Compliance March 31, 2022

Most of Pentegra MEP Lawsuit Clears Dismissal

A federal court found most of the plaintiffs’ ERISA fiduciary breach claims are sufficiently pled to advance beyond the motion to dismiss stage in the litigation process.  

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A new order has been issued in an Employee Retirement Income Security Act lawsuit filed against Pentegra Retirement Services in the U.S. District Court for the Southern District of New York, granting in part the defense’s motion to dismiss but siding mostly with the plaintiffs.

The lawsuit was initially filed against Pentegra Retirement Services and the Board of Directors of the Pentegra Defined Contribution Plan, a multiple employer plan for which Pentegra provides recordkeeping services, in September 2020. The lawsuit alleges that the company engaged in self-dealing and failed to ensure the payment of only reasonable fees by the plan. The complaint further alleges that, in 2010, thousands of dollars of plan assets were used to make payments to the Ritz Carlton Naples and the New York Palace Hotel, “presumably for defendants’ personal benefit.”

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Since the lawsuit’s initial filing, it has had a complex procedural history. In December 2020, the court consolidated into the case a separate action filed in October 2020 by a different group of plaintiffs who also sought class action status on substantially similar claims. Then, near the end of December of that year, the plaintiffs filed a new consolidated class action complaint. The court subsequently appointed Schlichter Bogard & Denton LLP as interim class counsel and granted the plaintiffs leave to amend the consolidated class action complaint.

The amended pleading was filed in March 2021, in response to which the defendants moved for dismissal under the Federal Rule of Civil Procedure 12(b)(6), supported by the testimony of various experts. The plaintiffs, as is par for the course in such cases, filed in opposition, and the motions were briefed in June 2021. Now, the court has issued its ruling on the defense’s dismissal motion, which it granted only in part, meaning the litigation process will continue.

As recounted in the order, at the core of the plaintiffs’ complaint are allegations that, in retaining Pentegra as a service provider, the defendants failed to ensure that the fees paid by the retirement plan were reasonable for the services received and relative to market rates for what plaintiffs contend are the same services. Particularly, the plaintiffs allege that the fees paid by participants have far exceeded the rates of comparable plans. They do this by identifying examples of other defined contribution plans that have allegedly paid far lower fees during the proposed class period.

In their dismissal motion, the defendants contend that Pentegra is not a fiduciary with respect to the plan and therefore, the claims alleged against it must fail. Considering this argument, the District Court observed that the 2nd U.S. Circuit Court of Appeals has explained that, when a person who has no relationship to an ERISA plan is negotiating a contract with the plan, that person is not an ERISA fiduciary with respect to the terms of the agreement for compensation. However, as the order states, the negotiated contract must be the product of an “arm’s length bargain presumably governed by competition in the marketplace.” Moreover, after a person has entered into an agreement with an ERISA-covered plan, the agreement may give such control over factors that determine the actual amount of compensation that the person thereby becomes a functional ERISA fiduciary with respect to that compensation.

“Of importance, courts have held that the determination of whether a person is a fiduciary is fact-based, and cannot be determined in a motion to dismiss,” the order states. “Plaintiffs have alleged that Pentegra was a fiduciary, that it had a prior relationship to the plan in that [its CEO] was both a member of the board of directors and president of Pentegra Services Inc., and that there was a lack of market competition with respect to its contract in that there was no competitive bidding, there were automatic contract renewals, and because Pentegra’s compensation relative to the market was excessive.”

After spelling this out, the court accepted the plaintiffs’ “well-pled allegations” as true and “declines the invitation to engage in a fact-finding missive at this juncture.” The order states that the parties are free to continue to probe this issue in discovery.

“Plaintiffs alleged that defendants failed to monitor and calculate the sum of the asset-based charges and determine whether they corresponded to the services’ actual costs, failed to solicit competitive bids and failed to use the plan’s size to negotiate lower fees,” the order states. “These allegations are each, and taken together, a plausible breach of the duty of prudence. Simply put, plaintiffs’ allegations are sufficient to withstand the motion to dismiss the breach of duty of prudence claims set forth in the first claim for relief.”

The order then states that, on a motion to dismiss, the court must draw “reasonable inferences from the pleading in the non-movants’ favor.” In doing so, the court found that the plaintiffs have “sufficiently alleged that it can be reasonably inferred that defendants breached their duty of prudence by providing the higher-cost options.”

“The motion to dismiss this claim is, therefore, denied,” the order states.

The order also includes a few points of victory for the Pentegra defendants. Specifically, the court concluded that the plaintiffs do not allege that the Pentegra CEO’s relationship with the company directly caused him to take or fail to take any actions detrimental to the plan while he was wearing his “fiduciary hat.” Thus, the order determines, they have not sufficiently alleged a breach of the duty of loyalty on the part of the company’s CEO. The claims involving the alleged use of plan assets for the defendants’ personal benefit similarly fail, but other loyalty-based claims do not.

The full text of the order is available here.

Compliance March 30, 2022

DOL Lawsuit Over Investment in DST Systems’ 401(k) Will Proceed

A federal court found the claims were not time-barred, the investment manager was responsible for its own fiduciary duties and an individual committee member can’t escape claims of breaches by omission.

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In 2019, the Department of Labor filed one of several lawsuits alleging mismanagement of investments in the DST Systems Inc. 401(k) Profit Sharing Plan.

