Plan fiduciaries have successfully fended off a suit brought by a participant upset that the plan committee removed a fund in which he was invested.
Charged in the suit (Kokoshka v. Investment Advisory Comm. of Columbia Univ., S.D.N.Y., No. 1:19-cv-10670, 8/19/21) were the Investment Advisory Committee of Columbia University, and the participant-plaintiff bringing the legal action—and representing himself in the case—was one Jerry Martin Kokoshka, Ph.D. The plan structure was pretty typical—participants make investment choices in the defined contribution plan from among funds that the Investment Advisory Committee selects and monitors. He argued that the Committee breached its fiduciary duty when it decided to remove a specific fund in which he had been invested from the menu of available investments.
The Plan
While this won’t likely surprise any readers, the court here (in the person of Judge John P. Cronan of the U.S. District Court for the Southern District of New York) noted that, “the Committee was not required to keep offering a fund it decided to place on the list of available investing options,” and that ‘…the Retirement Plan allowed the Committee ‘to add an Investment Fund or ... to eliminate an Investment Fund by transferring amounts held thereunder to a successor Investment Fund’ as long as “reasonable notice’ was given to participants.” Judge Cronan goes on to explain that, “if a participant’s contributions were in an Investment Fund that was removed from the list of available investment options, the Retirement Plan required that the participant transfer his or her contributions to another available investment option,” and that if they failed to do so the Committee had the authority “…to establish procedures to redirect those investments to a different fund on behalf of the participant.”
The court goes on to note that “one such procedure was to transfer those contributions to an Investment Fund ... intended to be a ‘qualified default investment alternative’ as described in ERISA Section 404(c)(5),” and that upon a decision to close a fund, participants were to be given written notice of the forthcoming change “at least 30 days and no more than 60 days prior to the effective date of the fund’s removal.” Moreover, the court explained that, “during the relevant time, two Funding Agents offered the Investment Funds available to plan participants: The Teachers Insurance and Annuity Association-College Retirement Equities Fund (“TIAA”) and The Vanguard Group Inc. (“Vanguard”). Retirement Plan—options that offered participants 134 different funds to choose from.”
Gold, Fingered
Now, for his part, participant-plaintiff Kokoshka said that in early 2017 he became concerned with “the high leverage in equity markets,” and wished to “invest his retirement savings in gold to preserve [the] purchasing power of his savings and to avoid risk associated with market crash.” He contacted the Committee, and the Committee recommended the “Vanguard Precious Metals and Mining Fund” (which later became the GCC Fund), at which point the participant-plaintiff claims that he directed the Committee to move his savings to this fund and to “keep it in Plaintiff’s portfolio until retirement or until Plaintiff instructs [the Committee] to sell.”
Oh, and he also alleges that, in March 2019, the effective date of the GCC Fund’s removal from the Retirement Plan, he noticed a loss in his investments due to the Committee’s divestiture of his position in the GCC Fund.
The Process
The court noted that the Committee “regularly reviewed” the menu of investment options available under the Retirement Plan “to assess whether the options offered (i) competitive long-term[] performance relative to market indicators, (ii) a diversified range of investment options, and (iii) competitive fee structure,” and that they further hired Aon Hewitt Investment Consulting to issue “Quarterly Investment Reviews” in advance of every Committee meeting.
As noted above, participant-plaintiff Kokoshka had an issue with the removal of one particular fund from the Retirement Plan’s portfolio of investments—the Vanguard Global Capital Cycles Fund (a.k.a. the “GCC Fund”). The Committee discussed that the GCC Fund had been “added to the Vanguard ‘Watch List’ due to its historical underperformance and a material change in investment philosophy and process.”
Then, “After a thorough discussion,” the Committee decided to remove the GCC Fund from the list of funds available to participants, consistent with the policies set forth in the Retirement Plan, the Committee issued a written notice of this removal to participants that explained what was going to happen, and advising that if a participant failed to transfer his or her assets from the GCC Fund to another available fund by March 28, 2019, the balance would be directed to the “Vanguard Institutional Target Retirement Fund.” By now you can guess that participant-plaintiff Kokoshka, despite this notice, did not transfer his balances, and that meant that his investment balance was automatically moved to the identified “qualified default investment alternative” (the Vanguard Institutional Target Retirement Fund).
