The U.S. District Court for the District of Massachusetts has ruled on the defense’s motions to dismiss a lawsuit filed by participants in the General Electric Company (GE) 401(k) Savings Plan, finding that just one claim out of eight should be dismissed ahead of the discovery process.
The underlying lawsuit alleges self-dealing by the company in offering investments managed by GE’s investment management arm, General Electric Asset Management (GEAM). The complaint (now in a second amended version) says 401(k) plan fiduciaries violated the Employee Retirement Income Security Act (ERISA) and prohibited transactions regulations by offering and failing to adequately monitor the performance of five investment fund options offered by the plan.
Funds named in the text of the complaint include GE Institutional International Equity Fund; GE Institutional Strategic Investment Fund; GE RSP US Equity Fund; GE RSP US Income Fund; and GE Institutional Small Cap Equity Fund.
The plaintiffs says these funds were among the 15 investment options (other than target-date funds) offered in the plan during the class period, and all were managed by GEAM. The complaint further says the GEAM funds are the only non-index funds offered to plan participants, so if a participant wants to invest in actively managed funds, he/she is forced by GE and the plan trustees to invest in GEAM funds.
Defendants in the case earlier this year filed motions to dismiss the plaintiff’s various claims. After a hearing, the court denied the motion as to Counts I, II, V, VI, VII, and VIII, and took Counts III and IV under advisement. In its new ruling, the court says defendants’ dismissal motion is allowed as to Count III and denied as to Count IV.
One piece of success for defendants
The text of the ruling steps through the facts and precedents that are relevant to Counts III and IV, focusing on complex issues of timeliness that are being tested in other ongoing ERISA cases.
“Prior to 1987, 29 U.S.C. Section 1113 contained a ‘constructive knowledge’ provision in which the limitations period began when a plaintiff ‘could reasonably be expected to have obtained knowledge of a breach or violation,’” the decision states. “‘Actual knowledge’ in the current version of the statute consists of awareness of ‘the essential facts of the transactions or conduct constituting the violation.’ The question of when actual knowledge exists thus is dependent on the facts of each individual case.”
Distinguishing between the former constructive knowledge requirement and today’s actual knowledge requirement, the 1st Circuit has ruled that, “where the alleged breach arises out of a financial transaction involving ERISA plan funds, determining where the distinction between actual and constructive knowledge lies in a particular case may depend on the level of generality employed in characterizing the transaction at issue, which may depend, in turn, on an examination of the complexity of the underlying factual transaction, the complexity of the legal claim and the egregiousness of the alleged violation.
After noting this standard, the district court goes on to say that, although mere knowledge that “something was awry” is insufficient for actual knowledge, the court does not think Congress intended the actual knowledge requirement to excuse “willful blindness by a plaintiff.”
“The 1st Circuit applied this rule in Edes, finding that the plaintiffs, who claimed that the defendants breached their fiduciary duty by failing to classify them as ERISA plan participants, had the requisite ‘actual knowledge’ shortly after being hired, as ‘the breach of fiduciary duty arises not from an intricate financial transaction,’” the decision states.
Turning to the matter at hand, under Count III of the complaint, plaintiffs allege that the offering of the GE Funds as the sole actively managed investment options constitutes a prohibited transaction in violation of ERISA Sections 406(a)(1)(A), (C), and (D). Plaintiffs allege that the GE Funds were offered throughout the putative class period, which began in September 2011, and that each of them were participants in the plan during the class period and were invested in the GE Funds.
“The fact that these were proprietary funds would have been immediately known to plaintiffs, as the funds are labeled as GE Funds,” the decision states. “To the extent that the basis of plaintiffs’ claim is that defendants only offered proprietary funds as the sole actively managed investment options of the plan, plaintiffs had actual knowledge the day plaintiffs elected their plan options. Thus, Count III is barred by the statute of limitations.”
Defense argument falters on other count
Under Count IV of the complaint, plaintiffs allege that GE defendants offered proprietary funds as the sole actively managed investment options of the plan despite high costs and poor performance in order to generate management fees and maintain GE Asset Management’s performance. Because the fees were for the financial benefit of GE and the Asset Management defendants, plaintiffs argue that these acts constitute a prohibited transaction in violation of ERISA Sections 406(b)(1) and (3).
“Although plaintiffs could have easily discerned that the funds were proprietary funds, and even that they were paying fees to GE Asset Management, the question of whether plaintiffs had actual knowledge of high costs and poor performance is much more complex,” the decision states. “There are no facts in the complaint to suggest that plaintiffs had actual knowledge that their funds were performing poorer and their fees cost higher compared to other funds.”
Even if they did, the decision states, plaintiffs “would certainly not have known about the sale of GE Asset Management prior to July 1, 2016, to State Street Corporation.”
“Plaintiffs do not only allege that defendants profited from the management fees, but that they also profited from the financial health of GE Asset Management due to the selection and presence of the GE Funds in GE Asset Management’s portfolio,” the decision says. “This financial benefit culminated in the sale of GE Asset Management for a reported $485 million dollars. As July 2016 is within the three-year statute of limitations, Count IV is not barred by the statute of limitations.”
The full text of the new district court ruling is available here. It includes several other failed arguments from the defense which readers may find informative. For example, the defense unsuccessfully argues that ERISA Section 406 does not apply here because the management fees are not a “plan asset,” and that even if management fees are a plan asset, the claims must be dismissed because plaintiffs have not pled a non-exempt prohibited transaction.