The terms of another proprietary fund/excessive fee suit settlement have come to light.
The case of Bekker v. Neuberger Berman Grp. LLC (S.D.N.Y., No. 7:16-cv-06123), filed in August 2016 in the U.S. District Court for the Southern District of New York, alleged that fiduciaries of the Neuberger Berman Group 401(k) Plan forced the plan into “investments managed by Neuberger or an affiliated entity, which charged excessive fees that benefited Neuberger and the managers of the proprietary funds.” One fund in particular—the Value Equity Fund—was singled out (little wonder, since it held about half the assets in the plan) for being “larded with high fees and has suffered from consistently abysmal performance.” The suit alleged that the decision to continue to offer this fund, and to open the fund to new investments (it had been closed to new money following the firm’s acquisition by Lehman Brothers, and then reopened following the re-separation of the firms), were fiduciary breaches which cost the plan more than $130 million.
That said, in 2018, Judge Laura Taylor Swain dismissed the plaintiff’s primary claim—but allowed him to restate that claim in May 2019, finding that “…resolution of the question of Plaintiff’s actual knowledge of the basis of his breach of fiduciary duty claim also requires discovery similarly narrowly targeted to that issue.” But then, following the Supreme Court’s ruling in the Intel case,[i] plaintiff Bekker (represented by Bailey & Glasser LLP) wrote to Judge Swain, noting that in the defendants’ motion for summary judgment, they claimed Bekker’s claim was brought too late (“time-barred” in legal parlance), arguing that “because information about the fees and performance of the Value Equity Fund, the proprietary fund about which Plaintiff complains, was available to Plaintiff, he had actual knowledge of the contents of such disclosures.”
And that led Judge Swain to basically instruct the defendants to show (in no more than five double-spaced pages) why their motion for summary judgment shouldn’t be dismissed—and that, in turn, led to the settlement agreement, announced on March 23—the details of which are now public.
The Settlement
As such settlements go, this one (Bekker v. Neuberger Berman Grp. 401(k) Plan Investment Comm., S.D.N.Y., No. 1:16-cv-06123, motion for preliminary settlement approval 6/10/20) is pretty straightforward—$17 million in cash, from which the plaintiff’s attorneys will request an amount not to exceed $5,666,666 (1/3 of the gross settlement) plus reimbursement of expenses, for their involvement, $20,000 to the named plaintiff, the cost of “an Independent Fiduciary to evaluate the Settlement as required by ERISA.”
As for the Value Equity Fund—well, the settlement acknowledges that “Defendant has already removed the VEF from the Plan, negating the need for additional relief through additional affirmative plan changes.”
The settlement claims that “Plaintiff’s expert calculated damages from the underperformance of the VEF compared to the applicable Morningstar category median and calculated damages of $87.5 million,” and “thus, the Settlement represents nearly 20% of the Class’ potential damages”—an amount, it says, is “consistent with approved settlements in other proprietary fund ERISA cases, including cases that settled after questions of the applicable statute of limitations and summary judgment were resolved.”
Settled, But Unresolved
Reminding us that a settlement is not an adjudication, nor is it an admission of guilt, the settlement notes that the defendants here not only “denies the claims and all liability,” but that they argue—among other things—that:
“…(a) the Plan offered an appropriate investment mix for participants, both proprietary and non-proprietary and across different asset classes, risk profiles, fee structures, and outcome opportunities; (b) the fees charged by the VEF were less than Marvin Schwartz—the VEF’s manager—charged outside investors for his services; (c) the VEF provided participants with strong performance before and during the Class Period; (d) the Plan was better off having concentrated its investments in the VEF than it would have been if the investments were more diversified across stock and bonds; (e) Neuberger met the Prohibited Transaction Exemption requirements to offer its own products as investment options for the Plan; and (f) Plaintiff’s comparator funds were either offered in the Plan alongside the VEF, or not sufficiently similar to the VEF to award damages based on their alternative performance.”
Indeed, upon the suit’s filing, Neuberger Berman’s sharp and public rebuke of the suit’s allegations was noteworthy in a time when many firms choose to refrain from comment.
That said, the settlement agreement—which must still be approved by the court—states that “instead of a drawn-out decade of costly litigation, with a risk of no recovery, class members will receive a certain benefit now whether they are current participants in the Plan or former participants. These factors all support preliminary approval of the settlement.”
What This Means
While there is a certain tendency to view settlements as victories for the plaintiffs, it is worth remembering that these are neither admissions of a, nor a court’s determination of guilt. In essence, they leave, largely, if not fully, unresolved the issues presented, and the settlement is generally well short of the damages alleged, but also much more than most defendants anticipated yielding in defense of their actions—and that’s not including the time, energy and expenses of their defense.
This is, of course the latest financial services company to agree to settle such claims—though not the largest in recent memory (SunTrust, at $29 million), though it’s well above of most others in this genre, including SEI ($6.8 million), MFS ($6.875 million), Eaton Vance ($3.45 million), Franklin Templeton ($4.3 million), BB&T ($24 million), Jackson National ($4.5 million), Deutsche Bank ($21.9 million), American Airlines Group Inc. ($22 million), Allianz SE ($12 million), TIAA ($5 million), and most recently Invesco.
Those decisions, of course, stand somewhat in contrast to the cases involving American Century and, more recently, CenturyLink, in which the defendants chose to go to court—and won.
However, this case does remind us of the significance of the “actual knowledge” standard raised (and ultimately adjudicated) in the Intel case—one that will almost certainly, as it did here, weaken the strength of the defense’s position both in rebutting plaintiffs’ claims, and in limiting the amount of damages to be recovered. And that, settlement decision notwithstanding, is worth taking note of.
[i]That Intel ruling, handed down in a unanimous ruling from the Supreme Court in February, held that you don’t need more than a dictionary to know the meaning of “actual knowledge” when it comes to participant awareness regarding 401(k) disclosures. Establishing when that knowledge took place is an essential element in setting the time limit to bring an ERISA claim—six years after the breach occurred, or three years following “actual knowledge”of that breach, whichever was shorter.
