California Federal Judge Upholds Plan Sponsor in TDF-Selection Case

A California federal district court ruled in favor of a plan sponsor and its advisers in a case brought by 401(k) participants alleging that the sponsor and investment manager had breached their fiduciary duties by imprudently selecting and sticking with target-date funds affiliated with the 3(38) investment manager and plan adviser.

The case, Robert Lauderdale et al. v. NFP Retirement Inc. et al., was resolved on Friday by U.S. District Judge James V. Selna in the U.S. District Court for the Central District of California, Southern Division.

The initial complaint was filed by the Schlichter Bogard & Denton law firm on behalf of the plaintiffs in February 2021, naming plan adviser NFP, the retirement plan committee of Wood Group U.S. Holdings and 3(38) investment manager flexPATH Strategies LLC, which at the time was an affiliate of NFP. In November 2022, the court dropped NFP from the complaint.

The 401(k) participants alleged that, rather than acting in the best interest of participants under the Employee Retirement Income Security Act, the plan sponsor and advisory NFP prioritized investing in collective investment trusts managed by NFP affiliate flexPath, as well as failing to use the plan’s size to bargain for lower fees. The result, the plaintiffs alleged, was “substantial losses to investments” in participants’ retirement accounts.

In his February 23 decision, Selna reviewed the allegations in a 70-page “Findings of Fact & Conclusions of Law.” Through the analysis of the various charges against evidence presented by the defense, he concluded that the plan sponsor and its advisers proved they had conducted the appropriate due diligence in selecting funds and managing the retirement plan.

Wood is an international consulting and engineering company in energy and materials, and the 401(k) plan had $2.66 billion in assets as of 2020, according to data from Beacon, which, like PLANSPONSOR, is owned by ISS STOXX.

The court had held a “nine-day bench trial” hearing the arguments of both sides from March 21, 2023, through March 29, 2023, and September 5, 2023, through September 6, 2023.

Thorough Analysis

In his findings, Selna examined the selection processes Wood’s retirement plan committee undertook in choosing NFP and the flexPATH investment options for plan participants; these included creating a finalist list of competitors and negotiating down fees.

“By the time flexPATH was hired in March 2016, [the Wood retirement plan committee] had already collected and analyzed a significant amount of information about the Wood Plan that informed its decision to select the flexPATH TDFs,” he wrote.

The judge went on to further describe the investment policy statement created by Wood’s committee, along with flexPATH’s ongoing review of its TDF offerings, which included BlackRock Inc.’s passive funds. The judge also considered how often the committee met and what was reviewed. The detail went as far as to note cancelled meetings, such as one intended for October 26, 2017, that did not happen due to the impact of Hurricane Harvey on the Houston area.

In going over the variety of allegations from the plaintiffs, Selna countered with evidence that the defendants had followed proper procedure under ERISA. Examples included:

• The evidence showed that flexPATH did not receive additional compensation from the plan’s investment in the flexPATH TDFs;
• The plaintiffs alleged that flexPATH selected the flexPATH TDFs because it needed seed money and to improve the marketability of the funds. However, the evidence showed that the flexPATH TDFs were fully seeded almost immediately after they were created;
• The plaintiffs alleged that in December 2015, NFP formally announced a new program that incentivized NFP advisers to sell flexPATH by offering them bonus compensation whenever flexPATH TDFs were “implemented into” one of their retirement plan clients. But Selna found that the 3(38) management fee was not contingent on which funds were selected;
• The plaintiffs alleged that there was no action taken on the underperformance of the flexPATH TDFs. But the flexPATH TDFs were performing as expected, given the inflation period. Selna ruled that the evidence showed that the Wood Committee appropriately considered and evaluated the reasoning behind the underperformance; and
• The plaintiffs alleged that the Wood Committee never met with flexPATH. However, Selna noted, nothing in the law requires the Wood Committee to meet with its 3(38) investment manager; rather, it was compelled to monitor the TDFs’ performance.

Reasonable Decisions

Selna also noted at one point in the filing that a fiduciary’s duty, according to prior rulings, is not to “pick the best performing fund,” or the “cheapest possible fund available on the market,” but rather to show “a reasoned decision-making process” done through independent evaluation and with the appropriate methods “to investigate the merits of the investment.”

The plaintiffs were given seven days to file an appeal to the judgment, after which it will be filed in the Federal Rule of Civil Procedure 52(b), according to the filing.

Representatives for the plaintiffs did not immediately respond to request for comment. The Wood Group’s lead representation is Mayer Brown LLP, flexPATH’s is Seyfaqrth Shaw LLP, and NFP’s is Jenner and Block LLP, according to the court docket.

FlexPATH is no longer an affiliate of NFP, which itself is in an agreement to be acquired by Aon plc.