Financial Engines and Alight Exit Home Depot ERISA Lawsuit

It requires a delicate dance between the adviser and the sponsor when tailoring the respective defense strategies.

The U.S. District Court for the Northern District of Georgia has ruled on a set of dismissal motions in an Employee Retirement Income Security Act (ERISA) lawsuit targeting Home Depot and its retirement plan services providers.

The plaintiffs in the case allege a broad range of claims against a number of defendants—including Home Depot, Inc.; the administrative committee of the Home Depot Futurebuilder 401(k) Plan; the plan’s investment committee; Financial Engines Advisors; Alight Financial Advisors; and some 30 or more individuals from these firms.

The sweep of the claims included in the 98-page complaint is extensive, echoing the language of the numerous excessive fee and failure to monitor ERISA litigation cases that have been filed in recent years. Plaintiffs here suggest Home Depot has selected multiple poorly-performing funds for its 401(k) plan, allowed investment advisers to charge its employees unreasonable fees, and turned a blind eye to what amounts to a kickback scheme between an investment adviser and the plan’s recordkeeper.

The Court’s ruling addresses respective motions to dismiss filed by Alight Financial Advisors, Financial Engines Advisors and the Home Depot defendants. In short, the court has granted the Alight and Financial Engines motions to dismiss, in which the defendants argued they are not, given their contracted roles and inability to set their own compensation levels as service providers, liable for the fiduciary breach claims alleged in the suit. The dismissal motion filed by the fiduciary Home Depot defendants, on the other hand, has been denied.

As to why the Home Depot motion was denied, the Court finds the plaintiffs have specifically and sufficiently alleged that Home Depot’s process in managing the plan “was faulty and tainted by imprudence because the decision-making process allowed for the retention of chronically poor performing investments when there were better investments available to the plan. Although plaintiffs have not identified the specific flaws in Home Depot’s decision-making process, the Court acknowledges that plaintiffs would likely have no access to Home Depot’s particular decision-making process at this stage of the litigation. In circumstances such as this, courts have held that plaintiffs may rely on circumstantial factual allegations to show a flawed process— particularly one that involves the fiduciaries management of underperforming investments.”

Taking into consideration all of the circumstantial factual allegations surrounding Home Depot’s retention of Financial Engines Advisors and Alight Financial Advisors, the Court finds that plaintiffs have alleged sufficient facts to support an inference of an imprudent process.

In their respective motions to dismiss, Financial Engines Advisors and Alight Financial Advisors contend that they cannot be held liable for any fiduciary breach with regard to their fees because they did not act as fiduciaries with respect to negotiating or collecting their fees.

“Here, plaintiffs do not allege that [Financial Engines Advisors and Alight Financial Advisors] functioned as fiduciaries in any capacity other than by providing investment advice,” the decision states. “Yet, they fail to allege facts sufficient to show that [the advisers] breached their fiduciary duties to provide investment advice. Instead, plaintiffs allege fiduciary breaches arising out of [the advisers’] negotiation and collection of their fees. Such allegations are insufficient. It is well established that a service provider does not become a fiduciary simply by negotiating its compensation in an arm’s-length bargaining process—particularly where, as here, the service provider is not alleged to have had the ability to determine or control the actual amount of its compensation.”

The court similarly rules in favor of the advisers’ motions to dismiss claims alleging prohibited transactions.

The full text of the order is available here

Serving Clients Facing Litigation

During the recent 2019 PLANADVISER National Conference, Jamie Fleckner, partner with Goodwin Procter and chair of the firm’s ERISA litigation practice, addressed the topic of advisers being dismissed from ERISA litigation when their clients are not.

“After the litigation is filed, it can in some cases be a delicate dance between the adviser and the sponsor in terms of tailoring the defense strategy,” Fleckner said. “The adviser, of course, wants to continue the personal and professional relationship with the sponsor, but at the same time wants to get out of the litigation. How do you walk this line and maintain those relationships?”

According to Fleckner, the line is actually walked quite easily by most of his clients. He says this is the result of the significant collaboration that is necessary between expert defense attorneys.

“When I’m representing an adviser or a sponsor, and there is a separate counsel working for another party, we work together as the lawyers,” Fleckner explained. “Yes, in the end we are advocating for our individual clients, but we work hard to harmonize our positions in a way that can be complementary for everyone. In the end, the adviser should feel comfortable arguing to a judge that, while they believe no wrongdoing happened and that this will be proven in court, it is still inappropriate for the adviser to be involved in the litigation.”

At the same time, Fleckner said, advisers should not expect or hope to completely separate themselves from litigation targeting this clients.

“Trial testimony of advisers can be very important,” he said. “Advisers may be called to testify even after being formally carved out of the suit. Advisers very well may be a prevalent witness, they may have to turn over evidence and emails. You can still be involved even if you don’t have the direct exposure. Fortunately, I have not seen a situation where there was finger pointing at trial between an adviser and a client.”