Skip to main content

You are here

Advertisement

Prudent Process Proves Potent in Fiduciary Breach Suit

Litigation

Once again, a prudent process has won the day in court for retirement plan fiduciaries.

In the case at hand, plaintiff Bonnie Birse, a participant in the CenturyLink Dollars & Sense 401(k) Plan since 2012, and invested in the plan’s 2015 Target Date Fund, argued that CenturyLink’s investment options (which consisted of a number of custom funds designed by CIM) “consistently under-performed its benchmark index … by two percent or more each year since it was formed in 2012.” The suit claims that this underperformance was “virtually guaranteed because it contained a serious design flaw from inception,” a flaw the plaintiff claims was “built-in” by the decision to use six different fund managers with the same mandate (five active and one passive). “The odds of the five active managers outperforming the market in aggregate was highly remote due to the efficiency of the large cap domestic equity market and the difficulty of even one manager outperforming for more than a year,” according to the suit.

More specifically, plaintiffs argue that the fund "underperformed immediately and consistently due to its flawed and imprudent design, and that CenturyLink plan fiduciaries failed to appropriately monitor and adjust the fund “because it lacked any formal process or guidelines for doing so." 

The original suit (Birse v. CenturyLink, Inc., D. Colo., No. 1:17-cv-02872, complaint filed 11/30/17) was filed in the U.S. District Court for the District of Colorado in late 2017 by Franklin D. Azar & Associates, a personal injury law firm that claims to specialize in “motor vehicle accidents, defective products, and slip-and-fall accidents.” It’s not the first ERISA suit filed by the firm, which has also filed suit on behalf of at least one relatively modest-sized plan. In fact, on the same day this suit was filed, the firm filed an ERISA excessive fee lawsuit against a union retirement fund.

Duty “Bound”

Fiduciaries such as CIM have "a duty to exercise prudence in selecting investments . . . .", observed Judge Christine M. Arguello (Birse v. CenturyLink, Inc., 2020 BL 82739, D. Colo., No. 1:17-cv-02872, 3/5/20), citing Tibble v. Edison Int'l . She went on to note (citing several other opinions) that in order “to determine whether a fiduciary has breached its duty of prudence in this context, courts apply an objective standard which focuses on a fiduciary's conduct in arriving at an investment decision, not on its results . . . ."  She goes on to remind us that, "We cannot rely, after the fact, on the magnitude of the decrease in the [relevant investment's] price; rather, we must consider the extent to which plan fiduciaries at a given point in time reasonably could have predicted the outcome that followed."

She then noted that, “The evidence indicates that CIM's evaluation of the merits of the Fund's design satisfies the prudent person standard. The investment objective of the Fund was to "[e]xceed the return of a broad market index of the largest 1,000 companies in the U.S. using an actively managed multi-manager approach,” and that in developing that objective, “CIM undertook extensive, appropriate research into how to structure the Fund, including with respect to an appropriate strategy and the selection of managers." 

In that regard she noted that “Paul Strong, the Director of CIM's Investment Strategy and Co-director of the Investment Strategy & Implementation Team, was heavily involved in the design of the Fund before it was offered to Plan participants in 2012,” and that he held a bachelor's degree in Business and as well as a Master of Business Administration, as well as that he was a Chartered Financial Analyst, which she noted was “the highest distinction in the investment management profession."  And— “as Mr. Strong's declaration regarding the process involved in designing the fund illustrates, CIM engaged in a robust decision-making process.”

She also noted that, “CIM undertook extensive quantitative and qualitative research regarding how to structure the [Fund], including as to the appropriate strategy and the composition and number of managers, both before and after the Fund was offered to Plan participants. CIM consulted and relied upon industry literature and data and communications with industry experts, peers, and current managers.” 

“Thus, CIM's highly qualified team of professionals rigorously analyzed the purpose the Fund would serve, how it would accomplish that purpose, and the Fund's strategic place within the overall portfolio of the Plan.”

Prudent Process(es)

She also concluded that, “The evidence indicates that CIM's oversight of the suitability of the Fund satisfies the prudent person standard,” once again citing the credentials and education of the individuals responsible for overseeing the fund. She also noted that the team there “received monthly performance reports created by CIM personnel based, in part, on data provided by Northern Trust, and quarterly performance reports prepared by the Asset Allocation & 401(k) Team,” that “the Committee met at least bi-monthly, and held quarterly performance review and quarterly risk meetings, during which the Committee reviewed performance and managers at a program level,” that “when necessary, the Committee could also discuss a particular fund, including the Fund, and/or its managers and performance, that the “performance reviews of each strategy, including the Fund, were typically presented to the Committee on an annual basis,” and that “when a fund or manager underperforms on a sustained basis, the Committee takes it extremely seriously.”

