Back in March, participants in John Hancock Life Insurance Co.’s defined contribution (DC) plan filed an Employee Retirement Income Security Act (ERISA) fiduciary breach lawsuit against their employer in the U.S. District Court for the District of Massachusetts.
The proposed class action suggests that John Hancock breached its fiduciary duties “by applying an imprudent and inappropriate preference for John Hancock products within the plan, despite their poor performance, high costs and lack of traction among fiduciaries of similarly sized plans.”
In addition, the self-dealing lawsuit suggests the firm failed to monitor or control the plan’s administrative expenses, allegedly costing the plan millions of dollars in excessive administrative fees over the course of the class period.
It now appears the case will proceed to discovery, as a judge has denied John Hancock’s motion to dismiss. In a sign of the times, the judge did not submit a written order, but instead placed an electronic order on the digital docket sheet for the case. For regular readers of written ERISA rulings and orders, the digital filing is refreshingly brief, stripping out as it does a substantial amount of the usual citations and cross-references that can make legal opinions unwieldy.
“Plaintiffs assert claims for breach of the duty of loyalty and prudence (Count I), and failure to monitor fiduciaries (Count II),” the ruling states. “Defendants move to dismiss under Federal Rule of Civil Procedure 12(b)(6). The court agrees with plaintiffs that drawing all inferences in their favor as is required at this stage, and, considering the cumulative effect of their allegations, the amended complaint survives the motion to dismiss.”
The ruling says that defendants “correctly state that ERISA permits a financial services firm to offer its proprietary funds in its retirement plan and that this is a common practice in the industry.”
“That said, an ERISA fiduciary has a continuing duty to monitor plan investments and remove imprudent ones,” the ruling states, citing the Supreme Court’s 2015 ruling in Tibble v. Edison. “Plaintiffs allege that all five target-risk funds retained by the plan missed their custom benchmarks for three- and five-year returns, both in 2014 and in 2019, even taking into consideration the fee rebate offered by John Hancock. These funds also trailed behind similar market comparators, and moreover, no other fiduciary managing a like-sized plan chose to offer any of these funds.”
Similarly, the ruling states, the suite of 11 target-date funds (TDFs) retained by the plan also underperformed against their custom benchmarks and market comparators in 2014 and 2019, and were not in the portfolios of any other like-sized plans.
“That the retained underperforming funds were all proprietary John Hancock funds and that, in some cases, the plan was one of the last investors propping up a failing fund gives rise to the plausible inference of a subjective motive inconsistent with the plan participants’ best interest,” the ruling states.
Finally, the court agrees with plaintiffs that they have standing to assert the claims with respect to the entire plan. The ruling says the defense’s reliance on a precedent set in a case known as Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset, Acceptance Corp. is unfounded. Their failed argument is basically that individual plaintiffs lack standing to assert claims as to funds they did not personally invest in. In Plumbers’ Union, this court dismissed securities fraud claims associated with mortgage-backed certificates, which the lead plaintiffs did not themselves purchase.
“The nature of the injury pled in that case focused on nondisclosure of material information in the purchasing documents for the trusts,” the ruling states. “Here, by contrast, plaintiff sues for breach of fiduciary duty, and alleges an injury rooted in defendant conduct in managing all 260 lending funds as a group. The named plaintiff, therefore, has an identity of interest with the proposed class in seeking redress from an injury perpetrated by all named defendants.”