The plaintiffs in one of a dozen suits challenging the use of BlackRock Lifepath target-date funds has once again gone down in flames.
Last December U.S. District Judge Michael S. Nachmanoff had dismissed a suit alleging a fiduciary breach brought by employee and former plan participant Andre Hall and current employee/plan participant Jermaine Minitee. Their basic argument was that the plan fiduciaries “chased low fees,” and in the process myopically ignored the poor performance of the BlackRock Lifepath TDFs, at least compared to the target-date funds that the plaintiffs argued were a valid benchmark—the half-dozen leading target-date fund families, though those funds all employed a “through” retirement date glidepath, unlike the BlackRock funds that have opted for a “to” retirement date glidepath. In that sense, the arguments mirrored those in about a dozen other suits filed last summer in federal district courts across the country by a variety of large employers.[i]
But, following that dismissal, Judge Machmanoff gave the plaintiffs two weeks to address what he had identified as “plausible” shortcomings[ii] in their arguments—and while they made some adjustments, it wasn’t nearly enough.
Judge Nachmanoff began his analysis this time (Hall et al. v. Capital One Financial Corp. et al., case number 1:22-cv-00857, in the U.S. District Court for the Eastern District of Virginia) by noting that (citing the Hughes v. Northwestern case) in order to “state a viable claim for fiduciary breach under ERISA, Plaintiffs must allege either direct facts demonstrating a deficient fiduciary process or circumstantial facts allowing a plausible inference that the fiduciaries’ decision was outside the ‘range of reasonable judgments a fiduciary may make based on her experience and expertise.’” Beyond that, he explained that “[I]f the complaint relies on circumstantial factual allegations to show a breach of fiduciary duties under ERISA, those allegations must give rise to a ‘reasonable inference’ that the defendant committed the alleged misconduct,” thus allowing the “court to infer more than the mere possibility of misconduct.”
That said, he made quick work of the plaintiffs’ attempt to remedy their prior suit. “Plaintiffs’ Amended Complaint fails to state a claim for fiduciary breach under ERISA because Plaintiffs rely solely on the performance of the BlackRock TDFs. That is, Plaintiffs ask this Court to infer Defendants’ fiduciary breach based solely on the circumstantial allegation that the BlackRock TDFs “fail[ed] to outperform” a composite index (the S&P Index) and the four Comparator TDFs based on the annualized returns for fourteen quarterly periods. To survive a motion to dismiss, however, Plaintiffs must set forth some additional factual matter from which this Court can reasonably infer misconduct under ERISA.”
In essence, the plaintiffs simply restated their prior claims—but offered as better/different benchmarks the S&P 500 and application of the Sharpe ratio (more on the latter in a minute).
“A claim of imprudence cannot ‘come down to simply pointing to a fund with better performance,’” Judge Nachmanoff noted, citing Smith v. CommonSpirit Health, which he said was “instructive.” From that same case, he noted that “ERISA does not require clairvoyance on the part of plan fiduciaries, nor does it countenance opportunistic Monday-morning quarter-backing on the part of lawyers and plan participants who, with the benefit of hindsight, have zeroed in on the underperformance of certain investment options.”
No Factual Allegations
Judge Nachmanoff continued, “underperformance of the BlackRock TDFs is all that Plaintiffs allege. Plaintiffs have provided no factual allegations from which the Court may reasonably infer that the choice of the BlackRock TDFs was imprudent from the moment the administrator selected it, that the BlackRock TDFs became imprudent over time, or that the BlackRock TDFs were otherwise clearly unsuitable for the goals of the fund based on ongoing performance. Plaintiffs allege nothing beyond data allegedly indicating the BlackRock TDFs’ disappointing performance relative to Plaintiffs’ preferred alternatives over the course of a limited period of time.”
As for the amendments to their original suit, he commented that “the addition of the Sharpe ratio and S&P Index to the Amended Complaint does not alter this analysis, as these are merely additional measurements of investment performance. That the Sharpe ratio is alleged to analyze performance on a risk-adjusted basis is therefore immaterial.”
Said more succinctly, he noted that “ERISA simply does not provide a cause of action for fiduciary breaches based solely on a fund participant’s disappointment in the fund’s performance.”
