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Shed of Many Claims, MEP Excessive Fee Litigation Goes to Trial


NFP knocks back all claims against it, but some charges filed against the plan fiduciary defendants and flexPATH will now go to trial.

The Schlichter law firm is representing the plaintiffs here—and the litigation targets are NFP Retirement, Inc., flexPATH Strategies, LLC, Wood Group U.S. Holdings, Inc., Wood Group Management Services, Inc. (nka Wood Group USA, Inc.), and the Committee of the Wood 401(k) Plan with regard to practices (and alleged breach of fiduciary duties and prohibited transactions under ERISA) for the $2.4 billion, 18,000+ participant plan.

The Allegations

The plaintiffs here—former participants of the Wood 401(k) Plan—Robert Lauderdale, Joshua Carrell, Ting Sheng Wang, Leonard Dickhaut, Robert Crow, Aubin Ntela and Rodney Aaron Riggins—all represented by the law firm of Schlichter Bogard & Denton LLP—claimed that rather than acting in the exclusive best interest of participants, “the Wood Defendants and NFP caused the Plan to invest in NFP’s collective investment trusts managed by its affiliate flexPATH Strategies, which benefitted the NFP Defendants at the expense of Plan participants’ retirement savings. The Wood Defendants and NFP also failed to use their Plan’s bargaining power to obtain reasonable investment management fees, which caused unreasonable expenses to be charged to the Plan.”

At a high level, those aren’t unusual charges in this type of litigation. However, there were some new elements. Specifically, the suit (Lauderdale v. NFP Ret., Inc., C.D. Cal., No. 8:21-cv-00301, complaint 2/16/21) claims that, “Based on conflicted advice, Defendants added NFP’s affiliated collective investment trusts to the Plan that were managed by an untested investment manager (flexPATH Strategies), and that NFP acted “under a profound conflict of interest in recommending the use of its affiliated investments in the Plan.”

Motion(s) to Dismiss

After first noting the various standards of review in considering motions to dismiss (consider facts presented in the light most favorable to the party not moving to dismiss, considering only admissible evidence, draw all reasonable inferences in the nonmoving party's favor), Judge James V. Selna of the U.S. District Court for the Central District of California delivered a mixed verdict (Lauderdale v. NFP Retirement, Inc., 2022 BL 424082, C.D. Cal., No. 8:21-cv-00301, opinion unsealed 11/28/22). 

With regard to allegations regarding a breach of fiduciary duties regarding the selection, evaluation and monitoring of the plan’s investment in the flexPATH target date funds, he noted that “the evidence presented creates a genuine dispute of fact as to whether the analysis was objective and scrupulous or whether the analysis was a mere "post hoc attempt" to push NFP's own new investment vehicles offered by flexPATH.” He noted that, “while NFP may have innocent explanations for these coincidences, a factfinder could reasonably conclude that NFP favored flexPATH's proprietary funds over others at the detriment of the plan participants.”

He continued by explaining that “the duty of loyalty is ‘a heavy one,’ and NFP is unable to meet its burden here. Whether NFP ‘genuinely and reasonably believed’ that the flexPATH Index target-date funds were in the participants' best interests—and whether that was the primary motive for NFP's actions—ultimately rests on the parties' respective credibility, rendering summary judgment on the issue of breach inappropriate”—and “[b]ecause the evidence presented by the Plaintiffs would allow a reasonable trier of fact to conclude that the process was imprudent”—denied summary judgment as to NFP's breach of fiduciary duty.

Causation Actions

However, as for arguments regarding a causation link between that selection and the losses to the plan/plaintiffs, Judge Selna noted that NFP argued that its “alleged imprudent advice could not have caused losses to the plan because Wood's decision to hire flexPATH as the Plan's investment manager severed causation between NFP's advice and the selection of the funds.” Judge Selna went on to note that “the Second, Fourth, Fifth, Eighth Circuits have explicitly taken the common law of trusts' burden-shifting approach under ERISA, which shifts the burden of persuasion onto defendants to disprove causation by showing any loss to the plan was not caused by their breach of fiduciary duty.” Noting that it had not yet been established that a fiduciary breach had occurred, and that the “Defendants can prevail if they present evidence that negates Plaintiffs' ability to demonstrate causation”—he concluded that “the undisputed record shows that the causal connection between NFP's assumed imprudent advice and the ultimate loss resulting from the target-date funds' inclusion is too attenuated.”

“In conclusion, while there are genuine issues of material fact as to NFP's breaches of fiduciary duties, Plaintiffs cannot show that NFP caused losses resulting from the Plan's investments in the flexPATH target-date funds”—and dismissed plaintiffs' breach-of-fiduciary duty claim against NFP.

flexPATH Positions

Plaintiffs allege that the Wood Defendants breached their duty of prudence by selecting the flexPATH Index target-date funds and the flexPATH Collective Investment Trusts without a reasoned decision-making process.  Judge Selna noted that the Wood Defendants claimed they employed a “reasoned decision-making process prior to approving the inclusion of the flexPATH target-date funds” and that there was evidence that they considered the pros and cons of selecting the flexPATH Index target-date funds to be included in the Plan's lineup. 

For their part, the plaintiffs alleged that process had “numerous flaws”—that the Committee “failed to consider flexPATH's management inexperience or the merits of alternative target-date funds from more experienced managers; failed to consider actual performance history of the funds relative to their benchmark index or peer group; failed to consider the funds' performance in accordance with the Investment Policy Statement; considered no performance data for the target-date funds; selected the target-date funds without fully understanding the differences between a ‘custom’ target-date fund despite this being their goal; and failed to press NFP about its relationship with flexPATH.” On the latter point, the Wood defendants claim to have taken “several steps" to assure there was no conflict of interest between NFP and flexPATH—but Judge Selna said that “the undisputed evidence does not support this. The only evidence in the record are (1) a single email in which a committee representative asked whether flexPATH would receive additional fees and (2) a single, in-person conversation that took place between a committee representative and one NFP representative.”

