While plan sponsors are generally the focus of ERISA litigation, retirement plan advisors can be a target of lawsuits for breach of fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA).
There has been a recent increase in ERISA claims filed against retirement plan advisors, and this article discusses the allegations and the courts’ conclusions in selected cases.
However, our discussion should not be viewed as a commentary on the merits of plaintiffs’ allegations.
Duties of ERISA Fiduciaries
Retirement plan advisors are fiduciaries under ERISA if they have or “exercise any discretionary authority or discretionary control” over plan assets (referred to as 3(38) investment managers) or if they provide “investment advice for a fee or other compensation, direct or indirect” for plan assets (referred to as 3(21) investment advisers).
In other words, if an advisor has discretionary control over plan investments or provides ongoing nondiscretionary advice regarding investments, the adviser is an ERISA fiduciary.
The core ERISA fiduciary duties for retirement plan advisors are the duties of loyalty and prudence. Intertwined in both duties is a responsibility to ensure that only reasonable fees are charged for the services and investments recommended or selected by the adviser.
Cases Against Plan-Level Advisors
One recent case brought against plan-level retirement plan advisors is Lauderdale v. NFP Retirement, Inc., No. 21-301 JVS (KESx), 2022 WL 4222831 (C.D. Cal. Feb. 8, 2022). The participant/plaintiffs sued the plan sponsor (Wood Group Holdings, Inc.) and two plan-level retirement plan advisors (NFP Retirement, Inc. and flexPATH Strategies, LLC).
Wood Group had hired NFP as the plan’s fiduciary investment advisor and flexPATH as the plan’s discretionary investment manager with authority over selecting, monitoring, and replacing the plan’s qualified default investment alternative (QDIA). The plaintiffs alleged that NFP and flexPATH “are operated and controlled by the same senior executives in the same office.”
Plaintiffs’ claims challenged several of NFP and flexPATH’s recommendations, specifically that:
• On NFP’s recommendation, in February 2016, Wood Group added flexPATH target date funds (TDFs) to the plan’s investment lineup.
• NFP recommended the flexPATH TDFs to Wood Group before the TDFs were launched and, therefore, before there was a track record of performance.
• flexPATH exercised its discretionary fiduciary authority to designate its own flexPATH TDFs as the plan’s QDIA.
• The flexPATH TDFs subsequently underperformed.
• In 2018, the Wood Group (acting contrary to NFP’s advice) removed the flexPATH TDFs from the plan’s investment lineup and removed flexPATH as the plan’s discretionary investment manager with authority over the plan’s QDIA.
• Acting on NFP’s recommendation, Wood Group later added three other flexPATH funds—collective investment trusts (“CITs”)—to the plan’s investment lineup.
• The same funds were available in otherwise identical but lower-cost share classes.
The court dismissed some of these claims early on, holding that flexPATH’s appointment as a designated investment manager shielded Wood Group and NFP from direct liability as co-fiduciaries for actions that flexPATH took in its capacity as the plan’s designated investment manager.
While plan fiduciaries may sometimes be liable for the breaches of co-fiduciaries, where—as in this case—an investment manager has been prudently appointed under ERISA, co-fiduciaries are not liable for the acts or omissions of the investment manager. Accordingly, the court held that ERISA shielded Wood Group and NFP from liability for flexPATH’s actions as the plan’s investment manager.
After discovery, the court dismissed all claims against NFP and most claims against Wood Group but allowed the remaining claims against flexPATH to proceed to trial. The court focused on the plaintiffs’ inability to prove a “causal link” between NFP and Wood Group’s conduct and losses to the plan.
Despite harsh words from the court regarding what it viewed as evidence of conflicts and an imprudent process related to the flexPATH TDFs, the court held that even if Wood Group or NFP had breached their fiduciary duties, those breaches had not caused the losses to the plan, since flexPATH had made the final decision to select those funds.
As to the plaintiffs’ claims against Wood Group and NFP regarding lower-cost share classes of the plan’s investment options, the court dismissed those claims. It said it was undisputed that NFP had negotiated the best-value share class for the plan’s size and that the Wood Group had appropriately balanced the benefits and “tradeoffs” of alternate share classes.
However, as noted above, the court allowed all claims against flexPATH to proceed to trial, noting that:
• Evidence supported plaintiffs’ claims that “flexPATH prioritized its own interests in growing its investment business at the expense of Plan participants”;
• flexPATH had failed to exercise “independent” judgment in selecting the flexPATH TDFs, relying instead on analyses that NFP performed before the Wood Group retained flexPATH as the plan’s discretionary investment manager and
• There was disputed evidence as to whether the flexPATH TDFs were objectively prudent investment options.
While this part of the case is still ongoing, the fact that the court has allowed these claims to proceed to trial means only that the plaintiffs had submitted what the court considered to be sufficient evidence of flexPATH’s conduct at the summary judgment phase (where the defendants requested a judicial determination without going to trial) to create disputes of material fact that required a trial to evaluate fully.
NFP was also recently named in a lawsuit involving similar claims related to the Molina Salary Savings Plan sponsored by Molina Healthcare, Inc., Mills v. NFP Retirement, Inc., No. 8:22-cv-994-JVS-DFM (C.D. Cal. May 16, 2022). NFP served as the plan’s fiduciary investment advisor.
