A federal appellate court has backed the ruling of a lower court, finding that a 401(k) plan’s investment consultant acted prudently, and in the interests of participants in decisions regarding a proprietary CIT.
The former participant/plaintiff here (one Benjamin Reetz) claimed that the defendants here (Lowe’s, the Administrative Committee of Lowe’s Companies, Inc. and investment advisor Aon Hewitt Investment Consulting) violated ERISA by limiting the menu of investment choices available to Plan participants and moving over $1 billion in Plan assets to one of Aon’s own investment funds, “resulting in a substantial loss of investment gains ($100 million, according to the suit) in the retirement accounts of the current and former Lowe’s employees in the class.”
More specifically, the suit charged[1] that the fund retained was a new and largely untested fund at the time it was added to the plan, that it underperformed its benchmark, that it was not utilized by fiduciaries of any similarly sized plans and was “generally unpopular” in the marketplace.[2]
The History
After three years of hard-fought litigation, in June 2021, the plaintiff and Lowe’s Companies, Inc. settled for a cash settlement of $12.5 million (“a fair and reasonable settlement amount considering the nature of Plaintiff’s claims, which focus on Aon’s self-interested conduct, and Aon’s ultimate role as a ‘delegated’ investment manager with unilateral decision-making authority over Plan investments”)—and “one thing Aon can’t provide: prospective relief,” and some procedural changes.
And then, in October 2021, Aon prevailed in its arguments, with U.S. District Judge Kenneth Bell determining that “Aon acted loyally and prudently with respect to its recommendations to change the plan’s investment choices—which were consistent with its industry research and the thinking of other financial consultants—as well as its selection and retention of the Aon Growth Fund in the plan, which was similarly reasonable based on Aon's investment expertise and legitimate strategic choices.”
Plaintiff Reetz appealed that decision—which brings us to the current case.
The Appeal
After an interesting (and quite readable) recitation[3] of the process and decisions that led to the controversy, the appellate panel reviewed and commented that “Selling services is not investment advice. So Aon didn’t fail to discharge a duty; it owed no duty to begin with. Second, he (plaintiff Reetz) alleges Aon violated the duty of loyalty by advising Lowe’s to change plan structure. This was investment advice, so Aon owed the duty of loyalty. Reetz argues that the menu advice was shaded by Aon’s desire to sell its services. So—since the duty of loyalty is absolute—he contends the advice violated the duty. The problem for Reetz is the bench-trial record shows Aon’s advice was solely motivated by benefitting plan participants.”
Regarading the latter point, the panel writes (Benjamin Reetz v. Aon Hewitt Investment Consulting Inc., case number 21-2267, in the U.S. Court of Appeals for the Fourth Circuit) that “Reetz says Aon was interested in streamlining the investment menu because it increased the chances of Lowe’s hiring a delegated fiduciary, which increased the chances of Lowe’s hiring Aon as delegated fiduciary, which would increase Aon’s fees from Lowe’s. Some record evidence supports this theory, and Aon does not dispute that a changeup in the investment menu played to its interest.” However, they noted that while Aon had an acknowledged interest in the result, “the problem for Reetz is he must also show that Aon acted on that interest—that is, it failed to act as if it were free of any conflict.” And here the court deferred to the judgement of the district court—which found that Aon did not act disloyally.
“Aon’s recommendation to streamline the investment menu may have incidentally benefited its own interest. But, because that interest did not motivate Aon’s recommendation, it did not violate the duty of loyalty,” they wrote.
Prudence Proof
As for the claims about prudence, Judge Richardson (again, writing for the panel), explained “When Aon created the Growth Fund, it considered ‘other potential investment funds and strategies’”—in fact, he noted, they “considered the very funds that Reetz now points to. So Aon ‘investigat[ed], research[ed], and review[ed] the options’”—but didn’t like what it saw, and—thought it could do better. “So in a sense, Aon went beyond the duty. It didn’t merely investigate, it created,” Judge Richardson commented. “Maybe—in hindsight—Aon was wrong that it could do better (or maybe it was right and hit the market at the wrong time). Again, though, prudence looks for process, not results. The process here was reasoned and calculated to maximize the benefits of the plan, so Aon cleared the prudence bar.”
