Advisory Firm Wins Partial Summary Judgement in Mixed ERISA Ruling

The advisory firm of Slocum & Associates will not face class-action claims and has prevailed on some summary judgement arguments, but the ruling allows certain individual claims to proceed.

The U.S. District Court for the District of Colorado has ruled in an Employee Retirement Income Security Act (ERISA) lawsuit referred to as Ramos v. Banner Health.

As case documents explain, this matter arises out of alleged mismanagement of defendant Banner Health’s 401(k) plan. Plaintiff Lorraine Ramos and others brought the lawsuit against Banner Health and certain current and former employees, as well as against the advisory firm of Jeffrey Slocum & Associates. Plaintiffs allege that the defendants breached their fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA).

Plaintiffs earlier moved for class certification, which the court granted as to the Banner Defendants and denied as to Slocum. The new ruling comes in response to Slocum’s motion for summary judgment, which was technically granted in part and denied in part.

Salient details covered in case documents include the fact that, until August 2014, the plan offered three levels of funds to participants. The first level included “ready-mixed investment options,” i.e., target-date funds (TDFs) that allowed a participant to invest in a single fund based on a desired retirement date. The second tier included core investment options, described as “eight core investment options to help you create and manage a diversified portfolio.” The final level included “expanded investment options,” intended as “additional investment opportunities for more sophisticated investors.”

Banner hired Fidelity Management Trust Company to serve as the plan’s recordkeeper in 1999. According to case documents, the plan’s recordkeeping services were never put out for competitive bidding. Until the end of 2016, Fidelity was compensated for its services through a revenue-sharing arrangement, which was a percentage of the retirement savings that participants invested in the plan and was sent to Fidelity in uncapped asset-based fees. Banner also retained Drinker Biddle as outside ERISA counsel to attend quarterly meetings, provide training to committee members, and advise the committee on ERISA issues.

To assist the committee in carrying out its investment responsibilities under the plan, Banner hired Slocum to serve as an independent investment consultant. Banner and Slocum signed the 2010 and 2014 contracts for investment consulting services, case documents show, and Slocum served as an independent investment consultant until October 24, 2016, when it was purchased by Pavilion Financial Corporation. The 2010 and 2014 contracts state that the investment-related responsibilities of the committee and plan service providers, including Slocum, would be defined in the plan’s investment policy statement (IPS). According to the text of the ruling, these contracts also outlined other contractual obligations of Slocum, including reviewing investment performance of current investment options in (among other things) the plan, helping to evaluate and select additional or replacement investment managers, providing written investment performance evaluations on a quarterly basis, and giving asset allocation and asset liability advice.

As case documents show, under the 2010 contract, Slocum was paid fixed a percentage on Banner’s Consolidated Investment Portfolio for services on “the Consolidated Investment Pool, defined benefit, supplemental executive retirement plans, insurance, foundation and planned Giving assets.” The firm also received an annual fee of $50,000 for services to the plan. Under the 2014 contract, Slocum received a variable percentage fee for non-plan investments based on the total value of assets, as well as an annual fee of $75,000 for services to the plan. Case documents show the 2010 contract also contemplated Slocum’s involvement with “large-scale special projects outside the scope of services” on a negotiated basis.

The 2010 contract described Slocum as a “fiduciary within the meaning of section (3)(21)(A)(ii) of ERISA with respect to the Defined Benefit and 401(k) Plans.” The 2014 contract provided that the “sole standard of care imposed on us [Slocum] by this agreement is to act with the care, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims.”

After laying out this background, from here the text of the decision goes into an extensive citation of the plan’s investment policy statement (IPS), which formally delegated different duties among the retirement plan committee, the employer and the Slocum firm. After describing the typical duties assigned by the IPS to the retirement plan committee, the IPS states that the committee retained “an investment consultant,” i.e., Slocum, “to provide investment advice in accordance with ERISA.”

