Compliance July 7, 2020

CareerBuilder Defeats ERISA Fiduciary Lawsuit

The complaint has been dismissed without prejudice, however, and the plaintiffs have until July 28 to attempt to remedy failures in their lawsuit.

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The U.S. District Court for the Northern District of Illinois, Eastern Division, has ruled in favor of CareerBuilder’s motion to dismiss a lawsuit filed against it under the Employee Retirement Income Security Act (ERISA).

The court’s order explains that the complaint has failed to adequately state a claim, and it gives the plaintiffs until July 28 to attempt to remedy this and other failures. If the plaintiffs do not file an amended complaint by that deadline—or any extension of it granted by the court—then the court will convert the dismissal to “with prejudice” and enter a final judgment under Federal Rule of Civil Procedure 58.

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Plaintiffs filed the complaint in October, alleging that plan fiduciaries allowed the plan’s recordkeepers, ADP and Empower, and its investment adviser and/or trustee, Morgan Stanley Smith Barney, to receive excessive and unreasonable compensation.

According to the complaint, the providers received excessive compensation through direct “hard dollar” fees paid by the plan to ADP and/or Morgan Stanley; indirect “soft dollar” fees paid to ADP and/or Morgan Stanley by mutual funds added and maintained in the plan to generate fees to ADP and/or Morgan Stanley; fees collected directly by ADP and/or Morgan Stanley from mutual funds added and maintained in the plan to generate fees to ADP and/or Morgan Stanley; and float interest, access to a captive market for 401(k) rollover materials to plan participants and other forms of indirect compensation.

The text of the dismissal ruling relies heavily on precedent set by the United States 7th Circuit Court of Appeals.

“Defendant argues that these allegations are uncannily similar to those made in Divane v. Northwestern University, where the 7th Circuit recently affirmed dismissal of an ERISA case,” the ruling states. “According to defendant, Divane is one in a line of 7th Circuit cases preventing courts from paternalistically interfering with plans’ slates of funds so long as the fiduciaries don’t engage in self-dealing and offer a comprehensive-enough menu of options.”

The court states that the 7th Circuit has repeatedly cautioned that plaintiffs and courts “cannot use ERISA to paternalistically dictate what kinds of investments plan participants make where a range of investment options are on offer.”

“It has accordingly affirmed dismissal of ERISA complaints alleging that some combination of high fees and underperforming funds signaled imprudence, where the plans in question offered some cheaper alternatives, and the complaint did not include allegations speaking to flawed decisions or self-dealing,” the ruling states. “Here, defendants are correct that under binding 7th Circuit precedent, plaintiff has not adequately pled a breach of the duty of prudence. Preliminarily, Divane resolves most of this case. … The [plan] in Divane charged fees (partially through revenue sharing) that averaged between $153 and $213 per person, essentially the same as those at issue here (which range from $131.55 to $222.43). The 7th Circuit held that such fees were not inconsistent with prudent portfolio management, particularly when revenue sharing was used to keep mandatory per-capita costs down. … Likewise, Divane clarified that a fund’s failure to invest in institutional as opposed to retail funds does not give rise to an inference of imprudence when a plan offers cheaper alternatives.”

Importantly, the ruling has been issued without prejudice, a development that is explained as follows: “Defendants moved to dismiss with prejudice. That would be overkill. Although 7th Circuit precedent dictates that some of plaintiff’s allegations are insufficient to state a claim for breach of fiduciary duty on their own, Rule 15 and circuit precedent counsel in favor of allowing an amended pleading here, as it is by no means clear that amendment would be futile.”

Compliance July 6, 2020

Another Lawsuit Challenges Use of Untested CITs in 401(k) Plan

A similar lawsuit was filed in May against an investment manager and a different plan sponsor.

Reported by

Former employees of Astellas US LLC have sued the pharmaceutical company, its board of directors and its retirement plan administrative committee, as well as the plan’s discretionary investment manager, Aon Hewitt Investment Consulting, for breaches of fiduciary duties and for prohibited transactions under the Employee Retirement Income Security Act (ERISA).

According to the complaint, instead of acting in the exclusive best interest of participants, Aon Hewitt, now known as Aon Investments USA, acted in its own interest by causing the plan to invest in Aon’s proprietary collective investment trusts (CITs) for Aon’s benefit. The Astellas defendants are also accused of failing to use the plan’s bargaining power to negotiate reasonable fees for investment management services.

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Responding to a similar lawsuit filed in May, Aon told PLANADVISER, “As a matter of company policy, we don’t comment on litigation matters.” Astellas tells PLANADVISER, “We have just received the filing and are assessing the complaint. Astellas does not comment on pending litigation.”

From at least 2010 through August 25, 2016, Aon Hewitt (then known as Hewitt EnnisKnupp Inc.) was a fiduciary to the plan because it rendered investment advice for a fee. Effective August 26, 2016, Astellas and the administrative committee appointed Aon Hewitt as the plan’s discretionary investment manager.

According to the complaint, “Astellas and the administrative committee did not require that Aon Hewitt consider all prudent investment vehicles that were available to the plan prior to making any investment decision. In direct violation of their fundamental fiduciary obligations, Astellas and the administrative committee expressly agreed to allow Aon Hewitt to select for the plan exclusively from its proprietary Aon Hewitt collective investment trusts, and agreed that Aon Hewitt had no obligation to consider non-proprietary investment vehicles for the plan.”

Soon after Aon was appointed as discretionary investment manager, the lawsuit says, the defendants restructured the plan. The Astellas defendants “partnered with Aon Hewitt” to develop a new investment lineup for plan participants. With one exception, the defendants removed all the plan’s mutual funds and replaced them with six CITs, five of which were Aon’s proprietary CITs.

“Defendants failed to conduct an independent investigation into the merits of the Aon Hewitt collective investment trusts prior to placing them in the plan,” the complaint states. It says the funds had a limited performance history of less than three years when they were included in the plan. In addition, during that time, all the Aon Hewitt CITs underperformed the benchmarks selected by Aon Hewitt and their style-specific benchmarks. The lawsuit says the CITs also underperformed the comparable mutual funds they replaced on the plan’s investment menu.

Aon Hewitt is accused of earning substantial revenue from the investment advisory fees charged on the funds and of using the plan to increase its assets under management for the funds.

The lawsuit also takes issue with the use of actively managed Aon proprietary funds. It says these funds also did not have sufficient performance records when added to the plan and underperformed the benchmarks identified by Aon Hewitt, as well as charged higher fees. For example, the complaint says that by including the Aon Hewitt Large Cap Equity Fund in the plan, the defendants caused participants to lose more than $15.6 million of their retirement savings as measured by the difference in the investment returns between the Aon Hewitt fund and the Vanguard Growth Index Fund. The complaint adds that by not retaining the plan’s prior actively managed large cap growth option rather than using the Aon Hewitt Large Cap Equity Fund, participants lost in excess of $28.5 million of their retirement savings.

As another point, the lawsuit alleges the defendants violated their fiduciary duties by not using the plan’s size to obtain share classes with far lower costs than the share classes used in the plan. In addition, the lawsuit says when the investment lineup was restructured in 2016, the Astellas defendants represented to participants that it was “making available the lowest overall cost share class of each fund. By selecting and maintaining higher-cost share classes for certain plan investments thereafter, the Astellas defendants acted contrary to that express representation made to plan participants.”

The complaint states, “By providing plan participants the more expensive share classes of plan investment options, the Astellas defendants caused participants to lose millions of dollars of their retirement savings.”

In addition to requesting that the court order the defendants to restore all losses to the plan, the lawsuits request that they reform the plan to include only prudent investments.

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