Court Pares Down 401(k) Self-Dealing Suit Against Neuberger Berman

A federal judge has 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, which it says “was larded with high fees and has suffered from consistently abysmal performance,” in its 401(k) 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 moved forward the prohibited transaction claim, dismissing all other defendants from the suit and dismissing the breach of fiduciary duty claims.

After finding that the plaintiff has standing to pursue his claims, Swain found his comparison of the Value Equity Fund, an actively managed fund, with Vanguard’s Institutional Index Fund Institutional Plus Shares fund (VIIIX), an index fund that is designed to track the performance of the S&P 500, lacking. “Plaintiff compares the [Value Equity Fund’s] fees unfavorably to those charged by the VIIIX, but does not allege that the two funds employed similar operations or investment strategies, nor does plaintiff proffer any other facts to make the comparison of the funds’ fees meaningful and plausibly suggestive of a fiduciary breach,” Swain wrote in her opinion.

In addition, Swain found the balance of the allegations—that the defendants offered a poorly performing affiliated fund with assets overwhelmingly invested by the sponsoring plan—are insufficient to plausibly support an inference that an objectively prudent and loyal fiduciary would have acted differently and ceased offering the Value Equity Fund.

Turning to the plaintiff’s claim that each time the plan paid fees to Neuberger Berman Trust Company N.A., or other Neuberger entities, in connection with the plan’s investment in the fund, the defendants caused the plan to engage in a prohibited transaction under ERISA, Swain ruled that defendants’ have the burden of proving that the fees paid to an affiliate are reasonable under ERISA’s Section 408(b) prohibited transaction exemption. She rejected the defendants’ argument that the plaintiff’s failure to provide any factual allegations to prove the fees paid for the Value Equity Fund were unreasonable implies the fees were reasonable.

Most defendants not fiduciaries with respect to fees paid

Now that only the prohibited transaction claim was left, Swain found most defendants were not fiduciaries with respect to the claim and dismissed all but the plan’s investment committee as defendants.

The plaintiff alleges, based on a Value Equity Fund disclosure, that Neuberger Berman Trust Company N.A. “maintains ultimate fiduciary authority over the management of, and investments made, in the Value Equity Fund,” and was, therefore, a functional fiduciary. Swain found this allegation only supports the proposition that Neuberger Berman Trust Company N.A. acts as a fiduciary in connection with the fund’s investment and management decisions, not that it played any role or had any responsibility in designating the fund as an investment choice or otherwise caused the plan to pay fees to any party in interest.

The plaintiff also argues that the manager of the fund, a shareholder in Neuberger, and leader and co-founder of the Straus Group at Neuberger, was also a fiduciary. Swain said, “Even if that is true as to the [Value Equity Fund’s] investment choices, it does not provide a basis for a finding that [he] had any authority or responsibly for choosing the [fund] as a plan investment option or authorizing the payment of fees to any fiduciary or party in interest.”

Swain also found the plaintiff makes no factual allegations specific to Neuberger Berman LLC from which a factfinder could reasonably infer that it was a fiduciary with respect to the decision to cause the plan to pay management fees to the Value Equity Fund. The plaintiff cited a 7th U.S. Circuit Court of Appeals decision that a fiduciary cannot abdicate its fiduciary responsibilities even if discrete fiduciary duties are delegated. But, Swain pointed out that the plan document specifically excludes responsibility for “control and management of the assets of the Plan and appointment of an investment manager or managers” from Neuberger Berman Group LLC’s fiduciary responsibilities as plan administrator, assigning those responsibilities to the plan’s investment committee instead. “Plaintiff’s allegation that Neuberger Berman Group LLC is responsible for plan investment options and delegated that authority to the investment committee is thus facially inconsistent with the governing plan document,” she wrote.

Finally, the plaintiff asserted that dismissal of the claims as against the non-committee defendants is unwarranted even if they were not fiduciaries in any relevant respect because, as parties in interest to the plan, they may be subjected to equitable restitution of proceeds of prohibited transactions pursuant to ERISA Section 502(a)(3). However, Swain said, restitution, as an equitable remedy, requires that “the money or property identified as belonging in good conscience to the plaintiff [can] be clearly traced to particular funds or property in the defendant’s possession” per Great-W Life & Annuity Ins. Co. v. Knudson. “Because plaintiff fails to trace the fees paid … to any particular property or funds held by defendants, or articulate why traceability is not required, plaintiff’s equitable restitution claim is not sustainable against the non-fiduciary defendants,” the judge concluded.