles, rather than cheaper, nonproprietary options; would not have failed to secure fee rebates from the funds; and would have removed the underperforming, poorly rated funds far earlier than it did.”

“But it is undisputed that an IPS is not required under ERISA,” Judge Ramos countered. “While Falberg argues an IPS is a ‘best practice,’ his expert Wagner conceded that the duty of prudence does not mandate a ‘best practice.’ And, despite Falberg’s suggestions to the contrary, the Department of Labor has never taken the position that an IPS is required to satisfy a fiduciary’s duties.”

Meeting Minutes

He continued by noting that “Falberg makes much of the fact that a ‘significant majority’ of large retirement plans have adopted an IPS and that investment advisors as well as the parties’ experts have recommended its use. But this is beside the point: that the adoption of an IPS is a common practice among retirement plans does not suggest that the choice to forgo one is a breach of any fiduciary duty under ERISA, and Falberg does not point to any authority showing otherwise.” Judge Ramos noted that “as support for his claim that the Committee lacked a ‘deliberative process’ with respect to the challenged funds—a process he maintains an IPS would have ensured—Falberg focuses almost entirely on the minutes from Committee meetings. In particular, Falberg argues that the sparse, ‘boilerplate’ meeting minutes reveal that the Committee at most engaged in a cursory review of the challenged funds, in effect ignoring them.” 

But Judge Ramos agreed with the plan fiduciary defendants’ position that “there is no requirement that meeting minutes need to be a verbatim transcript of all the issues considered by fiduciaries. Indeed, Falberg’s expert Wagner previously has acknowledged that meeting “minutes do not need to be lengthy” and testified that “the documentary file doesn’t have to be verbatim.” He also cited Wagner’s testimony that “more robust” minutes “are not an affirmative duty, per se.” He concluded that, “In any event, Falberg does not point to any evidence that an IPS would have caused the Committee to act differently.”

Conflicts of Interest

As for the potential conflict of interest in selecting GSAM funds, Judge Ramos pointed to the training committee members received (“including the need to treat GSAM funds the same as non-GSAM funds”), the fact that no Committee member had a personal financial incentive to prefer GSAM funds over nonproprietary options, the committee members’ testimony that “they applied no different standard for GSAM funds than for any other fund, and that the evaluated each investment option on its merits.”

Beyond a “broad contention that Defendants’ treatment of the GSAM funds overall creates an inference of favoritism, Falberg does not point to any authority showing a failure to expeditiously remove underperforming funds amounts to a breach of the duty of loyalty,” Ramos wrote. 

“At bottom, as Defendants note, the mere possibility that Committee members may have been influenced by a desire to benefit Goldman Sachs is not enough to show a breach of the duty of loyalty; Falberg has not pointed to any evidence demonstrating the Committee “acted for the purpose” of advancing Goldman Sachs’ interests. As a result, his conflict-of-interest argument cannot support a claim of the breach of the duty of loyalty.”

What This Means

Once again, a well-documented prudent process—buttressed by committee members with expertise, reinforced by training, and supported by the advice of expert investment advice (and legal counsel) has prevailed.    


[i] “The Clerk of Court is further directed to restrict access to this Opinion to the "selected party" viewing level.”

[ii][ii] Additionally, plaintiff Falberg's motion to compel documents designated as privileged and Defendants' motions to strike expert opinions and to compel arbitration of certain class members were denied as “moot.”

[iii] At the time Judge Ramos—accepting as true all factual allegations made by the original suit, and drawing “all reasonable inferences in plaintiff’s favor” found Goldman Sachs’ arguments that (a) the plaintiff hadn’t filed claims on a timely basis (GS had argued that the parties had agreed via the plan document’s terms to a two-year statute of limitations to bring claims, but Ramos found no controlling evidence that to support something shorter than ERISA’s six-year term following “actual knowledge” of a breach), (b) that the plaintiff hadn’t exhausted the claims process detailed in the plan document (again, finding no controlling judicial argument for that position), and that (c) the plaintiff lacked standing to bring suit on behalf of the class of participants because he had only invested in three of the five proprietary funds in question (considering plenty of cases where that argument had been refuted).     

[iv] According to Judge Ramos, upon joining the Committee, each new member participated in a one-on-one training.

session with Goldman Sachs’ senior ERISA counsel covering a range of topics, including fiduciary responsibilities, ERISA’s prohibited transaction rules, conflicts of interest, and disclosure obligations. He noted that Committee members also received periodic training about their fiduciary responsibilities at Committee meetings, as well as updates on legal and regulatory developments.

[v] Although the plaintiff’s expert witness Marcia Wagner contended that the time devoted to reviewing the Plan’s investments (apparently 15-30 minutes, according to committee members’ testimony) and Rocaton’s ratings at Committee meetings “would not have been enough to have meaningful conversations about the Plan’s investments.”

[vi] Though she did apparently point to a “disconnect” between their “financial professionalism” and “how they used that financial professionalism.”



All comments
Mike Sladky
1 year 1 week ago
The Judge should have also noted that ERISA does not require a plan fiduciary to be clairvoyant.