A federal appellate court has affirmed the decision of a district court in rejecting fiduciary breach claims in the selection/retention of proprietary funds—noting evidence of a "robust process" in reviewing plan investments.
The Claims
Back in September 2022 fiduciaries of the $7.5 billion Goldman Sachs 401(k) prevailed in a suit filed by Nichols Kaster PLLP (and MKLLC Law) that (in 2019) alleged that the Goldman Sachs defendants “…retained these proprietary funds despite persistent underperformance and steep asset declines, adversely affecting participant balances while allowing Goldman Sachs to continue to draw fees and stem the consequences of losing one of the of the largest investors in the funds—the Plan.”
And while those fiduciaries did, in fact, remove those funds from the plan in 2017, the plaintiffs allege that they did so “only reluctantly and belatedly”—“after other self-dealing firms were successfully brought to court over similar practices,” when—they argue—an “objective fiduciary in the same position would have removed these funds promptly at the start of the class period, and certainly before 2017.”
Ultimately, the suit claimed that “the circumstances of Defendants’ retention and belated removal of these proprietary funds demonstrates that Defendants’ process for managing the Plan and monitoring Plan investments was deeply flawed and improperly influenced by the interests of Goldman Sachs, in breach of Defendants’ fiduciary duties.”
District Court Determination
Despite those charges, there was plenty of evidence presented (Falberg v. Goldman Sachs Grp. Inc., S.D.N.Y., No. 1:19-cv-09910, opinion publicly released 9/15/22) that the Goldman Sachs committee received training, met regularly (quarterly, as well as ad hoc meetings, including eight of the latter during the period in question), discussed in some detail the specific issues related to various investments (assisted by investment consultant Rocaton Investment Advisors LLC), including the prudence/risk of continuing to include proprietary funds in the lineup.
In fact, to the ears of Judge Edgardo Ramos of the U.S. District Court for the Southern District of New York, the plaintiff’s arguments were largely dependent on the lack of a formal investment policy statement (IPS). “But it is undisputed that an IPS is not required under ERISA,” Judge Ramos commented. “While Falberg argues an IPS is a ‘best practice,’ his expert Wagner conceded that the duty of prudence does not mandate a ‘best practice.’ And, despite Falberg’s suggestions to the contrary, the Department of Labor has never taken the position that an IPS is required to satisfy a fiduciary’s duties.”
Appellate Ruling
In affirming the summary judgement decision (and echoing the findings) of that district court, the three-judge panel (Leonid Falberg v. The Goldman Sachs Group Inc. et al., case number 22-2689, in the U.S. Court of Appeals for the Second Circuit) noted that, “As an overarching matter, Falberg failed to introduce evidence that Defendants retained the Challenged Funds in the Plan for the purpose of advancing their interests; indeed, the evidence in the record suggests otherwise. For example, there was evidence that Defendants employed a robust process to manage potential conflicts of interest: the Committee required its members to participate in fiduciary training sessions, which is not a standard market practice, and retained an investment consultant to act as an independent advisor and provide unbiased advice about the Plan’s fund offerings. Moreover, there is no evidence in the record that either the independent investment advisor or the Committee members had any personal incentive to favor the Challenged Funds,” going on to note that the “conclusory assertions” of the plaintiff here were “unsupported by the record.”
“At best, Falberg takes issue with the timeliness of removal of the Challenged Funds,” the panel commented. “But a fiduciary does not breach its duty of loyalty by choosing to retain an investment that, in the fiduciary’s reasonable assessment, may perform well in the long term despite short-term underperformance. And more to the point with respect to the duty of loyalty, there is no evidence that Defendants’ weighting of long-term versus short-term performance with respect to any particular fund was somehow skewed by favoritism toward GSAM funds.”
‘Formal Criteria’
As for the claims regarding a breach of the plan fiduciaries’ duty of prudence “because they did not establish formal criteria for selecting or monitoring the Plan’s investments,” the appellate panel noted that the “duty of prudence ‘focuses on a fiduciary’s conduct in arriving at an investment decision, not on its results, and asks whether a fiduciary employed the appropriate methods to investigate and determine the merits of a particular investment.’” They went on to note that, “Here, the district court correctly determined that Falberg failed to introduce sufficient evidence that a prudent fiduciary in Defendants’ position ‘would have acted differently.’” Moreover, they echoed the decision of the lower court in affirming that while a formal IPS might represent a “best practice,” it was not a legal requirement.
“Further, the undisputed evidence in the record indicates that, even without an IPS, the Committee followed a deliberative and rigorous process when selecting and monitoring investments,” the judges explained. “The Committee’s independent advisor continually monitored and evaluated the Plan’s investment options, and provided the Committee members with detailed information… .” They went on to note that “Falberg’s argument that the adoption of more formal criteria would have improved Plan performance is supported by nothing more than mere speculation. Given that Falberg failed to submit evidence sufficient to create a dispute as to whether a prudent fiduciary would have acted differently, his duty of prudence claim fails.”
As for the prohibited transaction claims—that “because GSAM paid fee rebates to other plans that invested in their proprietary funds and did not do the same with respect to the Plan”—the judges commented that “the shareholder services agreement between GSAM and Hewitt Associates provided that no such fee rebates would be provided for any retirement plans that invested in the GSAM funds before April 1, 2009. Because the Plan had invested in GSAM funds before April 2009, it fell into the category of plans that were ineligible for fee rebates.”
And thus, the Goldman Sachs plan “was treated no less favorably than other retirement plans because all retirement plans that used Hewitt Associates as a recordkeeper were subject to the same fee rebate eligibility requirements. Any difference in treatment between the Plan and certain other retirement plans which did receive fee rebates was either because those plans did not use Hewitt Associates as their recordkeeper or because they invested in the GSAM funds after April 1, 2009.”
And, of course—having determined that the plaintiff’s appeal came up short in all the foregoing matters, the appellate panel readily dismissed the ancillary claims of a failure to monitor those actions—and affirmed the decision of the district court in dismissing the suit.
What This Means
Once again, a well-documented prudent process—buttressed by committee members with expertise, reinforced by training, and supported by the advice of expert investment advice (and legal counsel) has—eventually—prevailed.
