A federal court judge has denied Transamerica’s motion to dismiss a lawsuit accusing it of retaining poorly performing proprietary fund portfolios in it 401(k) plan.
The lawsuit also says, “Transamerica exacerbated plan participants’ losses by encouraging them to sign up for Transamerica’s Portfolio Xpress, a tool that automatically allocated participants’ money to Transamerica’s investment products.” Also named in the suit are trustees of the Aegon USA Inc. Profit Sharing Trust, who were responsible for the selection and monitoring of the investments in the Transamerica plan. Aegon is the parent company of Transamerica.
In his court order, U.S. District Judge C. J. Williams in the U.S. District Court for the Northern District of Iowa noted that the plaintiffs in the case are members of a class of participants under a settlement in a previous similar case against Transamerica and Aegon. The plaintiffs released the “Released Claims,” as defined in the settlement agreement. The settlement agreement defines the “Released Claims” as “any and all claims [against defendants] arising out of or related to the conduct alleged in the plaintiffs’ operative complaint, whether or not included as counts in the complaint.”
The defendants contend that plaintiffs’ claims in this case fall within the scope of the Released Claims in that settlement agreement, and thus their claims are barred by the settlement agreement.
Citing Iowa case law, the defendants apply a broad definition of the phrase “arising out of or related to” used in the definition of the Released Claims in the settlement agreement. They interpret the conduct alleged in Count I of the previous lawsuit to include “Transamerica’s retention of the [c]hallenged [f]unds as investment options in the Plan.” They also argue that the high fees alleged in that lawsuit are equivalent to the inclusion of underperforming funds alleged in the instant action because both result in lower overall returns.
Williams noted that the previous complaint, in relevant part, alleged that Transamerica breached its Employee Retirement Income Security Act (ERISA) fiduciary duty of loyalty when it caused the plan to invest in funds managed by its affiliates who charged substantial middle-man fees, only to turn around and hire sub-advisers to manage the plan’s portfolio. In the new complaint, the plaintiffs allege that defendants breached their ERISA fiduciary duty of prudence by retaining poorly performing funds in the plan. “The conduct alleged in Dennard concerned the method of procuring the portfolio management service through an intermediary and the resulting fees, not the inclusion or performance of the underlying investments themselves,” Williams wrote in his order. “The Court finds that the claims in this case arise out of and relate to different alleged conduct than the claims in Dennard. Thus, plaintiffs’ claims are not barred by the Dennard settlement agreement’s release.”
In addition, the defendants assert that Count I of the recent complaint, alleging that defendants’ investment process was imprudent, should be dismissed for failing to state a claim on three independent grounds. They assert that it is not a violation of ERISA’s fiduciary duty of prudence for a plan sponsor to offer affiliated investment funds, and that to the extent plaintiffs’ claim is based on this proposition, plaintiffs’ complaint fails to state a claim for imprudence. They argue that plaintiffs fail to state a facially plausible claim of imprudence because the plaintiffs must plead facts to show that defendants employed a flawed process for selecting investments, and that allegations of poor performance alone are insufficient. The defendants go on to argue that plaintiffs’ admitted lack of “actual knowledge . . . of Defendants’ decision-making processes . . . for selecting, monitoring, and removing plan investments,” is fatal to plaintiffs’ imprudence claim. Finally, they contend that the plaintiffs’ imprudence claim is implausible because the defendants’ substitution of sub-advisers and the performance record of challenged funds demonstrates that defendants acted prudently.
However, Williams found that the plaintiffs’ allegation of imprudent conduct is not based on the challenged funds’ affiliation with Transamerica. “Regardless of whether an investment is affiliated with the fiduciary, the fiduciary has an obligation to act prudently in monitoring the underlying investments,” he wrote “Plaintiffs’ complaint alleges that the selection and retention of ‘substandard investment portfolios,’ constituted imprudent conduct.”
Citing an 8th U.S. Circuit Court of Appeals decision in Braden v. Wal-Mart Stores, Inc., Williams said ERISA plaintiffs “generally lack the inside information necessary to make out their [imprudence] claims in detail unless and until discovery commences.” He added that courts employ a “holistic evaluation of an ERISA complaint’s factual allegations” and “draw reasonable inferences in favor of the nonmoving party as required” to effectively serve ERISA’s remedial purpose. “An ERISA claim alleging an imprudent investment process can survive a motion to dismiss even when the alleged facts do not ‘directly address [ ] the process by which the Plan was managed,’ because a court can infer a flawed process from circumstantial factual allegations. Here, plaintiffs’ complaint alleges sufficient factual information ‘to raise a reasonable expectation that discovery will reveal evidence of [the conduct alleged],’” he wrote.
According to the court order, the defendants request that the court take judicial notice of various Securities and Exchange Commission (SEC) filings to show the various changes of the sub-advisers. They then ask the Court to conclude, based on the sub-adviser changes, that they must have acted prudently in overseeing their sub-advisers. But, Williams said, even if the court takes judicial notice of defendants’ SEC filings, “it may not rely on [defendants’] opinions about what proper inferences should be drawn from them.”
He found that the plaintiffs’ complaint sufficiently asserts the underperformance of the challenged funds in comparison to both comparable funds and the relevant market indices. Transamerica Asset Management’s substitution of its sub-advisers may indicate that defendants acted prudently, but it is merely consistent with lawful conduct, Williams said, adding that the substitution of sub-advisers is not a concrete, obvious explanation for the poor performance of the challenged funds throughout the applicable period. “Drawing all inferences in plaintiffs’ favor, neither the existence of the sub-adviser structure nor the changes in sub-advisers renders plaintiffs’ imprudence claim implausible.”Williams also found that “Based on the well-pleaded facts regarding the challenged funds’ performance, plaintiffs’ imprudence claim is plausible at this stage.”