By Pension and Benefits Editorial Staff
Plan fiduciaries did not breach their duties under ERISA by imprudently designing and failing to monitor an actively managed large cap investment fund that underperformed its benchmarks, according to a federal trial court in Colorado. The lack of documented, written processes for designing, monitoring, and adjusting the fund did not indicate that the fund’s relative underperformance was due to flawed and imprudent design or the failure to appropriately monitor and adjust the fund.
Underperforming active large cap investment option. A publicly traded telecommunications company sponsored a 401(k) plan that offered participants an Active Large Cap U.S. Stock Fund (Fund) investment option. The Fund, which was included as a component of the plan’s generally conservative target date funds, was designed to “obtain excess returns” over the Russell 1000 Stock Index , “with increased downside and wealth protection, at a reasonable price over the long term.” The Fund provided substantial gains for plan participants (83 percent cumulative return) but trailed its benchmark for the majority of the five years of its existence.
Plan participants brought suit against the plan sponsor and the plan investment fiduciary, alleging that the Fund “underperformed immediately and consistently due to its flawed and imprudent design,” and that the investment fiduciary failed to appropriately monitor and adjust the Fund “because it lacked any formal process or guidelines for doing so.” In addition, the participants charged that the plan sponsor breached its fiduciary duty to monitor the investment fiduciary.
The investment fiduciary maintained that it employed a prudent process in designing and monitoring the Fund. In addition, the fiduciary argued that it engaged in a “robust monitoring process” and implemented appropriate structural changes to the Fund over the course of its duration. The court agreed and awarded summary judgment to the fiduciary.
Fund was prudently designed. Initially, the court determined that the investment fiduciary’s design of the Fund satisfied the applicable prudent person standard under ERISA Reg. 2550.404a-1(b)(2), by showing “appropriate consideration” of whether the investment was reasonably designed, as part of the portfolio to further the purposes of the plan, taking into consideration the risk of loss and the opportunity for gain (or other return) associated with the investment. In pursuing the investment objective of the Fund, to exceed the return of a broad market index of the largest 1,000 companies in the United States, using an actively managed multi-manager approach, the investment fiduciary, the court explained, undertook extensive quantitative and qualitative research regarding the structure the Fund, including its strategies and the selection of managers.
Investment fiduciary prudently monitored the Fund. The court next ruled that the investment fiduciary satisfied its duty to prudently monitor and oversee the continued suitability of the Fund. The investment fund systematically analyzed the Fund at regular intervals to ensure that it was an appropriate long-term investment for plan participants, and made reasoned decisions based on appropriate sources of data. Accordingly, despite the Fund’s relative underperformance, the court found that the investment fiduciary satisfied its duty of prudence with respect to its monitoring procedures.
Lack of functional processes not determinative of lack of prudence. The participants countered that the investment fiduciary lacked “functional processes” for “nearly every aspect of designing, implementing, monitoring and adjusting the Fund.” The participants relied heavily on the opinion of a retained expert, who maintained that the lack of a documented process cast doubt on the prudence of the Fund’s construction.
In dismissing the argument, the court noted that the expert’s opinion, that a lack of written procedures can establish a breach of fiduciary duty, has been rejected as not being the standard required by ERISA (Wildman v. Am. Century Servs., LLC, DC Mo (2019), 362 F. Supp. 3d 685). The court, similarly, concluded that the expert’s opinions could not form the basis of a genuine dispute of fact regarding the investment fiduciary’s alleged breach, because his opinions were “based on an unrelated standard.”
In addition, the court explained that, even if the expert’s opinion was consistent with ERISA’s standards, the mere existence of a proposed “better” alternative to fiduciary conduct will not establish fiduciary breach if the fiduciary’s course of conduct was prudent. As the investment fiduciary’s evaluation of the merits of the Fund’s design, and its analysis of the Fund’s subsequent performance, satisfied the prudent person standard, the alternative courses of conduct promoted by the participants’ expert did not cast doubt on, or negate, the prudence of the substantive measures employed by the fiduciaries.
Source: Birse v. CenturyLink, Inc. (DC CO).
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