Neuberger Berman ERISA Complainants Get Another Chance

The text of the decision highlights that Federal Rule of Civil Procedure 15 provides that a court may permit a party to amend its pleadings “when justice so requires,” and absent special circumstances, such leave should be “freely given.”

Back ­in late September 2018, a federal judge pulled apart a lawsuit against Neuberger Berman and other defendants alleging they violated the Employee Retirement Income Security Act (ERISA) by maintaining the Value Equity Fund as an investment option in its own 401(k) plan. The plaintiffs argue the fund “was larded with high fees and has suffered from consistently abysmal performance.”

In a decision that discussed in detail what makes an entity a retirement plan fiduciary in connection to being paid fees by the plan, U.S. District Judge Laura Taylor Swain of the U.S. District Court for the Southern District of New York left only the plan’s investment committee as a defendant and only approved the prohibited transaction claim, dismissing all other defendants from the suit and dismissing the breach of fiduciary duty claims.

At that juncture, the court specifically found that the lead plaintiffs’ allegations that the Neuberger Berman Value Equity Fund (an actively-managed Neuberger-affiliated fund available to members of the Neuberger Berman Group 401(k) Plan) failed to meet its S&P 500 benchmark, were alone insufficient to support plausibly an inference that defendants had breached their fiduciary duties. The court further found that plaintiffs’ “proffered comparison of the VEF to a passive Vanguard-managed index fund that tracked the S&P 500 but charged a fraction of the VEF’s fees was inapt because of the vastly different investment strategies involved.”

In response to the September 2018 decision, plaintiffs moved for leave to amend the complaint to provide further detailed factual allegations against which to compare the Value Equity Fund (VEF) performance and fees as circumstantial support for plaintiffs’ claims of breach of fiduciary duty, and to add a demand for a jury trial. Now, after the court “considered carefully the submissions of both parties,” the plaintiffs have received leave to amend the complaint.

Importantly, this interim decision says nothing about the court’s expectations for whether such an amended complaint could remedy the previous issues which led to claims and defendants being dismissed. In explaining its decision to allow an amended complaint, the court highlights that Federal Rule of Civil Procedure 15 provides that the court may permit a party to amend its pleading “when justice so requires.” But it also points out that “such leave may be denied on grounds of futility if the proposed amended pleading could not withstand a motion to dismiss, such as a motion under Rule 12(b)(6) to dismiss the complaint for failure to state a claim,” per a 2014 decision known as Griffith-Fenton v. Coldwell Banker Mortgages. Of course, in order to survive a Rule 12(b)(6) motion to dismiss, a complaint must plead “enough facts to state a claim to relief that is plausible on its face.”

“In the absence of any apparent or declared reason—such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc.—the leave sought should, as the rules require, be freely given,” the court new decision states, citing a 1962 case known as Foman v. Davis.

The decision offers some additional detail into the court’s thinking, including the following: “These allegations show significant underperformance at inflated fee levels by the Neuberger-affiliated VEF. The complaint also includes specific allegations that committee defendants violated the plan’s investment policy regarding review and removal of underperforming funds by retaining the VEF, while committee defendants terminated two other unaffiliated plan investment options—the Virtus and PIMCO Funds—despite their arguably better performance over the five-year period prior to their respective terminations.”

The decision continues: “The VEF did not meet its benchmark for the five years ending in 2017 before its termination, whereas Virtus, with the exception of one year, performed well, by some metrics, during the five years proceeding its termination, and PIMCO only failed to meet its benchmark in three of the five years and performed better than average among its peers during the five-year period preceding its termination. These allegations plausibly suggest that committee defendants, despite higher fees and lower performance, retained the VEF where they would have terminated an unaffiliated fund.”

In a statement to PLANADVISER, Neuberger Berman said, “The most recent decision merely permits the plaintiff to re-plead an earlier dismissed claim and makes no ruling on the merits of what we believe is a losing law suit.  The Firm is proud of its 401(k) program, its 15% contribution rate to employees, and the variety of investment options – active and passive, in-house and competitor – each at an appropriate fee level.  We continue to look forward to fighting the claims on the merits.”

The full text of the new decision is here.