Prudential Defeats Fiduciary Breach Lawsuit

The underlying complaint was dismissed ‘without prejudice,’ meaning the plaintiff can attempt to replead the claims in a way that satisfies the rules of standing.

The U.S. District Court for the District of New Jersey has ruled against the plaintiff in a proposed class action Employee Retirement Income Security Act (ERISA) lawsuit filed in November 2019 against Prudential.

The complaint named as defendants the Prudential Insurance Co. of America, the Prudential Employee Savings Plan Administrative Committee, the Prudential Employee Savings Plan Investment Oversight Committee, and 20 “John and Jane Does.” At a high level, the suit alleged that the Prudential defendants put the interests of the company ahead of those of the plan “by choosing investment products and pension plan services offered and managed by Prudential subsidiaries and affiliates, which generated substantial revenues for Prudential at great cost to the plan.”

Among other things, the plaintiff alleged the defendants violated ERISA by “overpopulating the plan with proprietary mutual funds offered by Prudential and its affiliates, failing to monitor the performance of those funds and failing to adequately disclose the amount of recordkeeping fees received by Prudential, resulting in the payment of grossly excessive fees to Prudential and significant losses to the plan and its participants.”

The dismissal order published by the District Court notes that the plaintiff filed an amended version of his complaint in September 2020, upon which the ruling to dismiss is based. As amended, the complaint contained five counts. Count I alleged the defendants breached their fiduciary duties of prudence and loyalty. Counts II and III alleged the defendants engaged in prohibited transactions with a party-in-interest and fiduciaries, while Count IV alleged the Prudential defendants failed to monitor fiduciaries. Finally, Count V pleaded in the alternative that, to the extent any defendants are not deemed a fiduciary or co-fiduciary under ERISA, any such defendants are liable for a knowing breach of trust.

In response, the Prudential defendants filed their now-successful dismissal motion, first moving to dismiss the matter under Federal Rule of Civil Procedure 12(b)(1), arguing that plaintiff lacks standing. The defendants also moved to dismiss the suit under Federal Rule of Civil Procedure 12(b)(6), which permits a defendant to move to dismiss a count for “failure to state a claim upon which relief can be granted.”

Prior to engaging in fairly substantial analysis of both motions, the court emphasizes that, in evaluating the sufficiency of a complaint, a district court must accept all factual allegations in the complaint as true and draw all reasonable inferences in favor of the plaintiff. The court, however, notes it is “not compelled to accept unwarranted inferences, unsupported conclusions or legal conclusions disguised as factual allegations.”

Notably, because the plaintiff’s claims are dismissed on other grounds, the court engages with but does not reach a definitive ruling on the question of the plaintiff’s Article III constitutional standing to bring claims relating to the GoalMaker investment solution. The plaintiff had alleged that the defendants improperly advanced their own interests through GoalMaker.

From here, the ruling states that the plaintiff fails to plead sufficient facts as to each individual defendant’s involvement in the alleged wrongdoing.

“Indeed, beyond listing each individual defendant’s respective position on the various Prudential committees they served on, the plaintiff’s allegations fail to even mention the individual defendants by name, much less state specific facts as to each individual defendant’s alleged wrongdoing,” the ruling states. “Similarly, the plaintiff’s claims broadly attributing misconduct to all ‘defendants’ generally do not satisfy the basic pleading requirement to provide adequate notice to each defendant of the specific claims against him. … Thus, the plaintiff’s claims against the individual defendants … are dismissed.”

The ruling then engages in an analysis of all five counts included in the amended complaint, in each case siding with the defense that dismissal is warranted. For example, in discussing the first count regarding an alleged breach of fiduciary prudence and loyalty, the court notes that the lead plaintiff “for the most part relies on historical price and expense information in support of his allegations.

“Not only is hindsight 20/20, but it also does not meet the plausibility requirement,” the ruling continues. “This general shortcoming is prevalent throughout the amended complaint. … The plaintiff fails to allege sufficient facts or provide the ‘substantial circumstantial evidence’ necessary for the court to reasonably infer that the Prudential defendants breached their duty of prudence. … The plaintiff compares each of the challenged funds to a single corresponding Vanguard fund alleged to have a ‘similar investment style.’ This comparison does not constitute a meaningful benchmark and is insufficient to plausibly allege that the Prudential defendants’ selection and retention of the challenged funds was imprudent. Indeed, if a comparison to a single cheaper fund with ‘similar investment styles’ sufficed to create a reasonable inference of imprudence, ERISA plaintiffs could challenge any fund so long as they could identify one cheaper fund sharing some alleged similarities with the challenged fund.”

The plaintiff’s claims regarding the defendants’ selection of Prudential-affiliated funds and Prudential’s receipt of administrative fees fare no better.

“The amended complaint does not provide any comparisons to the practices of similarly situated fiduciaries or otherwise provide specific allegations supporting an inference of imprudence with regard to the defendants’ selection of Prudential-affiliated funds or Prudential’s administrative fees,” the ruling concludes.

The dismissal was filed without prejudice, and the plaintiff has 30 days to file an amended complaint that cures the deficiencies noted in the ruling. If the plaintiff does not file an amended complaint within that time, the claims dismissed without prejudice will instead be dismissed with prejudice.

The full text of the ruling is available here