The plaintiffs in one of the dozen or so cases involving the BlackRock Lifepath target-date funds (TDFs) have made it past the motion to dismiss stage.
In this case (Trauernicht et al. v. Genworth Financial Inc. et al., case number 3:22-cv-00532, in the U.S. District Court for the Eastern District of Virginia), participant-plaintiffs Peter Trauernicht and Zachary Wright had alleged—as had different plaintiffs in multiple jurisdictions (all[i] represented by the law firm of Miller Shah, LLP)—that the fiduciaries of their employer’s (in this case Genworth) 401(k) plan had “chased low fees” to the exclusion of considerations about performance, in the process breaching their fiduciary duties—as had those responsible for overseeing those making those decisions.
The plaintiffs had also asserted that a more appropriate benchmark for evaluating these options was the other leading target-date fund families, though they utilized a “through” retirement date glidepath, rather than the “to” version embraced by the BlackRock TDFs. The plaintiffs argued that the underperformance during the class period “caused participants to miss out on over $100 million in retirement savings growth that would have been achieved through investments in alternative TDFs.”
To date, these claims have not held up well, generally speaking not proceeding past the fiduciary defendants’ motions to dismiss, and not managing to amend their arguments sufficiently to get past a second attempt—in multiple jurisdictions. However, they had more success this time.
In fairness, this case has struggled more than other actions in different jurisdictions. As U.S. District Judge Robert E. Payne noted, the initial motion to dismiss by the Genworth defendants was dismissed (in October 2022) for “failure to properly divide the issues,” but was subsequently amended to remedy that procedural shortcoming.
Genworth had argued that the participant-plaintiffs lacked standing to bring suit—as they were ex-participants. But Judge Payne—while acknowledging that at least one court had expressed doubt that a former participant could adequately represent the class—commented that it was clear “that Plaintiffs have suffered an injury-in-fact that is casually related to Genworth's conduct as the fiduciary of the Plan because a violation of the fiduciary duty can serve as the injury which can justify injunctive relief.” That said, Judge Payne granted the Genworth defendants partial motion to dismiss the claims for PROSPECTIVE relief with prejudice, as the former participants would not be in the plan to benefit from it. But that was all they won in this round.
Genworth claims that it monitored the investments because: (1) it sought and received outside financial and legal expertise to inform the monitoring process; (2) the Committee regularly met and even exceeded the IPS requirement of meeting annually; and (3) it received regular updates on the investments' performance as evidenced by the presentations made to the Committee.
As for the assertion that the Committee did not review or discuss the BlackRock TDFs because it is not reflected in the meeting minutes, Genworth contended that it was not required (nor was it plausible) to review those investments during every single meeting and that the minutes do not necessarily detail every discussion that occurred during each meeting. Moreover, they contend that any suggestion that it did not monitor the BlackRock TDFs because it did not consider the performance of the Comparator TDFs identified in the amended complaint is without merit because the Comparator TDFs are not meaningful benchmarks. Oh—and in the alternative, if the court were to find them to be plausible, the claim for breach of duty, nonetheless, falls short because there has been no claim that the failure to monitor caused the losses.
Judge Payne also noted that Genworth argued that the plaintiffs have failed to allege "significant underperformance" or how they calculated their losses, so there is no method for the Court to find loss causation—nor, they contend, were there external warning signs to alert a prudent fiduciary that the BlackRock TDFs should be removed.
The plaintiffs basically responded that the points made by Genworth were “factual disputes” of a kind more suited for resolution at trial. As for comparisons with the comparator TDFs, the plaintiffs assert that, while there always differences in funds, the comparators represent "the most likely funds that a prudent fiduciary would have considered in weighing the performance of the BlackRock TDFs," so it is a sound basis for comparison. They also argue that it is reasonable to infer that a lack of sufficient monitoring caused the losses, and (according to Judge Payne), quoting the Seventh Circuit, "[w]here alternative inferences are in equipoise . . . the plaintiff is to prevail on a motion to dismiss."
But basically—and in contrast to the perspective of other courts in these cases to date—Judge Payne found the Genworth arguments to be more appropriate for a full consideration at trial, rather than to simply allow those to brush aside the plaintiffs’ claims. He explained “because the SAC alleges facts that show that the breach caused the loss because a prudent fiduciary properly monitoring the performance of the BlackRock TDFs would have replaced the funds, this ground for dismissing COUNT ONE is rejected.”
