Allegations Against Northrop Grumman Pared Down in Excessive Fee Suit

A federal judge has found that Northrop Grumman was not a fiduciary with respect to acts specified in an excessive fee suit regarding its 401(k) plan.

U.S. District Court Judge Andre Birotte Jr. of the U.S. District Court for the Central District of California noted that the document governing Northrop Grumman’s 401(k) plan designates two committees—an “Administrative Committee” and an “Investment Committee”—which, along with their members, are administrators and named fiduciaries of the plan. Each committee is comprised of three members, to be appointed by Northrop’s Board of Directors.

According to the original complaint, the defendants—including Northrop—“acted to benefit themselves and Northrop by paying plan assets to Northrop purportedly for administrative services Northrop provided to the plan, which were not necessary for administration of the plan or worth the amounts paid. Defendants also caused the plan to pay unreasonable recordkeeping fees to the plan’s recordkeeper and mismanaged the plan’s emerging markets equity fund.”

The plaintiffs also accuse the plan and its administrative and investment committees of allowing its recordkeeper to receive fees from an agreement with Financial Engines to provide participants with investment advice.

Generally, the defendants argue the plaintiffs fail to specify how Northrop or the individual defendants—members of the committees—acted in a fiduciary capacity with respect to their claims. The defendants seek dismissal of the breach of fiduciary duty claims against Northrop because they claim Northrop is not a named or functional fiduciary with respect to the duties of loyalty and prudence the plaintiffs allege were violated. The plaintiffs concede Northrop is not a named fiduciary under the plan, but argue it has sufficiently alleged Northrop is a functional fiduciary under the Employee Retirement Income Security Act (ERISA).

Birotte notes that the power to appoint, retain and remove plan fiduciaries constitutes discretionary authority over the management or administration of a plan within the meaning of ERISA Section 1002(21)(A), but, a fiduciary’s duties are limited to the extent “it retains or exercises any discretionary authority over the management or administration of a plan.” For example, Birotte says in his opinion, “the board of directors may be responsible for the selection and retention of plan fiduciaries. In such a case, members of the board of directors exercise ‘discretionary authority or discretionary control respecting management of such plan’ and are, therefore, fiduciaries with respect to the plan. However, their responsibility, and, consequently, their liability is limited to the selection and retention of fiduciaries.”

The plaintiffs argue that Northrop retained authority over the management and administration of the plan because it appointed its own employees to serve on the committees. They contend that since Northrop can act only through its employees, the employees’ actions are attributable to Northrop. Birotte found this unpersuasive. “A Plan sponsor does not become or remain a fiduciary merely because it appoints its own employees to serve on fiduciary committees,” he wrote in his opinion.

He granted the defendants’ motion to dismiss Counts I through VI against Northrop, “because Plaintiffs have had numerous opportunities to state the basis for holding Northrop liable as a fiduciary but has consistently failed to do so.” For this reason, Birotte decided further amendment would be futile and the dismissal is with prejudice.

However, Northrop did not escape the failure to monitor fiduciaries complaint. Birotte found allegations that Northrop failed to “evaluate their [appointees’] performance, or to have a system in place for doing so,” and “ensure that the monitored fiduciaries had a prudent process in place for evaluating the plan’s administrative fees and ensuring that the fees were competitive,” and “remove appointees whose performance was inadequate” are sufficient to state a claim for failure to monitor. So, he denied the defendants’ motion to dismiss Count VII against Northrop.

Birotte found the plaintiffs have sufficiently alleged that the individual defendants are ERISA fiduciaries. The complaint alleges facts or circumstances from which it can be inferred that the individual defendants’ actions may have set in motion the circumstances for which the plaintiffs complain. They allege that the individual defendants may have exercised discretionary authority over the plan and the committees during the class period, and Birotte found this sufficient at this stage of the proceedings. He said, “fiduciary status must be determined in the context of the specific fiduciary duties asserted to have been breached. Because the timing of the alleged fiduciary breaches as well as the extent of the Committee members’ knowledge, participation or involvement in some of the acts that led to the breach of fiduciary claims is at issue, dismissal is premature at this time.