A suit that questioned the prudence of proprietary funds, as well as alleging excessive fees and poor performance in those selections, has been dismissed.
The suit was brought by one Judy Lalonde, a former employee of Defendant Massachusetts Mutual Insurance Company on behalf of herself and a proposed class of plan beneficiaries against MassMutual, Roger Crandall, the Investment Fiduciary Committee, the Plan Administrative Committee, and John and Jane Does 1-20, alleging violations of the Employee Retirement Income Security Act of 1974.
The Claims
Judge Mark G. Mastroianni in the U.S. District Court for the District of Massachusetts, outlined her claims (Lalonde v. Mass. Mut. Ins. Co., 2024 BL 108984, D. Mass., No. 3:22-cv-30147, 3/29/24) as follows:
- that the defendants breached fiduciary duties of prudence and loyalty in violation of 29 U.S.C. § 1104 (Count I);
- caused the plan to engage in prohibited transactions with "parties-in-interest" in violation of 29 U.S.C. § 1106(a) (Count II);
- caused the plan to engage in prohibited self-dealing transactions in violation of 29 U.S.C. § 1106(b) (Count III); and
- failed to monitor other fiduciaries (Count IV).
The Defense
He noted that, in response, the MassMutual defendants had made three arguments for dismissing the suit:
- that the plaintiff’s claims are barred by the three-year statute of limitation applied to ERISA actions and codified at 29 U.S.C. § 1113(2);
- that a previous settlement agreement in Gordan, et al. v. Massachusetts Mutual Life Insurance Co., which involved “substantially similar allegations about the plan, either bars this action in its entirety or restricts its allegations to those arising after December 3, 2020;” and
- that the suit “fails to plausibly state a claim upon which relief may be granted requiring dismissal pursuant to Federal Rule of Civil Procedure 12(b)(6).”
And, as it turns out, Judge Mastroianni agreed with the MassMutual defendants on all counts, ruling that Counts II and III were, in fact, barred by the three-year statute of limitation governing ERISA actions, that Counts I and IV were, in fact, restricted by the Gordan settlement agreement to alleged conduct arising after December 3, 2020—and that when “then reviewed in context, Counts I and IV fail to plausibly state a claim upon which relief may be granted.”
The Rationale(s)
Regarding the first point, Judge Mastroianni commented that it was “obvious from the face of the complaint, thereby justifying dismissal.” That said, he went on to explain that “As to Plaintiff's breach of fiduciary duty claim (Count I) and failure to monitor fiduciaries claim (Count IV), the three-year statute of limitation does not bar this action entirely” as it would apply only to activity after Dec. 3, 2020 in view of the aforementioned Gordan settlement, though he also noted that the prohibited transaction claims were barred by that three-year SOL.
He then commented that the prohibited transaction claims “all turn on the plan's inclusion of proprietary funds in the investment lineup,” and those were—according to Plaintiff—part of the plan as early as Dec. 31, 2016. Further, as the plaintiff acknowledged that she had invested in those funds, he noted that the suit “contains an entire section devoted to listing facts of which she was unaware. Yet, this section does not allege a lack of awareness regarding the plan's use of proprietary funds. Nor would it be plausible for Plaintiff to allege she was unaware of the presence of the proprietary funds in the plan's portfolio when she admittedly invested in the funds.” As it turns out, she was also part of the class involved in the Gordan settlement. “Class memberships makes it even more implausible she was unaware the plan contained proprietary funds,” he wrote, dismissing Counts II and III as barred by the statute of limitation.
As for that Gordan settlement,[i] Judge Mastroianni explained that terms of that settlement granted the district court jurisdiction to enforce its terms for four years, and granted Gordan class counsel the “exclusive right to institute an action enforcing the terms of the agreement.” These are things that he noted the current plaintiff—as a member of that class action—should have been aware. Those terms restricted her ability to bring this suit to conduct arising after Dec. 3, 2020.
The ‘Meat’ of the Case
Those complexities notwithstanding, the “meat” of this suit involved the allegations that the defendants breached their fiduciary duties with their inclusion of proprietary funds, the plan's retention of the GIA (Guaranteed Interest Account), the plan's failure to bargain for less expensive share classes in non-proprietary funds, and the plan's excessive recordkeeping fees. All of these, Judge Mastroianni noted, “give rise to an inference of breach. However, when properly limited to conduct arising after December 3, 2020, Plaintiff does not plausibly allege breach of fiduciary duty.”