As in Lauderdale, the plaintiffs challenged NFP’s advice regarding the flexPATH TDFs. The NFP case was consolidated with a parallel case that the plaintiff brought against Molina in July 2022, Mills v. Molina Healthcare, Inc., No. 2:22-cv-1813-ODW (GJSx) (C.D. Cal.). The Mills case is also still pending.
Notably, on a motion to dismiss, the Mills court disagreed with the Lauderdale court’s holding that a plan sponsor’s delegation of discretionary investment authority could shield co-fiduciaries from liability, indicating that different courts may come out differently on that question.
Cases Against Participant-Level Advisors
Plaintiffs are also filing lawsuits related to advisors that provide participant-level investment advice, such as managed account services. These lawsuits have fallen into one of two categories: lawsuits against ERISA plan sponsors that allegedly contract with managed account providers for allegedly excessive fees; and lawsuits against managed account providers for allegedly providing imprudent, conflicted, and excessively expensive advice to participants.
Gosse v. Dover Corporation, No. 1:22-cv-04254 (N.D. Ill. Aug. 11, 2022), is an example of a recent lawsuit against a plan sponsor related to a plan’s managed account provider. The plaintiffs in this case alleged that the managed account fees were excessive and unreasonable and that the managed account services did not provide any value to participants. The reasoning is that the “asset allocations created by the managed account services were not materially different than the asset allocations provided by the age-appropriate target date options ubiquitously available … in the market.” Plaintiffs brought ERISA breach of fiduciary duty claims against the plan sponsor in its fiduciary role.
Shaffer v. Empower Retirement, LLC, No. 1:22-cv-02716-NYW (D. Colo. Oct. 14, 2022), is an example of a recent lawsuit against a managed account service provider. Here, the plaintiffs alleged that the provider (Empower) misrepresented the nature and scope of its managed account advisers’ compensation, the services that the managed account advisers provided, and the relationship between the provider and the funds its managed account advisers recommended to clients.
Plaintiffs brought breach of fiduciary duty claims under the Investment Advisers Act, as well as common law charges of fraudulent misrepresentation, fraudulent omission, and negligent omission claims.
Limit Litigation Exposure
These recent cases are good reminders of the importance of having—and documenting—good processes.
o For plan-level advisory services: Be aware of the plan’s Investment Policy Statement. Courts will generally pay special attention to a plan’s written Investment Policy Statement, if one exists. In the Lauderdale case, for example, plaintiffs alleged that the defendants’ selection and retention of the flexPATH TDFs was inconsistent with the plan’s Investment Policy Statement.
o Have a strategy for new investment funds. As in the Lauderdale and Mills cases, Plaintiffs’ attorneys will often assert that newly formed funds that underperform would not have been selected by a prudent fiduciary (or recommended by a prudent fiduciary adviser). Advisors who want to add funds without at least a three-year track record might consider recommending the adoption of specific provisions in the IPS that would allow for the inclusion of those type funds in the plan, for example, acknowledging the investment manager has a proven track record in managing similar funds.
• For participant-level advisory services:
o Communicate clearly with participants (and the plan fiduciaries who have appointed you as a participant-level investment advisor) about your services. As evident by the allegations in the Shaffer and Gosse cases, participants who feel misled by their managed account providers or who are not educated about the value their managed account advisers provide are more likely to think that account fees are too high or that managed account advisers are providing imprudent advice. Participant-level advisors should disclose to participants the investment advice’s nature, scope, and limitations. In addition, the advisors should consider providing participants with a report each year on the services provided and results. Participant-level advisers should, of course, be monitored by plan fiduciaries the same way the plan fiduciaries would monitor any other service provider (see, e.g., EBSA Field Assistance Bulletin 2007-01), including the managed account’s performance and the managed account provider’s compensation. Participant-level advisers should, therefore, provide information to plan fiduciaries to fulfill that obligation.
o Consider how the managed accounts differ from the plan’s target date funds. Plaintiffs in the Gosse case alleged that the managed account provider’s services lacked value because they were too similar to what plaintiffs could have received—at a lower cost - by investing in a TDF. While there is no legal requirement to invest participant accounts with allocations different than a TDF, plaintiffs’ attorneys may use similar allocations to challenge the reasonableness of advisory fees. In addition, if an allocation corresponds to a participant’s age-appropriate TDF, that may support an argument that the account was managed only based on the age of the participant (and therefore was not a personalized managed account that might support a higher cost rationale for the choice.
o Consider other legal issues and value propositions. If there is little investment activity in a managed account, is there a risk of a challenge of reverse churning? In terms of value, does the management of the account consider several factors about the participant rather than just age? More specifically, is the account personalized to the investment profile of the participant? Also, are other services offered in connection with investment management? For example, advice about whether the participant is on course to a financially secure retirement. These services provide value that can support the reasonableness of the advisory fee.
Conclusion
Litigation against retirement plan advisors is probably here to stay. Indeed, it may pick up in the months ahead.
Advisors can protect themselves against these kinds of claims by documenting the processes behind their investment advice, understanding and following a plan’s investment policy statement (including recommending changes to the IPS where appropriate), adequately communicating with participants about the nature and scope of their services, and ensuring that participants understand and better appreciate the value they are receiving.
Of course, and as is almost always the case under ERISA, specific facts matter in every case, and having adequate documentation of your process and communications can be the key to defending against these claims.
Fred Reish, Partner Faegre Drinker Biddle & Reath LLP, Megan Hladilek, Partner Faegre Drinker Biddle & Reath LLP, Emily Kile-Maxwell, Associate Faegre Drinker Biddle & Reath LLP.
