Suit Finds Fault with (Too) Conservative Asset Allocation

A participant suit claims that a profit-sharing plan’s investment allocation was “inappropriate” and the plan fiduciaries’ actions in establishing and maintaining it imprudent. 

Plaintiff Paul Toomey worked for DeMoulas Super Markets, Inc., and was a participant in the DeMoulas (Restated) Profit Sharing Plan and Trust from the start of the class period until 2015, when he left the Company and his account was distributed. He brought two claims against DeMoulas (and three individual trustees of the Plan to whom DeMoulas delegated some fiduciary responsibilities), alleging that they breached their duty of prudence under ERISA and that DeMoulas breached its obligation to monitor the individual defendants—“the fiduciaries DeMoulas had entrusted to administer the Plan.”

Unlike most of the litigation we’ve read about of late, this was a traditional profit-sharing plan, with participants’ accounts funded solely by employer contributions, subject to a six-year vesting schedule. Indeed, employees are not permitted to contribute their own money to the plan. And yes, that means that there are no investment choices in the plan, which between 2013 and 2017 had approximately 11,000 to 13,000 participants, and between $580 million and $756 million in assets. It did have an investment policy statement, which called for 70% of the plan’s assets to be allocated into domestic fixed income options, and 30% into equities.

Plaintiff’s Case

In an April 16 court order, U.S. District Judge Leo T. Sorokin laid out plaintiff Toomey’s allegations in three categories: 

1. that the plan’s “one-size-fits-all target allocations are inappropriate even for participants nearing retirement, but are especially inappropriate for participants in their twenties, thirties, and forties, who are decades away from retiring”; 
2. that the investment strategy chosen by the plan as the benchmark was “imprudently executed in several ways” (that the plan “often” failed to meet the equity targets, that “even among fixed income investments, the defendants failed to undertake appropriate efforts to generate meaningful returns”), that the plan left imprudent sums uninvested (“$27 million in 2016” in accounts that returned 0% interest, and “that to the extent Defendants invested in bond funds, they failed to procure the lowest-cost share class of those funds even though, as a large institutional investor, they had the leverage to do so…”; and 
3. that the defendants “failed to monitor the performance of their chosen investments or to choose better performing options to achieve the Plan’s conservative investment goals, which options would have been revealed by a reasonable investigation.”

In considering the motion to dismiss, Judge Sorokin cited legal precedents, acknowledging that courts must “take all factual allegations [in the Complaint] as true and ... draw all reasonable inferences in favor of the plaintiff.” However, the “complaint must also “set forth ‘factual allegations, either direct or inferential, respecting each material element necessary to sustain recovery under some actionable legal theory.’”

He quickly concluded that the latter condition was met, though qualifying that conclusion by noting that in so doing it was “not determining that any single allegation or category of allegations suffices to allege imprudence or that, taken together, they establish imprudence, but only that Plaintiff has plausibly alleged the claim in light of the totality of the allegations.”[i]

‘Actual Knowledge’

Judge Sorokin then explained that the defendants here argued that the claim that they failed to provide the plaintiff with a menu of investment options, “the claim is barred by ERISA’s three-year statute of limitations because Plaintiff had actual knowledge of that allegation no later than 2015 when he left the company and his account was distributed.” 

However, Judge Sorokin said that the “Plaintiff is not alleging that Defendants breached their duty of prudence by failing to provide Plan participants with a menu of investment options, though that might be a relevant factor in analyzing the prudence of Defendants’ decisions when they were made.” Judge Sorokin then noted that plaintiff Toomey says he did not have actual knowledge of all the material facts underlying his complaint until shortly before he filed suit, and therefore (citing the recent Supreme Court decision regarding “actual knowledge”) “the statute of limitations is not an appropriate grounds of dismissal.”

Ultimately, Judge Sorokin dismissed the motion to dismiss, but explained that “the Court’s denial of the motion is not a ruling that an ERISA plan must follow any specific path.”

What this Means

At this point, not much. The case is interesting (to me, anyway) because of the issues raised with regard to the alleged imprudence of a profit-sharing plan’s asset allocation applied to a varied workforce dynamic. That notwithstanding, this is merely a decision by the court to allow the suit to proceed, with no real evaluation of the facts alleged (plausible facts viewed through the perspective most favorable to the plaintiff is a relatively modest hurdle). 

Courts have generally been very accommodating regarding fiduciary investment menu decisions—at least when, unlike this case, participants had choices on that menu. We shall see.