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Managed Account Provider Dodges Fiduciary Breach Suit


A federal judge has refused to let plan fiduciaries off the hook in an excessive fee case – but has dismissed claims against the plan’s managed account provider.

Plaintiffs here are participants in Home Depot’s FutureBuilder 401(k) plan, and they have filed suit not only against the plan fiduciaries, but also against Financial Engines Advisors, LLC (FEA) and Alight Financial Advisors, LLC (AFA), “investment advisory firms with which Home Depot has contracted to provide services for the Plan.”

The Claims

The plaintiffs here allege that Home Depot “imprudently selected and retained investment options for the Plan which were poorly-performing and charged high asset-based fees,” and that Home Depot “imprudently selected and retained FEA and AFA as investment advice service providers because they charged high asset-based fees, provided poor customer service, and provided substandard advisement services” (their April 2018 suit claimed that Home Depot “constructed a plan with far too many layers of fees, and turned a blind eye to a kickback scheme between Financial Engines and the Plan recordkeeper Aon Hewit”). 

Additionally, they allege that FEA and AFA “likewise breached their duties of prudence and loyalty under ERISA because they charged expensive asset-based fees, provided poor customer service, and provided substandard advisement services” – more specifically that the firms “engaged in self-dealing in violation of 29 U.S.C. § 1106(b) by utilizing a ‘reverse churning’ scheme, which is based on the theory that – by charging expensive, asset-based fees for investments with low trading activity and no need for ongoing monitoring or advice – the fiduciaries were able to limit the time they spent on customer service and investment advice and focus on recruiting additional customers.”

All of this, the plaintiffs alleged in their suit, contributed to what they claimed (citing data from Brightscope) was “a $100,000 gap in retirement savings between the average Home Depot plan participant and in top-rated plans of a similar size.” In that suit it was noted that plaintiff Jaime H. Pizarro used Financial Engines managed account services, while plaintiff Craig Smith “suffered harm by investing in the Plan’s poorly performing investment options…”

Motions to Dismiss

Noting that (Pizarro v. Home Depot, Inc., N.D. Ga., No. 1:18-cv-01556-WMR, 9/23/19), “to survive a motion to dismiss, plaintiffs must “allege some specific factual basis” for their legal conclusions,” Judge William M. Ray II of the U.S. District Court for the Northern District of Georgia, explained that in its motion to dismiss, Home Depot had argued (1) that Plaintiffs’ allegations of poor investment fund performance, without accompanying allegations of actual imprudent conduct on the part of Home Depot, are insufficient to state a plausible prudence claim under ERISA, and (2) that Plaintiffs “failed to plausibly allege that any investment fund’s performance required its removal from the Plan.”

With regard to that motion, Judge Ray noted that while the plaintiffs “have not identified the specific flaws in Home Depot’s decision-making process, the Court acknowledges that Plaintiffs would likely have no access to Home Depot’s particular decision-making process at this stage of the litigation,” and that in such circumstances “courts have held that plaintiffs may rely on circumstantial factual allegations to show a flawed process—particularly one that involves the fiduciaries management of underperforming investments.” Indeed, Ray wrote that he was “unconvinced that Plaintiffs’ factual allegations of performance data and benchmarks could not lead to a reasonable inference of imprudence in Home Depot’s decision-making process,” and found that the plaintiffs have “stated a plausible ERISA claim for breach of the duty of prudence by sufficiently alleging that Home Depot utilized an imprudent decision-making process in managing the Plan’s investment funds,” and denied Home Depot’s motion to dismiss. In doing so, he brushed aside Home Depot’s argument that a case from the Northern District of California, White v. Chevron Corp., applied. That case concluded that “[p]oor performance, standing alone, is not sufficient to create a reasonable inference that plan administrators failed to conduct an adequate investigation.” Judge Ray instead turned to a case closer to home (and in the same court district – the findings in Henderson v. Emory Univ. – where plaintiffs alleged similar claims based on “circumstantial” evidence, and were allowed to proceed to trial.

Advisory ‘Opinion’

With regard to the decision to hire and retain the services of Financial Engines Advisors, LLC (FEA) and Alight Financial Advisors, LLC (AFA), Home Depot argued that those allegations of imprudence – that there were cheaper investment advisement service alternatives readily available – was insufficient to state an ERISA claim for breach of the duty of prudence, absent any allegations showing an abuse of discretion in Home Depot’s decision-making process. Judge Ray didn’t see it that way – noting again that plaintiffs were allowed to “rely on circumstantial factual allegations to show a flawed process.”  And once again, the court was inclined to rule that the particulars as to the “specific methods and knowledge that Plaintiffs have not yet had access to, this Court finds that the disposition of Count II is improper at this stage of the litigation.”

With regard to the claims filed against FEA and AFA, Judge Ray stated that they argued that they could not be held liable for any fiduciary breach with regard to their fees because they did not act as fiduciaries with respect to negotiating or collecting their fees. Ray noted that the plaintiffs didn’t allege that FEA and AFA functioned as fiduciaries in any capacity other than by “providing investment advice,” and “yet they fail to allege facts sufficient to show that FEA and AFA breached their fiduciary duties to provide investment advice.” Ray found that the notion that a fiduciary breach arose out of the negotiation and collection of fees was “insufficient.” He explained, “It is well established that a service provider does not become a fiduciary simply by negotiating its compensation in an arm’s-length bargaining process—particularly where, as here, the service provider is not alleged to have had the ability to determine or control the actual amount of its compensation.” 

As for allegations of a fiduciary violation based on “inadequate customer service,” FEA and AFA contend that they were not fiduciaries with respect to Plaintiffs’ allegations regarding inadequate customer service because such ministerial actions do not confer fiduciary status. Judge Ray concurred, writing that “FEA and AFA’s duty to provide prudent investment advice does not extend to providing flawless customer service. Here, Plaintiffs have failed to connect any supposed customer service failure with any resulting breach of FEA’s fiduciary duty to provide investment advice” – and dismissed that claim by the plaintiffs.

Regarding that reverse churning claim, Judge Ray commented that, “Apparently, Plaintiffs are attempting to advance the theory that by charging asset-based fees for low maintenance accounts, FEA and AFA have engaged self-dealing.” He went on to note that § 1106(b)’s purpose is to “prohibit transactions that improperly benefit the fiduciary or adversely affect the Plan or its participants, not to prevent fiduciaries from being paid for their work.” Moreover, he explained that plaintiffs “fail to identify any transaction that violates § 1106(b), and FEA and AFA’s collection of previously negotiated and agreed-upon fees, without more, does not satisfy the elements of that section.”

What This Means

While the result was clearly a “win” for the managed account provider (and the recordkeeper that engaged them), this was, after all, just a determination as to whether the plaintiffs had established a case sufficient to warrant further proceedings. 

This court was more lenient than some in that determination, though it’s worth remembering that most give the party opposing dismissal the benefit of the doubt in such cases. Whether those claims will be sufficient to carry the day at trial following discovery is yet to be determined.