He went on to explain that “because the Amended Complaint’s performance-only allegations are legally deficient, the Court will not address whether the charts provided by Plaintiffs in fact reflect what they suggest—that the BlackRock TDFs exhibited ‘consistently deplorable performance’ and were ‘consistently and dramatically outperformed’ by the Comparator TDFs. Nor will the Court address whether the time period reflected in those charts is legally sufficient to demonstrate long-term underperformance as a matter of law.” Moreover, he explained that whether the BlackRock TDFs were “allegedly outperformed by some other TDFs at some points during a three- or five-year window, without more, does not suggest that offering the BlackRock TDFs fell outside the ‘range of reasonable judgments’ that fiduciaries may make.”
And, just in case that point was lost on the plaintiffs, he noted that “Plaintiffs have not remedied this deficiency in their Amended Complaint. In their Opposition, Plaintiffs state that “the funds at issue are passively managed, and the [Amended] Complaint contains both passive and active comparators, each of which were selected for their similarity to the BlackRock TDFs and status as leading offerings in the TDF market,” but provide no citation to their Amended Complaint.
He went on to comment that the amended suit “remains silent on whether the Comparator TDFs use ‘through’ or ‘to’ retirement glidepaths; whether the Comparator TDFs invest only in actively-managed or passively-managed funds; or how the Comparator TDFs’ underlying equity and bond funds are allocated among the types and categories of possible equity and bond funds. In short, the Amended Complaint makes no factual allegations demonstrating that the Comparator TDFs are meaningful comparators to the BlackRock TDFs.”
What they did add—“two additional performance metrics in the Amended Complaint—the S&P Index and the Sharpe ratio”—he commented that “neither salvages Plaintiffs’ claims.”
“Because funds with distinct goals and distinct strategies are inapt comparators, there is no sound basis on which the Court can compare the BlackRock TDFs with the S&P Index. As Plaintiffs concede, the S&P Index is “a composite of the disparate strategies and styles present in the broad universe of investable alternative TDFs.” With regard to the Sharpe ratios, he concurred with the fiduciary defendants’ response—that “Sharpe ratios are just another way to compare the performance returns of any two investments. Sharpe ratios are not magic wands that equalize any two investments as meaningful benchmarks in the first place.”
Judge Nachmanoff commented that while “the Sharpe ratio assesses risk adjusted across investments to account for differences in investments’ asset allocations and styles,” it was “not in itself a TDF—it is simply a metric one can use to compare the risk-adjusted returns for any two kinds of investments.” Finally, he commented in support of arguments made by the fiduciary defendants that “courts that have rejected TDF comparisons have done so not because the plaintiffs advanced the wrong metrics, but rather because the underlying investment strategies and styles were meaningfully different to start.”
‘Devoid of Any Factual Allegations’
As for motions that the Capital One defendants breached their duty of loyalty, Judge Nachmanoff noted that the plaintiffs “…have simply recast the alleged breaches of the duty of prudence as breaches of loyalty. They merely assert the fiduciaries breached their duty of loyalty without alleging any supporting facts,” concluding (once again citing CommonSpirit) that was “insufficient to state a claim for disloyalty.”
Beyond that, he explained that while the plaintiffs “allege that Defendants failed to ‘act in accordance with the documents and instruments governing the Plan,’ in violation of 29 U.S.C. § 1104(a)(1)(D),” their legal argument was “devoid of any factual allegations to support their allegation. Plaintiffs, for instance, do not even specify the particular documents or instruments to which Defendants are alleged to have failed to adhere.”
And so, this time, once again the court granted the defendants’ motion to dismiss the suit—but this time with prejudice.
What This Means
One needs to have only a rudimentary understanding of ERISA fiduciary law to expect that a suit alleging a myopic focus on fees that sacrificed performance would have an uphill fight on their hands. Fiduciary suits have long reminded us that it’s about prudence and a documented process, and these suits have basically assumed that those were not possible with what they alleged were inferior results. And yet, as this decision reminds us, the courts have not typically (ever?—someone correct me if I’m wrong) been eager to substitute hindsight judgement based on results.
That’s the good news for fiduciaries.
The bad news is that this plan (and the dozen others similarly sued) have had to go to court to make that point—twice.