As for the decision to retain the Growth Fund, Judge Richardson noted that ERISA fiduciaries have a “continuing duty of some kind”—but that “no matter the scope under ERISA, Aon cleared it.” Specifically, he explained that Aon staffed a committee to monitor its funds (including the Growth Fund), and that through the Delegated Portfolio Oversight Committee “Aon reviewed the underlying managers’ work (recall that Aon did not themselves pick investments; it was a manager of managers). When Aon saw something it didn’t like, it changed it. It periodically altered asset allocation and swapped out the underlying managers.” Indeed, Judge Richardson commented that not only had Aon tracked the funds, it “closely monitored” the fund “by ‘review[ing] extensive quantitative and qualitative information about the Growth Fund’s performance.’”
“True,” he acknowledged, “Aon never asked whether it should abandon the Growth Fund for another fund in so many words. But in this context, it wasn’t required to. As the district court found, ‘Aon over time exercised its expertise to keep apprised of alternate investments in the market’ and compared the Growth Fund to those alternatives. And, through its manager-of-managers role, it could—and did—make underlying tweaks to the Growth Fund without jumping ship entirely. Together, these actions discharged Aon’s ‘continuing duty to monitor . . . investments and remove imprudent ones.’”
In summary, Judge Richardson noted that “After becoming Lowe’s delegated fiduciary, Aon moved plan assets to its proprietary investment fund. Reetz challenges that decision as breaching the duty of prudence. But Aon considered alternative investment funds when creating its fund. And it continued to monitor the fund’s performance. That satisfied Aon’s duty to engage a ‘reasoned decision-making process.’ So Aon did not breach the duty of prudence either.”
And affirmed the decision of the district court, rejecting the appeal.
What This Means
Once again, a documented, prudent process prevails.
Footnotes
[1] In restating the case, writing for the three-judge panel U.S. Circuit Judge Julius N. Richardson cited the issues: “First, the duty of loyalty. While Aon was Lowe’s investment consultant, it pitched its delegated-fiduciary services. Like it sounds, such services allow a fiduciary—here, the committee that runs Lowe’s plan—to outsource its duties to a third party. Reetz argues Aon’s sales efforts were self-motivated and thus violated the duty of loyalty. Also, around the same time, Aon recommended that Lowe’s streamline the investment menu it offered to plan participants. Reetz suggests that this advice was not solely motivated by the plan’s best interest, it was shaded by the desire to land the deal, so it was disloyal. Second, the duty of prudence. After Lowe’s accepted the recommendation to streamline its investment menu and hired Aon as delegated fiduciary, Aon moved $1 billion in plan assets to a relatively untested investment fund that it created. The fund didn’t do so well. So Reetz alleges the fund selection and retention breached the duty of prudence. He argues that Aon did not seriously consider alternative funds when it invested the plan assets in the fund and did not properly monitor the fund once it was chosen.”
[2] Even in reviewing the decision, the appellate court acknowledged that “the fund might be described as an unconventional choice. It didn’t have much of a record. And the record it did have was underwhelming. At the time of selection, the Growth Fund: '(i) had only two years of performance history, (ii) was in the bottom 10% of its peers over all periods, (iii) was included in only two other retirement plans in the country, and (iv) was not included in any similarly-sized retirement plans.” Further, relative to the otherwise comparable funds, the Growth Fund had few assets under management—the $1 billion from Lowe’s was nearly three-quarters of the fund’s assets.'"
[3] U.S. Circuit Judges Julius N. Richardson, Robert B. King and Barbara M. Keenan sat on the panel for the Fourth Circuit.
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