A federal judge has moved forward a lawsuit on behalf of T. Rowe Price’s 401(k) plan and all similarly situated plan participants and beneficiaries, as well as all predecessor plans, accusing the firm of self-dealing and prohibited transactions.
The original complaint notes that at the inception of the class period, the 401(k) plan exclusively held T. Rowe Price proprietary funds, and almost all of these were the expensive retail class versions of T. Rowe Price mutual funds. It accuses the plan trustees of breaching their fiduciary duties under the Employee Retirement Income Security Act (ERISA) by either failing to remedy their predecessors’ breaches, or, in a few cases of offering expensive retail class versions of proprietary mutual funds, waiting too long to act to shift into lower cost versions of the funds.
T. Rowe Price and the other defendants moved to dismiss all claims in the lawsuit.
According to a memorandum by Chief Judge James K. Bredar of the U.S. District Court for the District of Maryland, the defendants argue that the plan document required the plan’s trustees to select an exclusive line-up of T. Rowe Price funds. They say it was T. Rowe Price’s decision as plan sponsor to structure the plan in this manner, and such a decision is a settlor function not subject to ERISA’s fiduciary provisions. Bredar noted that ERISA does permit financial services companies to offer employees proprietary funds for their 401(k) plans.
“Regardless of the reasons that T. Rowe Price may have chosen to restrict the Trustees to investing only in in-house funds, it does not provide a blanket defense for the Plan Trustees. Plaintiffs’ allegations that related to the use of the more expensive retail funds rather than commercial funds, the allegations that related to retaining chronic underperforming funds, and the allegations that related to seeding, remain plausible. Plaintiffs provide specific examples, not merely conclusory statements, and the Court is required to accept those factual allegations as true at this stage of the proceedings. Defendants argue with regard to each one of Plaintiffs’ theories, that the allegations, standing alone, are insufficient. But Plaintiffs have alleged multiple grounds to support their claim; the allegations related to any one theory do not stand alone but must also be reviewed as a combined set,” Bredar wrote.
He found that the plaintiffs have produced sufficient allegations to raise a plausible inference that the trustees breached their duties of loyalty and prudence in their selection and monitoring of investments for the 401(k) Plan. In addition, since the specific allegations are adequate to support the cause of action against the trustees, Bredar found they are also adequate to support the same claim against the investment advisers to the Trustees and a claim for co-fiduciary liability against T. Rowe Price, the Management Committee and its individual named members, as well as the Management Compensation Committee and its individual members.
Regarding the claim of failure to monitor fiduciaries, Bredar said the plaintiffs have plausibly stated a claim for breach of the duties of loyalty and prudence by the trustees. They also alleged that the appointing fiduciary defendants had the authority to appoint and remove the trustees and knew or should have known that the trustees were failing to fulfill their ERISA fiduciary obligations. Bredar found that the failure to monitor claim is plausible.
Regarding the trustees’ failure to remedy their predecessors’ breaches, the judge cited an opinion of the Department of Labor (DOL), that states, “…although a fiduciary may not be liable under section 409 of the Act for the acts of predecessor fiduciaries, if he knows of a breach of fiduciary responsibility committed by a predecessor fiduciary, he would be obligated to take whatever action is reasonable and appropriate under the circumstances to remedy such breach. Failure to take such action would constitute a separate breach of fiduciary responsibility by the successor fiduciary.”
According to the court document, the defendants argue primarily that the plaintiffs fail to state a failure-to-remedy claim because they failed to plead a plausible prior fiduciary breach, but they also argue that the plaintiffs failed to allege that the trustees had actual knowledge. However, Bredar found the plaintiffs did sufficiently allege a prior fiduciary breach and that the defendants were aware that their predecessor fiduciaries had breached their duties in selecting the in-house funds. Bredar refused to dismiss this claim as well.
Prohibited transaction claims
The defendants contend that the plaintiffs must plead facts showing that the alleged prohibited transactions fell outside ERISA’s exemptions because the T. Rowe Price investment products were compelled by the plan document. The defendants specifically point to ERISA Section 1108(b)(8), which includes a statutory exemption allowing financial services companies to offer affiliated collective trust investments to their in-house plans, provided that the plan document allows for such investments and the compensation paid to the trust company is “not more than reasonable.” However, the plaintiffs are challenging the payment of unreasonable fees, Bredar said. In addition, the plaintiffs include allegations under Section 1106(b) regarding transactions between the plan and the fiduciary, which are not exempted under Section 1108.
The defendants also assert that the plaintiffs’ prohibited transactions claim is substantially barred by ERISA’s limitations statute that requires a lawsuit to be filed within six years of the date of the prohibited transaction violation. They argue that the only transaction attributable to the trustees is the initial inclusion of a fund in the plan, so any funds initially offered to plan participants more than six years before the initial complaint was filed on February 14, 2017, are time-barred.
In response, the plaintiffs argue that the Supreme Court held in Tibble v Edison that a plan fiduciary “has a continuing duty to monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset.” However, Bredar pointed out that Tibble relates to ERISA Section 1104’s duty of prudence, not Section 1106’s prohibited transactions.
The plaintiffs note, however, that the prohibited transactions at issue are the monthly fees being paid to T. Rowe Price investment affiliates by the trustees—not the initial selection of the investment for the plan—and therefore, there are occurrences of the prohibited transactions within the past six years.
The defendants contend that the trustees are not causing the monthly fee transactions to be paid from the plan, but rather, the T. Rowe Price investment affiliates are charging the monthly fees to the assets of the mutual fund, so there is no direct transaction between the plan or trustees and the T. Rowe Price investment affiliates. However, the plaintiffs have alleged that the “Plan, directly or indirectly, paid millions of dollars in investment management and other fees,” and Section 1106 covers transactions that constitute an “indirect . . . furnishing of . . . services” or “indirect . . . transfer[s] to . . . a party in interest, of any assets of the plan.”Bredar conceded that the defendants may have viable defenses, but said they do not warrant dismissal at this time. “The Court can infer a plausible claim of prohibited transactions that are not barred by limitations,” he wrote.