Judge Payne was clearly aware of the other decisions—though had he not, the defendants ensured that he would by pointing to those decisions, notably the Booz Allen Hamilton decision where Payne commented that while that case was dismissed for failure to state a claim, he contended that the plaintiffs’ arguments in that case were "completely devoid of facts about the particular decision-making process undertaken by the defendants,” and involved a claim that "relie[d] solely on the performance of the BlackRock TDFs.”
In the case at hand, Judge Payne said the SAC (second amended complaint) “provides ample detail on the underperformance of the BlackRock TDFs and how the underperformance would have signaled the need for a change to a prudent fiduciary”—and “also bases COUNT ONE on Genworth's failure to monitor and alleges that Genworth failed to follow its internal documents (mainly the IPS) when it initially chose to retain the BlackRock TDFs even though they failed when measured against the criteria listed in the IPS”—and that meant that the arguments made here were NOT the same as in the Booz Allen Hamilton case.
Judge Payne also distinguished the claims made by the fiduciary defendants in the latter case with this one because in this case the plaintiffs explained the applicability of the comparator TDFs as plausible benchmarks as being “because ‘they represent the most likely alternatives to be selected were the BlackRock TDFs to be replaced’ based on Genworth's own criteria described in the IPS.” Moreover, Judge Payne noted that at this stage in the proceedings, a greater level of detail was not required (“only enough factual context so the court can draw reasonable inferences that there is ‘more than a sheer possibility that a defendant has acted unlawfully’”).
Judge Payne also recalled that in the Booz Allen Hamilton case (their amended complaint) the court criticizes the use of the S&P Index and the Sharpe ratios as performance metrics because the two were not actual funds—and he noted that Genworth raised the same issue “arguing that the use of the S&P Indices does not show significant underperformance but rather shows that Genworth was adhering to a sound evaluative process.” However, he commented that “this argument ignores the fact that Genworth's own IPS provides the S&P Target Date Index as a benchmark to measure the performance of the BlackRock TDFs. There is, therefore, nothing implausible or defective about the SAC when it relies on the same data for one of its comparisons.”
As for the Sharpe ratio comparison (also raised in the Booz Allen case), Judge Payne commented that, although Genworth hadn’t challenged its use, the suit “describes the Sharpe ratio as a ‘commonly prescribed component of a fiduciary investment monitoring process’ that ‘accounts for differing levels of risk by measuring the performance of an investment’ to similar investments”—and he viewed it favorably as a means to standardize the risk levels between the Comparator TDFs and the BlackRock TDFs for a more meaningful comparison. Regardless, he also characterized that disagreement as its applicability as “a dispute that is appropriate to be addressed later in the proceedings, potentially with the aid of expert testimony. In any event, the SAC's allegations respecting the Sharpe ratios are to be taken as true, and they are plausible.”
“The simple fact is that the SAC in this case is materially different than the pleadings as discussed in the newly offered authorities,” Judge Payne concluded. “And, in all of those cases, leave to file an amended complaint was granted. Thus, the new decisions do not change the result here: COUNT ONE is well-pled under Twombly and Iqbal.”
And, having given credence to the arguments with regard to the fund selection, Judge Payne also kept alive the allegations regarding oversight of the fiduciaries making those decisions.
What This Means
This is really the first of the series of cases involving the BlackRock Lifepath target-date funds that hasn’t proven to be a resounding win for the defendants. We’re often reminded by the courts in response to motions to dismiss that they are directed to essentially accept the arguments presented by the party that is NOT moving to dismiss the case (the plaintiffs) at face value unless they are clearly implausible. Here we have a judge who seems to have taken that admonition to heart, and accepted pretty much at face value the arguments and rationale positioned by those plaintiffs.
It’s another reminder that the threshold for one judge’s “plausible” case can be higher than another—even within the same federal court jurisdiction.
[i] You will likely recall that the suits have been filed on behalf of participants in about a dozen 401(k) plans that had investments in the BlackRock Lifepath target date funds, including Citigroup Inc., Genworth, Capital One, Booz Hamilton Allen, Stanley Black & Decker Inc., Marsh & McLennan Cos., Advance Publications, and Wintrust Financial Corp. Representing the plaintiffs in each of these suits is the law firm of Miller Shah LLP.