“Both a 2011 and 2014 version of the IPS provide that Slocum is a fiduciary, but only with respect to those matters specifically assigned or delegated to Slocum pursuant to its contract for consulting services dated June 28, 2010, or any supplemental assignment of duties mutually agreed to by the parties,” the decision states. “In terms of the recordkeeper advice, under the IPS, Slocum was tasked with advising the committee in selection of the recordkeeper, and any other investment related service providers, as requested, by identifying and screening candidates for appropriate characteristics and assisting in performing due diligence checks.”

Importantly, case documents show, Slocum contends that the committee never requested its assistance in selecting a recordkeeper, and plaintiffs did not respond to this factual allegation.

“Plaintiffs and Slocum dispute whether the term ‘investment fund’ in the IPS includes self-directed brokerage accounts or mutual fund windows,” the decision explains. “Slocum cites testimony of Slocum representatives and committee members, stating that Slocum had no responsibility for monitoring or reporting to the committee on individual funds in the mutual fund window, and Slocum’s responsibility was limited to the ‘core funds’ (defined by Slocum as Levels 1 & 2),” the decision states.

According to case documents, Slocum’s quarterly reports often contained recommendations for the committee regarding retention of the Level 1 & 2 Funds. For example, in the August 2014 plan review, Slocum recommended that the committee “consider other target-date fund options to ensure that the Freedom Funds remain the most appropriate option for Banner.” In November 2014, Slocum presented another report to the committee that compared the Freedom Funds to other TDF offerings. Based on this report, Slocum recommended that the committee hear presentations from each target-date fund provider and gather additional meeting. The committee agreed, case documents show, and Slocum set up meetings with Fidelity, J.P. Morgan, and Vanguard in February 2015. Thereafter, Slocum recommended that the committee replace the Freedom Funds with the J.P. Morgan target-date funds. The committee agreed, and directed the replacement in February 2015.

The timing of this decision is at the core of the plaintiffs’ allegations. The plaintiffs contend the performance gap between the Freedom Funds and other alternatives “was so glaring by the end of second quarter 2011 that a prudent fiduciary could no longer ignore the need to replace the Fidelity Freedom Funds.” In addition, plaintiffs argue, “a diligent review of the Freedom Funds as compared to prudent alternatives prior to 2015 would have led to a diligent choice of including [alternatives] in place of the Freedom Funds.”

According to the plaintiffs, this alleged fiduciary failure to timely remove the Freedom Funds resulted in $40.7 million in plan losses.

With all of this spelled out, the plaintiffs contend that Slocum was a fiduciary and breached its duty of loyalty in two ways—first by providing imprudent investment advice, and second by failing to monitor and advise Banner defendants of excessive recordingkeeping and administrative fees.”

On summary judgment, the court notes, plaintiffs bear the burden of proving that Slocum was a fiduciary with respect to the challenged conduct; that Slocum breached its fiduciary duties; and that those breaches caused plaintiffs to incur losses.

Settling these complex matters

In detailing its own legal review of these issues, the district court states that “no fact finder could conclude that Slocum was a fiduciary with respect to the Level 3 Funds because the term ‘investment fund’ in the IPSs did not include the Level 3 Funds, and the weight of the evidence overwhelmingly supports a conclusion that Slocum had no duties with respect to the Level 3 Funds under the contracts.”

According to the decision, this understanding of the contracts is confirmed by the testimony of multiple committee members and Slocum employees, who testified directly that Slocum’s fiduciary duties did not include advising on the Level 3 Funds. While Slocum’s called expert acknowledges some vagueness of the language in the contracts and IPSs, he concludes—as did the committee board members and Slocum employees—that the Level 3 Funds were beyond the scope of Slocum’s engagement. Given this conclusion, the court finds that Slocum’s expert’s testimony is not sufficient to demonstrate a genuine dispute of material fact on this issue. The court therefore grants Slocum’s summary dismissal motion with respect to the Level 3 Funds.