Moreover, “in addition to regularly scheduled meetings, appropriate CIM employees interacted with the individual investment managers of its funds, including the investment managers in the Fund, on a less formal basis. CIM employees had periodic contact with each of the investment managers retained to manage CIM's assets through calls, emails, and/or in-person meetings.”

Judge Arguello also noted that CenturyLink’s Strong explained that "CIM used long-term outperformance of the passive benchmark on a rolling three-year basis as one quantitative measure in determining the success of the [Fund's] strategy." Moreover, CIM "considered other quantitative information, including absolute fund and manager performance, manager performance against the manager level benchmark determined as part of the design process, fund and manager performance relative to eVestment manager universe data and CIM's expectations, fund and manager risk statistics and historical performance."

‘Under’ Ways

As for the alleged underperformance, she noted that, “Despite ongoing analysis and discussions that took the Fund's underperformance into account, "[p]rior to 2016, [CIM] concluded that the underperformance was driven by market conditions," and that the Fund should continue to be offered to Plan participants,” though—“as a result of CIM's monitoring procedures, CIM made adjustments to the Fund throughout its existence,” citing decisions to replace various investment managers and changing the asset allocation ranges for other managers,” among other things.

“In summary, the evidence in the record shows that CIM systematically analyzed the Fund at regular intervals to ensure that it was an appropriate long-term investment for Plan participants, and CIM made reasoned decisions based on appropriate sources of data. In doing so, CIM exercised reasonable care, skill, and caution, and it reevaluated the Fund periodically as conditions changed. Therefore, CIM has shown that it satisfied its duty of prudence with respect to its monitoring procedures.”

She noted that, “Plaintiffs argue that "Defendants lacked functional processes for nearly every aspect of designing, implementing, monitoring and adjusting the [Fund],” but citing “detailed procedures set forth in Sections A and B, supra, Plaintiffs' argument is factually unsupported.” Moreover, she noted that “Plaintiffs attempt to manufacture a dispute of fact through their experts' interpretation of the procedures Defendants maintained” was unpersuasive “… because their experts' critique of Defendants' procedures does not suggest that Defendants breached their duty of prudence.”

Expert ‘Opinions’

Indeed, Judge Arguello didn’t have much use for the testimony of the plaintiff’s expert witness, Roger Levy, on whose testimony she said they relied “almost exclusively.” She discarded it as a “flawed” strategy “…because Mr. Levy's opinion of what constitutes a breach of the duty of prudence is distinct from what ERISA requires.” She went on to note that “a court[i] recently gave Mr. Levy's opinions about an ERISA fiduciary's obligations ‘no weight’ because at trial, Mr. Levy: acknowledged that his approach has not won wide acceptance in the retirement plan industry, with only fourteen to sixteen retirement plans out of approximately 500,000 conforming to these standards.” 

She did throw a bone to the plaintiffs, noting that, “while the Court agrees with Mr. Levy that fiduciaries should strive to attain the standards he champions, they are not the standards ERISA requires.”

“In summary, there is no genuine dispute of material fact with regard to whether CIM breached its duty of prudence. As a consequence, Plaintiffs' derivative claims against CenturyLink fail as a matter of law because they are premised upon CIM's purported breach,” granting the CenturyLink fiduciaries’ motion for summary judgement, rejecting the plaintiff’s motion for same, and denying all other outstanding motions in the case as “moot.”

What This Means

Once again, a prudent process prevails. Here, many of the allegations that have been widely made in these excessive fee cases were refuted by testimony and documentation that revealed the kind of thoughtful, ongoing, due diligence process that plan fiduciaries are often counseled to undertake.

And it pays to have expert witnesses who know what the law actually requires, rather than what it “ought” to …

 

[i] This happens to be Wildman v. Am. Century Servs., LLC, 2019 BL 21670, W.D. Mo., No. 4:16-cv-00737-DGK, 1/23/19)), another case where the defendants presented a compelling, documents, case of a fiduciary process.

Advertisement