The fiduciary defendants of a $4.3 billion 401(k) plan have prevailed in their revised motion to dismiss a fiduciary breach suit involving the selection and retention of a suite of target date funds.
The Cleveland, OH-based Parker Hannifin 401(k) plan fiduciaries were accused by a handful of participant-plaintiffs (represented by Schlichter Bogard LLP) of retaining a suite of allegedly unproven underperforming target date funds from Northern Trust—which the plaintiffs said had “significant and ongoing quantitative deficiencies and turmoil” resulting in losses ranging from $45 million and $73 million—when identical, lower-cost alternatives were available.
In July 2022, the defendants in the case had requested—and received—permission to refile following the June 2022 ruling in the case of Smith v. CommonSpirit Health. At the time, Judge Bridget Meehan Brennan of the U.S. District Court for the Northern District of Ohio said this move was driven by “the importance of understanding how recent decisions may apply to the facts and circumstances of this case.” And now, roughly 18 months later, she has.
Standard of Review
That same Judge Brennan noted (Johnson v. Parker-Hannifin Corp., 2023 BL 439099, N.D. Ohio, No. 1:21-cv-00256, 12/4/23) that “when addressing a motion to dismiss brought under Rule 12(b)(6) of the Federal Rules of Civil Procedure, the Court must construe the complaint in the light most favorable to the plaintiff and accept all well-pleaded material allegations in the complaint as true.” However, she also noted that “…the complaint's factual allegations, taken as true, 'must be enough to raise a right to relief above the speculative level”—and that the facts must “support an inference that the defendant's liability is plausible, rather than just possible."
Judge Brennan noted that “the Sixth Circuit has recently addressed the pleading requirements necessary to survive a Rule 12(b)(6) challenge when bringing a claim like Count One”—specifically explaining that in the cases of CommonSpirit and Forman, the plaintiffs' underperformance claims alleged that funds with lower fees and better returns could have and should have been selected. In both of those cases, the courts found that the plaintiffs failed to state a viable ERISA breach of fiduciary duty claim.
She went on to explain (citing CommonSpirit) that “at a minimum, for these types of allegations to support a claim, the complaint must contain sufficient ‘context,’ showing that the challenged funds underperformed relative to their stated goals”—and that if the plaintiff chooses to do so via comparator funds, “she must show that the challenged funds and the comparator funds share the same investment ‘strategies,’ ‘risk profiles,’ and ‘objectives’”—and that, failing that “the plaintiff has not shown the challenged funds have, in fact, underperformed.”
A Spectrum of Options
“Different services, investment strategies, and investor preferences invariably lead to a spectrum of options—and in turn a spectrum of reasonable fee structures and performance outcomes,” she continued. “As a result, side-by-side comparisons ‘of how two funds performed in a narrow window of time, with no consideration of their distinct objectives, will not tell a fiduciary which is the more prudent long-term investment option.’” She noted that even comparator investments that are "sponsored by the same company, managed by the same team, and use a similar allocation of investment types" will be inapt when "each fund has distinct goals and distinct strategies."
She concluded, “put another way, an ERISA plaintiff is required to plead sufficient facts demonstrating that the challenged funds underperformed relative to a ‘meaningful benchmark’”—and that “none of Plaintiffs' comparators—the S&P target-date benchmark, the Price Funds, the Plus Funds, or the Lifecycle Funds—constitute meaningful benchmarks”—before proceeding to detail the irrelevance of each.[1] In making that determination, Judge Berman noted that the plaintiffs preferred to “simply assert that whether these funds are meaningful benchmarks should not be decided at the motion to dismiss stage but left to a jury after discovery”—an argument that she noted was (also) rejected in CommonSpirit.
