Pension & Benefits News Successor fiduciaries not liable for failure to remedy imprudent selection of proprietary investment funds by predecessor fiduciaries
Tuesday, October 8, 2019

Successor fiduciaries not liable for failure to remedy imprudent selection of proprietary investment funds by predecessor fiduciaries

By Pension and Benefits Editorial Staff

Successor fiduciaries who lacked actual knowledge of the allegedly imprudent process by which predecessor fiduciaries selected proprietary plan investment options were not liable for failing to remedy the breach, according to a federal trial court in Georgia. The fact that the successor fiduciaries knew that the plan contained proprietary funds was not sufficient evidence to charge them with actual or constructive knowledge of their predecessors’ allegedly improper selection process.

Allegedly imprudent selection of proprietary investment funds. Participants in a 401(k) plan sponsored by SunTrust Banks brought suit, alleging that successor fiduciaries breached their duties under ERISA by failing to remedy the consequences of the imprudent process used by predecessor fiduciaries in selecting plan investment options. The predecessor fiduciaries, in their capacity as members of the plan’s benefits committee, allegedly imprudently selected proprietary SunTrust mutual funds without considering unaffiliated funds, without comparing the performance of the affiliated funds to that of non-proprietary funds, and without analyzing the fees assessed plan participants.

The affiliated funds were added to the plan before the class period (March 11, 2005-December 31, 2012) began. However, the funds remained in the plan during the class period, when the successor fiduciaries were serving on the benefits committee.

In attempting to hold the successor fiduciaries liable for failing to remedy the allegedly imprudent investment selections, the participants charged that the successor fiduciaries should have known of their predecessors’ alleged breach because: (1) the offering of proprietary funds in the plan presented a clear conflict of interest; (2) a cursory review of the minutes of the benefits committee’s meetings would have revealed the imprudent process by which the affiliated funds were selected; (3) the successor fiduciaries had duty to familiarize themselves with the plan, which included a review of the minutes of prior committee meetings; and (4) the successor fiduciaries, knowing that most of the plan’s options were proprietary, should have been aware that “no fund company offers the best fund in every asset class.”

The successor fiduciaries, while acknowledging the presence of the affiliated funds in the plan, generally claimed to be unaware of the process by which the funds were initially selected. Submitting a motion for summary judgment, the fiduciaries specifically argued that they could not be liable for failing to remedy the alleged breaches by the predecessor fiduciaries because they did not have actual knowledge of the allegedly imprudent process used in selecting the proprietary investment funds.

Successor liability requires actual knowledge of fiduciary breach. Initially, the court explained that, while fiduciaries may not be vicariously liable for breaches committed outside their tenure, they may be held liable for the independent fiduciary breach of failing to remedy the continued effect of a predecessor’s fiduciary breach. Citing DOL Opinion Letter 76-95 (Sept. 30, 1976), the court noted that fiduciaries who know of a breach of fiduciary responsibility committed by a predecessor fiduciary would be obligated to take whatever action is reasonable and appropriate under the circumstances to remedy the breach. Failure to take such remedial action, the DOL has advised, would be considered a separate breach of fiduciary responsibility by the successor fiduciary.

The duty of a successor fiduciary to remedy the continuing effect of a predecessor’s breach, however, the court further explained, requires actual knowledge of such breach. Rejecting the participants’ contention that constructive knowledge is sufficient to hold a fiduciary liable for failure to remedy the breach of a predecessor fiduciary, the court noted that the overwhelming majority of courts to have addressed the issue, and the Department of Labor, have established actual knowledge as the appropriate standard.

Successor fiduciaries lacked actual knowledge of alleged breach by predecessors. The court next concluded that no genuine issues of material fact suggested that the successor fiduciaries had actual knowledge of the predecessor fiduciaries’ alleged breach in selecting the affiliated funds. The successor fiduciaries familiarized themselves with plan affairs upon becoming members of the benefits committee and may have reviewed a document providing a history of committee actions related to the plan. However, those facts were not sufficient to establish actual knowledge of the alleged prior breaches.

No evidence of constructive knowledge of fiduciary breach. The court further held that, even assuming “that willful blindness” to or constructive knowledge of the predecessor’s alleged breach were sufficient for liability to attach, no evidence was proffered indicating that the successor fiduciaries knew of a high probability of illegal conduct or that they purposefully attempted to avoid learning of such conduct. The successor fiduciaries, the court stressed, did not have a duty to “scour past minutes and interrogate” committee members for an indication of prior breaches. Moreover, the court averred, there was “nothing inherently improper” about the inclusion of proprietary funds in the plan. The mere fact that the fiduciaries were aware that the plan included affiliated funds, the court concluded, was not sufficient evidence of constructive knowledge of the allegedly improper selection process.

SOURCE: Fuller v. SunTrust Banks (DC GA).

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