Judge Mastroianni went on to outline ERISA’s standards of loyalty (“solely in the interest of the participants and beneficiaries and for the exclusive purpose of: providing benefits to participants and their beneficiaries; and defraying reasonable expenses of administering the plan”), and then noted that the use of proprietary funds had been “explicitly blessed” by the Labor Department “so long as the use otherwise complies with ERISA's statutory mandates.”
With regard to those points, he noted that “poor performance is not sufficient to infer breach because ‘[t]he test of prudence [*11] 'is one of process rather than ultimate investment performance and cannot be measured in hindsight.’” He explained that the plaintiff here “relies on a backwards looking comparison between the proprietary funds and alleged comparator funds which reveals a modest differential in performance. But this is not sufficient because the comparison fails to demonstrate the existence of an imprudent process. Instead, the comparison reflects the inherent vagaries of investing in the market.”
He commented similarly with regard to the allegations of excessive cost, noting that they “do not plausibly support an inference of breach because "[t]he fact that it is possible that some other funds might have had even lower ratios is beside the point; nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund (which might, of course, be plagued by other problems)." In fact, he concluded that “absent a valid benchmark, Plaintiff fails to plausibly allege excessive costs supporting an inference of breach. Where Plaintiff's complaint provides the expense ratios associated with alleged comparator funds, the differential is minimal. And where the complaint provides seemingly more substantial expense ratio differentials, the comparison is not made to a comparator fund but rather to an “industry average.”[ii]
As for the allegation that these proprietary funds are not commonly found in “mega plans,” Judge Mastroianni found that argument to be “speculative, as Plaintiff fails to advance a factual predicate for the assertion Defendants retained the proprietary funds to ‘create the illusion of market acceptance.’” He went on to note that the plaintiff “must provide sufficient factual support to enable the court to evaluate the plausibility of this assertion. Otherwise, the contention is speculative. ‘But such speculation, which is not based on any concrete or objective facts, is insufficient even at this stage.’”
He also found the allegations with regard to the GIA offering insufficient for the same reasons noted above (existence of alternatives not proof of imprudence, performance comparisons irrelevant, and comparators flawed).
Finally, with regard to allegations of excessive fees, Judge Mastroianni explained that “Plaintiff's complaint is devoid of factual allegations supporting this contention. Instead, she affirmatively alleges Defendants, by subjecting the recordkeeping service to open market bidding, secured a $13 drop in the cost of recordkeeping expenses per plan participant during the relevant time.” And that, he noted was “implausible to infer breach of fiduciary duty from an alleged $13 decline in recordkeeping expenses,” particularly since the complaint "fail[s] to allege that the [recordkeeping] fees were excessive relative to the services rendered.” He concluded that “absent comparators and facts sufficient to ascertain what the recordkeeping services paid for, the court cannot plausibly infer a breach based on excessive recordkeeping”—and since the plaintiff here “fails to allege facts sufficient to plausibly infer breach of fiduciary duty,” he dismissed Count I, albeit without prejudice, leaving the door open for an amendment of their claims.
What This Means
While there are certain unique aspects to this case, ultimately the suit was dismissed not so much because there was evidence of a prudent process, but rather because the plaintiff didn’t even allege that as a shortcoming, but rather left it to the court to infer that based on circumstances presented. While at the motion to dismiss stage some courts have been willing to proceed with little more than that, here more than mere assertions were required.
[i] In 2013, “participants in this same plan filed a class action lawsuit against various MassMutual-affiliated defendants,” where the plaintiffs in THAT suit (also) “alleged that the defendants placed MassMutual’s interests above plan participants’ interests in violation of ERISA’s duty of loyalty.” A case that, in November 2016 was settled for $30.9 million, along with an agreement that going forward plan participants were charged no more than $35 per participant for standard recordkeeping services.
[ii] Judge Mastroianni noted that “Industry average ratios are an insufficient benchmark because ‘the mere fact that a fund charges an expense ratio higher than the mean or median … does not imply that the cost was excessive … [o]therwise, by definition, half of all funds would charge excessive fees.’”