“Plaintiffs have, however, raised sufficient evidence to show a genuine dispute of material fact as to whether the timing and nature of Slocum’s recommendations to replace the Freedom Funds breached Slocum’s fiduciary duty,” the decision states. “In this case, plaintiffs must establish that Slocum breached its fiduciary duty to act as a reasonably prudent investment advisor when advising the committee on the Freedom Funds. Certainly, Slocum presents evidence that it carefully monitored the Freedom Funds beginning in 2009, started recommending that the committee consider alternatives in 2013, and finally worked with the committee to replace the Freedom Funds in February 2015. However, plaintiffs have presented expert testimony that a reasonably prudent investment adviser would have recommended replacement significantly earlier (starting in 2011).”

As case documents show, the parties offer differing views of what a prudent process would be for responding to and evaluating the Freedom Funds as of 2011. Such evidence is sufficient to create a genuine dispute of material fact that must be resolved at trial, the ruling concludes.

“Plaintiffs’ expert has submitted testimony that failure to advise the committee to remove the Freedom Funds prior to 2013 resulted in losses to the plan,” the decision continues. “Regardless of any breach by the committee or Banner, should plaintiffs prevail on their claim that Slocum breached its fiduciary duty by not earlier recommending removal, at the very least, Slocum may be liable for losses between when it should have recommended removal and when it actually did so. There is a genuine dispute over the amount of losses, if any, caused by plaintiffs’ alleged breach, which must be resolved by the trier of fact.”

On these grounds, the court denies Slocum’s dismissal motion as to the Freedom Funds.

After this setback in the decision, the advisory firm enjoys two important victories. First, as the decision explains, a review of the disputed contracts demonstrates Slocum was only committed to assisting the committee “in the transition process of negotiating [recordkeeping] fees” after the committee selected an investment manager (here, Fidelity).” The contracts “do not support a conclusion that Slocum had any ongoing authority or discretion” over the recordkeeping fees paid by the plan.

“The court finds that this single e-mail alone cannot reasonably support a conclusion that Slocum assumed a fiduciary duty to negotiate reasonable recordkeeping fees with Fidelity,” the decision states. “At summary judgment, plaintiffs bear the burden to support their argument with specific facts. It is entirely plausible to assume that, had Slocum in fact engaged in negotiations over recordkeeping fees with Fidelity, plaintiffs would have been able to put before the court evidence of this conduct far beyond this single e-mail, in order to at least create an issue of fact as to whether Slocum had indeed participated in the negotiation of reasonable recordkeeping fees with Fidelity. The absence of such additional evidence is telling, and substantially undercuts plaintiffs’ position on this point.”

The second important stipulation in the decision is that the plaintiffs “have failed to undertake adequate steps to represent the interests of absent potential plaintiffs and thus bind them through this litigation, as required by the Second Circuit’s middle ground approach in Coan.” As a consequence, the court holds that plaintiffs may recover their individual plan losses allegedly attributable to Slocum, but not such losses for the plan as a whole. Slocum’s dismissal motion as to plaintiffs’ direct action claims is also granted.

The ruling is then summarized in conclusion by the court, as follows: “For the foregoing reasons, the Court orders defendant Slocum’s motion for summary judgment is GRANTED IN PART and DENIED IN PART; the Motion is GRANTED in favor of Defendant Slocum with respect to claims arising out of Slocum’s conduct related to Level 3 Funds/Mutual Fund Window, as well as the Balanced Funds, and with respect to claims against Slocum related to monitoring recordkeeping fees or arising out of the negotiation of Fidelity’s recordkeeping fees. Plaintiffs may not bring direct action claims for losses to the entire plan allegedly attributable to Slocum, and plaintiffs’ claims for losses arising from Slocum’s conduct prior to November 9, 2010 are time-barred. The motion is DENIED in all other respects.”

The full text of the decision is here