Plaintiffs Clear Dismissal in Case Involving Prudential’s GoalMaker

The U.S. District Court for the Eastern District of Michigan has issued a new ruling in an Employee Retirement Income Security Act lawsuit targeting the automotive components and supply business GKN North American Services Inc.

The plaintiffs’ allegations, which resemble those made in multiple prior complaints, charge that the defendants failed to ensure investment options in their companies’ retirement plans were prudent in terms of performance and cost. The complaint takes issue, specifically, with the defendants’ selection and retention of the Prudential GoalMaker asset allocation service and its selection as a default investment.

Prudential itself is not a party in this case, which has been brought by a proposed class of participants in the GKN Group Retirement Savings Plan. The plaintiffs allege that GoalMaker “disfavored the reliable, low-cost index funds in the plan’s investment menu available from reputable providers that did not pay kickbacks to Prudential.” This, they allege, resulted in the participants paying excessive investment management fees, administrative expenses and other costs, which over the class period allegedly cost participants millions of dollars in retirement savings.

The plaintiffs argue that GKN should have replaced GoalMaker funds “with reliable, low-fee” index funds or with “other less expensive target retirement date funds offered by numerous mutual fund families.”

The court’s new order in the case denies the GKN defendants’ motion to dismiss the suit while also rejecting a separate motion from the U.S. Chamber of Commerce in which the business group requested leave to file an amicus curiae, or “friend of the court,” brief. In its motion, the Chamber claimed its brief would “contribute in clear and distinct ways” to the analysis of the case, largely by explaining the broader regulatory or commercial context, supplying empirical data and providing “practical perspectives” on the consequences of varying outcomes.

The court’s order rejects that suggestion and concludes the Chamber’s motion and its accompanying proposed brief improperly rehash arguments already made by the parties. The order further states the Chamber’s proposed brief seeks to raise case outcomes from other jurisdictions irrelevant to the case at hand.

Turning to the ERISA claims against GKN, the order is similarly direct, finding summary dismissal of the case would be inappropriate at this juncture.

“In this case, this court finds that plaintiffs have made a claim of the violation of the fiduciary duty of prudence sufficient to survive a motion to dismiss,” the order states. “Plaintiffs’ claim survives on the grounds that defendants failed to investigate and select lower-cost alternatives and by retaining imprudent plan investments, but not on the grounds that defendants charged excessive recordkeeping fees.”

The order states that courts across the U.S. have begun to define a middle ground for when a claim for a breach of prudence is sufficient in relation to investigating and selecting funds. The order advises that, while a claim is sufficient when a plaintiff can show that the fund selection process itself favored higher-fee funds, it is insufficient when a plaintiff claims only that other, lower-cost funds were theoretically available in the market. The court’s order concludes that the allegations raised by the plaintiffs clear this bar, as they focus rightly on the investment selection and retention process.

The defense’s arguments regarding the plaintiffs’ disloyalty claims proved more successful, but the elimination of these claims does not derail the broader suit.

“Plaintiffs fail to make any allegations to suggest that the fiduciaries’ operative motive was self-dealing or to benefit their own interests as opposed to the beneficiaries,” the order states. “Rather, they allege that defendants’ choice asset allocation service, Prudential, was acting in its own interest. But the actions of the asset allocation service are not at issue here. The question is whether defendants, as fiduciaries, acted for the purpose of benefitting the third party or themselves. Without the required allegations of fiduciary self-dealing, it is not reasonable for the court to find a breach of fiduciary duty under the duty of loyalty theory.”

As the order recounts, this mixed result comes after the filing of several pre-trial motions, including cross-motions from the plaintiffs and defendants pertaining to the 6th U.S. Circuit Court of Appeals’ recent ruling in a related case, Smith v. CommonSpirit Health.

The full text of the ruling is available here.