The Claims
Plaintiff alleges that the Committee was negligent in “fail[ing] to realize ahead of time the significant loss that [the Committee’s] action would inflict on Plaintiff’s retirement savings,” and that therefore the Committee breached its fiduciary duty by acting in its own interest rather than for his benefit. For those wondering how the fund switch accomplished that, he claimed that the Committee was focused on “maximiz[ing] growth of the retirement accounts and improv[ing] [its] track record as fund manager,” while Plaintiff “was interested in preserving [the] purchasing value of his savings”). And then, since the removed GCC Fund was not a “growing fund,” the plaintiff further asserted that his “retirement savings became the casualty of [the Committee’s] desire to improve [its] own track record at the expense of Plaintiff’s retirement savings in [a] clear breach of fiduciary duty.”
Oh—and as for damages, the participant-plaintiff (who you will recall represented himself at trial) was seeking $23,803[i] in damages, and also “requests that going forward” the Committee “take [] into consideration [the] impact of [its] actions on individual accounts of Columbia officers.”
The Standard(s)
Judge Cronan began his analysis noting that Rule 56 of the Federal Rules of Civil Procedure instructs that a court must “grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law”—and that the party making the motion (the movant) bore the initial burden of showing that no genuine factual dispute exists.
Now, for some reason the defendants here hung an argument on 404(c), arguing that it provided a safe harbor for the participant’s independent exercise of investment control over his assets—arguing that when he got the notice of the change, refused to move his investments and allowed them to be mapped to the Vanguard Institutional Target Retirement Fund—he exercised control. Judge Cronan wasn’t buying that argument, however. Not only because it didn’t seem to fit the scenario, but because “the Amended Complaint does not allege that the damages incurred by Plaintiff resulted from the transfer of funds from the GCC Fund to the default account…,” but “from the Committee’s decision to remove the GCC Fund from the menu of available investment options.”
That said, Judge Cronan noted that the plaintiff here “has not alleged facts, or provided evidence, showing that this duty of care was breached.” Though he alleged that there was no mention in any of the Committee minutes of the impact that decision might “have on any individual saving account including Plaintiff’s saving account,” he offered no proof regarding that assertion.
Duty ‘Bound’
“More importantly,” Judge Cronan wrote, “the Committee has proffered evidence showing that it fulfilled its duty of care when it chose to remove and divest the GCC Fund. In assessing whether to retain the GCC Fund, the Committee discussed the fact that the fund had been added to a ‘Watch List’ because of its historical underperformance and changed investment philosophy. A Quarterly Investment Review, issued by a consulting firm retained by the Committee, reported that the GCC Fund had underperformed for three quarters of 2018 as well as the prior five years. The Committee also submitted the Declaration of Dan Driscoll, the Vice President and Chief Human Resources Officer at Columbia University, that describes how the Committee arrived at its decision to remove the GCC Fund only after thorough consideration.” He then noted that after making that decision, “…the Committee followed all relevant procedures set forth in the Retirement Plan,” notified the participants, and gave them time to respond/react. “These undisputed facts show that the Committee acted prudently in evaluating the GCC Fund’s performance and deciding that it was not a suitable investment option for the Retirement Plan.”
Even if the Committee’s actions served to “maximize the growth of the Retirement Plan’s investment portfolio,” Judge Cronan explained, “So long as a fiduciary makes decisions ‘with an eye single to the interests of the participants and beneficiaries,’ it will satisfy its duty of loyalty even if its decisions ‘incidentally benefit[]’ itself, as well.
“Nothing in ERISA or the Retirement Plan required the Committee to make available any fund that a particular participant desired to invest in,” Judge Cronan wrote. “To the contrary, the Retirement Plan specifically reserved to the Committee the ability to choose which investment options are available to participants.” Perhaps more to the point, he noted that, “…requiring a fiduciary to include any fund desired by a participant would of course be unworkable and contrary to the duties that ERISA imposes on plan administrators,” going on to explain that the only way the Committee could fulfill its obligations under ERISA “…was by prudently maintaining a list of available investment options suitable for the Retirement Plan as a whole.” He explained that it would be “…impractical—and extremely costly—for it to offer any fund that a participant wishes to invest in,” and that “…while a certain fund may be suitable for one participant, it could be a wholly inadequate investment option for another.”
And were that not sufficient, Judge Cronan explained that, “Plaintiff’s urging that a duty of loyalty required the Committee to offer him the GCC Fund stands in tension with the Committee’s separate duty of care, particularly given the considerable evidence of the GCC Fund’s underperformance.”
With that, Judge Cronan granted summary judgment in favor of the Columbia University defendants.
What This Means
For those of us familiar with the retirement plan space, the arguments presented by the plaintiff[ii] may seem almost silly—though it’s worth remembering that judges aren’t always well-versed in the “norms” and particulars of retirement plan administration.
What is worth noting however, is that here the plan committee had what appeared to be a well-run and well-documented process for both the selection and monitoring of plan investments, one that they applied, and that they followed the process and procedures outlined in the plan document. And that made the difference.