Ultimately—and “construing the foregoing evidence in a light most favorable to Plaintiffs, the Court finds that a reasonable factfinder can conclude that the Wood Defendants failed their duty of prudence in approving the flexPATH target-date funds to be included in the Plan.”

CIT Cite

As for selecting flexPATH Collective Investment Trusts, Judge Selna noted that “the Wood Defendants present no evidence to suggest that the Wood Committee considered or investigated any other non-flexPATH Collective Investment Trusts when the Committee instructed NFP to consider options outside the Wood and Amec plans.” Concluding that “while the mere fact that a record of discussions does not appear in meeting meetings [sic] does not mean that such discussions never took place,” he noted that “the evidence cited by Plaintiffs, balanced against the slim evidence cited by Defendants, raise serious questions as to whether the Wood Committee's investigatory process was prudent,” as he denied the motion for summary judgment as to Wood Defendants' breach regarding the selection of both the flexPATH target-date funds and the Collective Investment Trusts.

That said, Judge Selna had the same issue with the loss causation arguments here and granted the Wood Defendants' motion for summary judgment as to the issue of causation for both the flexPATH target-date funds and Collective Investment Trusts—and, “as a result,” dismissed the plaintiffs’ claims against the Wood defendants.

In regards to flexPATH's alleged breach of fiduciary duties regarding flexPATH Investments (“by failing to conduct a thorough investigation into whether selecting and retaining its own target-date funds would be in the best interests of the Plan participants”), Judge Selna disagreed with flexPATH’s argument “that no reasonable trier of fact would find that it acted disloyally when it selected its own funds to be included in the Plan's lineup because Plaintiffs' have presented ‘no evidence’ that flexPATH's decision to include the target-date funds were not made in the best interests of the Plan participants.”

Judge Selna argued that, “while the fact that flexPATH selected its own funds is not per se evidence of disloyalty, the Court finds that Plaintiffs have presented sufficient evidence that would allow a trier of fact to reasonably conclude that flexPATH prioritized its own interests in growing its investment business at the expense of the Plan participants. Resolution of this issue necessarily involves weighing the credibility of witnesses and weight of the evidence presented by both parties. Both parties offer competing theories and supporting evidence, but the Court must draw all inferences in favor of the nonmoving party, and in doing so, the Court denies summary judgment as to flexPATH's breach of duty of loyalty.”

‘Share’ Class?

With regard to charges related to the use of higher-cost versions of plan investments, Judge Selna considered—and granted NFP’s motion for summary judgement. “Plaintiffs' arguments rest largely on speculation and hindsight. There is no genuine dispute that NFP sought the lowest-cost options from Vanguard and communicated the best offers to Wood Committee,” he wrote, granting NFP's motion for summary judgment as to this count.

Similar allegations made regarding the Wood defendants, Judge Selna noted that “Plaintiffs' 20/20 hindsight arguments are insufficient to maintain Count 2 against the Wood Defendants. Plaintiffs have failed to demonstrate that the Wood Defendants' conduct fell short of their fiduciary obligations…,” granting their motion for summary judgement on this count.

Similar allegations had been made with regard to prohibited transactions—specifically that NFP did so by causing the plan to engage with a party-in-interest (flexPATH)—but found, “based on the undisputed evidence in the record, the causal link between NFP's conduct and the resulting ‘prohibited transaction’ is ‘too distant,’” and dismissed that claim.

Prohibited Transactions

Judge Selna went on to explain that the plaintiffs allege that the Wood Defendants participated in a prohibited transaction by causing the Plan to transfer plan assets to flexPATH, the party in interest, with respect to the flexPATH Index target-date funds. However, he found their position “untenable. The Court agrees with Wood Defendants that a ‘fiduciary does not cause a prohibited transaction by entering into a contract that makes that counterparty a 'party in interest’”—and granted the motion to dismiss.

Similar claims were made about flexPATH—but here Judge Selna concluded—“viewing the evidence in the light most favorable to Plaintiffs, a reasonable factfinder could conclude that flexPATH dealt with the Plan's assets as the discretionary investment manager in its own interest in violation of section 1106(b)(1) -(2)"—and denied flexPATH’s motion to dismiss “…to the extent it is a self-dealing transaction.”

‘Carte Blanche’

And finally, regarding claims that the Wood defendants failed to monitor fiduciaries “by essentially giving flexPATH ‘carte blanche’ to invest in the flexPATH target-date funds, ‘doing nothing’ to monitor their performance relative to a market benchmark or peer group for ‘[ten] months after they were placed in the Plan’”—and “taking the facts in the light most favorable to Plaintiffs, there are genuine issues of material fact as to whether the Wood Committee satisfied its ‘limited duty’ in monitoring its service providers in reasonable intervals regarding the Plan's investments”—denying that motion for summary judgement.

Regarding the selection of flexPATH as discretionary money manager, Judge Selna observed that, “Oddly, while Wood Defendants provide ample, undisputed evidence that it employed a prudent and thorough process when seeking to retain NFP as the investment advisor, they present no evidence whatsoever about the process they used to evaluate flexPATH's qualifications as investment manager”—and yes, denied their motion for summary judgement.

So, for those of you trying to keep “score”—the court dismissed all the pending claims against NFP, denied flexPATH’s motion to dismiss, and granted motions to dismiss by the Wood defendants on three of the five claims outstanding.

Stay tuned.