While DST, the DST Advisory Committee and the DST Compensation Committee exercised discretionary authority or control over the plan, the company hired Ruane, Cunniff & Goldfarb & Co. to serve as investment adviser to the plan. Ruane, Cunniff used its explicit investment strategy of “non-diversification,” by which concentrated investment of the plan’s assets in a small number of securities and held those investments for a long period of time.

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The lawsuits challenge the investment in Valeant Pharmaceuticals International Inc. stock, which suffered a share price decline in 2015 following a well-publicized fraud scandal involving the company. According to the DOL’s lawsuit, in August 2015, the DST Advisory Committee directed Ruane, Cunniff to limit investments in any one security to no more than 25% of the plan’s portfolio. However, DST afforded the investment manager discretion regarding when and how to effectuate this limit.

The DOL alleges that the defendants violated their fiduciary duties of diversification, loyalty and prudence under the Employee Retirement Income Security Act by employing Ruane, Cunniff’s non-diversification strategy for the plan’s assets. It also claims that the DST defendants failed to follow the plan document by not establishing a written investment policy for the plan and that they failed to monitor the investment manager. In addition, the lawsuit alleges that the DST defendants are liable as co-fiduciaries for Ruane, Cunniff’s breaches.

Settlements to resolve two lawsuits were presented to a federal court in January 2021. But the DOL took issue with a provision in the settlements that would bar the agency’s litigation. Last August, the court rejected the settlement agreements and certified a class in those lawsuits.

Now, Judge Andrew L. Carter Jr. of the U.S. District Court for the Southern District of New York has denied motions filed by the defendants to dismiss the DOL’s case. The defendants argue that the complaint is time-barred by the applicable statutes of limitation and repose. In addition, a committee member defendant and Ruane, Cunniff each argue that the DOL fails to state a plausible claim that they are liable for breach of their fiduciary duties.

Motions for Dismissal Denied

The defendants asserted that the DOL’s claims are untimely as the fiduciary breaches resulted from the initial hiring of Ruane, Cunniff by DST in the 1970s. However, Carter pointed out that ERISA imposes a statute of repose by which breach of fiduciary duty suits must be filed within six years of “(A) the date of the last action which constituted a part of the breach or violation, or (B) in the case of an omission the latest date on which the fiduciary could have cured the breach or violation.” He said the defendants would be correct if the only breaches alleged related to DST’s decision to hire the investment manager; however, the complaint alleges that the defendants owed continuing fiduciary duties to the plan distinct from that, and that they breached these duties during the statutory period of March 19, 2013 through October 8, 2019.

Under ERISA, the six-year statute of repose is accelerated when the plaintiff has actual knowledge of the breach. Suits must be brought within “three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation,” Carter noted in his opinion. The defendants argued that the DOL had actual knowledge of the alleged conduct from the Forms 5500 that DST annually filed with the agency. Carter cited the Supreme Court’s decision in Intel Corporation Investment Policy Committee v. Sulyma in saying if “a plaintiff is not aware of a fact,” the plaintiff “does not have ‘actual knowledge’ of that fact however close at hand the fact might be,” even if the plaintiff “received numerous disclosures” about the plans at issue. He rejected the defendants’ contention that Sulyma does not apply to the DOL as it does to private plaintiffs because the agency is charged with reviewing the relevant plan information as part of its regulatory duties, saying the “defendants provide no binding caselaw for this distinction.” In addition, Carter pointed out that the Sulyma opinion acknowledges the DOL’s position that “the [DOL] will have a hard time [bringing suits] within § 1113(2)’s timeframe if deemed to have actual knowledge of the facts contained in the many reports that the department receives from ERISA plans each year.”

“At the least, discovery is needed to ascertain whether the [DOL] obtained ‘actual knowledge’ from the Form 5500 filings,” Carter wrote in his opinion.

The judge also rejected Ruane, Cunniff’s argument that the DOL improperly alleges that the investment manager breached a non-existent fiduciary duty to determine the percentage of the assets it manages. According to the opinion, Ruane, Cunniff focused on the lawsuit’s references to its use of its non-diversification strategy for 100% of the plan’s assets and asserted that it was not obligated to know the percentage of assets under its management. Carter determined that this is an overly narrow reading of the complaint.

Ruane, Cunniff also argued that DST was fully apprised of its investment strategy and therefore any ERISA violations related to its investments are attributable to DST. However, Carter found that, irrespective of DST’s knowledge of Ruane, Cunniff’s investment strategy and investments, the investment manager was accountable for its fiduciary obligations. The service agreement with DST acknowledged that the investment manager “was a fiduciary regarding all assets in the portfolio it managed for the plan.” As such, Carter said, Ruane, Cunniff was responsible for “ensuring the prudent management of a properly diversified portfolio . . . regardless of [DST’s] actions in this case.”

The individual committee member that filed a motion to dismiss the suit against him argued that his role on the Advisory Committee terminated in October 2013, before the loss in the value of Valeant shares and before the Advisory Committee’s alleged actions occurred. However, Carter noted that the DOL alleges in the lawsuit that the DST defendants breached their fiduciary duties by omission. More specifically, the complaint alleges that the losses to the plan transpired because of the DST defendants’ inaction over the course of many years in failing to monitor and correct Ruane, Cunniff’s imprudent investments and application of its non-diversification strategy. Similarly, the complaint alleges that the Advisory Committee failed to establish a written investment policy for the plan as mandated by the plan document. “As alleged in the complaint, these breaches by omission persisted for many years, including during [the] defendant[’s] time as a member on the Advisory Committee,” Carter wrote in his opinion.

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