As for other allegations on this count, Judge Berman found the claims “untimely”—that is, involving decisions that took place beyond ERISA’s six-year statute of limitations—but said that was irrelevant since the plausible argument noted above had not been made. She also noted that “there is persuasive authority rejecting the argument that an investment is imprudent simply because it has a limited or no performance history”—and that the plaintiffs had made no argument to the contrary. She also found no credence in the argument that the high turnover rates in the Focus Funds made their selection imprudent. “Turnover in asset allocation is a ‘natural feature’ for some funds,” she explained. “Without providing any context for the assets' turnover rates relative to their stated investment strategies and long-term objectives, Plaintiffs have failed to demonstrate how this allegation supports their claim.”
And, therefore, dismissed the first count.
Institutional ‘Share?’
As for the second count—that Defendants breached their fiduciary duties by not obtaining the institutional shares with the lowest fees for the Focus Funds and the Vanguard Funds, and that defendants could have used the Plan's bargaining power to obtain better shares even if the Plan did not technically satisfy the lower-fee share's investment thresholds—Judge Berman found that the plaintiff’s arguments here were “factually distinct from Forman and the cases cited within that opinion.”
Specifically, she noted that the plaintiffs have not alleged that Defendants obtained retail shares when institutional shares were readily available—but rather “allege Defendants failed to obtain institutional shares with lower fees than the institutional shares the Plan offered.” While the distinction may seem insignificant, Judge Berman noted that “instead of addressing this factual distinction—retail versus institutional shares—and explaining why these cases nonetheless apply, Plaintiffs rotely cite language from the opinions.”
Judge Berman also concluded that the allegations fell short of the necessary "context-sensitive" inquiry for ERISA fiduciary duty breach claims. She explained that “unlike the complaint in Forman, where the plaintiffs alleged that the plan qualified for lower-fee shares but did not obtain them, Plaintiffs here allege that the lower-fee shares could have been obtained through bargaining due to the Plan's size.” And while that statement might seem sufficient on its face, Judge Berman felt otherwise.
“Without any additional context, Plaintiffs' theory is nothing more than a ‘naked assertion devoid of . . . factual enhancement.’” She referred to it as a “naked assertion” one in which “plaintiffs have only shown that their claim of imprudence is ‘possible and conceivable’ but not ‘plausible and cognizable’”—and that “the law only allows ‘plausible’ and ‘cognizable’ claims to survive a Rule 12(b)(6) challenge.”
“Plaintiffs essentially ask this Court to find that any time a plaintiff alleges a large plan did not obtain the lowest-fee shares, plan beneficiaries and participants have stated viable ERISA fiduciary duty claim. To Plaintiffs, no other factual allegations are required—only the size of the plan and the existence of shares with lower fees must be pleaded. Rubber-stamping this view is inconsistent with binding authority”—and dismissed this count as well.
And finding that there was no fiduciary breach(es) in the first two counts, Judge Berman found no merit in the third count—the duty to monitor the fiduciaries—and dismissed that as well.
And dismissed the case.
What This Means
Add this decision to the line of cases decided in the wake of the CommonSpirit decision—which marked something of a shift in the standards for plausibility that would be required to move past a motion to dismiss. Said another way, it stood for the principle that while a court might be required under the law to accept the facts presented by the plaintiffs (more specifically the party that wasn’t moving to dismiss the suit) they didn’t have to embrace them uncritically.
Ultimately, it should come as no surprise that this decision came out this way—since the defendants here had petitioned—and received—permission to incorporate “new law” arising from “substantial” new guidance from the Sixth Circuit—more specifically, that June 2022 ruling in the case of Smith v. CommonSpirit Health.
Footnote
[1] In case you’re interested, Judge Berman said that the S&P target-date fund benchmark “is not a fund but a statistical data composite created from a ‘universe of target date funds,’ and that other courts had ‘found that such an index could never serve as a meaningful benchmark for a real fund with unique investment strategies, goals, and asset allocations.’” She noted that the T. Rowe Price funds were, unlike the Focus Funds in question, actively managed. Nor, in her assessment, did the plaintiffs have an answer for the argument that the Focus Funds “had a uniquely conservative investment strategy and asset allocation compared to the Plus and Lifecycle Funds.”
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