AutoZone ERISA Challenge Drives Ahead

The U.S. District Court for the Western District of Tennessee, Western Division, has ruled against AutoZone’s motion to dismiss an Employee Retirement Income Security Act (ERISA) lawsuit accusing the firm of a variety of fiduciary breaches.

The underlying complaint emerged in November. While it does not specifically name Prudential as a defendant, the fiduciary breach allegations center on Prudential’s GoalMaker investment solution, which was allegedly offered by AutoZone to its employees during the period at question in the lawsuit.

According to the plaintiffs, AutoZone described GoalMaker to participants as a service that would “guide you to a model portfolio of investments available, then rebalance your account quarterly to ensure your portfolio stays on target.” AutoZone also represented, according to plaintiffs, that GoalMaker’s allocations “are based on generally accepted financial theories that take into account the historic returns of different asset classes.”

The complaint, which has now cleared the motion to dismiss stage, goes on to suggest “the approval, maintenance and recommendation of an abusive ‘GoalMaker’ asset allocation service furnished by Prudential Insurance Co. served Prudential’s interests” over the interests of participants. The plaintiffs say AutoZone breached ERISA’s prudence and loyalty standards in a variety of ways—allegations which can now proceed to discovery and potentially a full trial.

Here is how the new decision characterizes the one-count complaint: “Plaintiffs’ one-count complaint, taken as a whole, alleges AutoZone breached its fiduciary duties in violation of ERISA by (1) retaining GoalMaker, which allegedly steers participants into high-cost investment options to the benefit of Prudential and against the best interests of plan participants; (2) by failing to monitor and remove the Guaranteed Index Fund as an investment option; (3) retaining mutual funds and separate accounts that charge exorbitant management fees and have hidden trading costs; (4) failing to invest in lower-cost share classes; (5) failing to monitor exorbitant recordkeeping fees; and (6) failing to provide participants with the complete and accurate information they required to make adequately informed investment decisions.”

AutoZone disputes all the allegations raised by plaintiffs and thus sought dismissal of the entire complaint. In its motion to dismiss, AutoZone requested an opportunity to present an oral argument. Case documents show the court granted AutoZone’s request and heard oral arguments from both parties on August 28.

For the reasons outlined in the 21-page ruling, the court finds plaintiffs “have alleged sufficient facts to state a claim to relief that is plausible on its face.”

Among the defendants’ arguments is the notion that comparing GoalMaker funds to passively managed Vanguard index funds—as the complaint does—is like “comparing apples to oranges and does not raise an inference of imprudence on AutoZone’s part.” AutoZone further argues that retirement plan fiduciaries are not required by law to pick the best performing fund or “the lowest-cost fund.” Rather, ERISA requires plan administrators to offer a variety of investment options.

“While AutoZone is correct that no authority requires the fiduciary to pick the best performing fund, that is not the allegation made here,” the ruling states. “In addition, AutoZone’s argument that the court should give limited weight to fee comparisons between actively managed GoalMaker funds and low-cost Vanguard index funds invites the kind of factual analysis that is inappropriate at the pleading stage. … This court declines to rule on the reasonableness of comparing actively managed funds to passively managed index funds on a motion to dismiss. While plaintiffs must allege more than inapt investment comparisons to make the necessary inference of imprudence to survive a 12(b)(6) motion, at the pleading stage, taking all factual allegations in plaintiffs’ favor, the court finds the complaint sufficiently states a claim for breach of fiduciary duty based on AutoZone’s selection and management of GoalMaker funds.”

The decision goes on to state that the parties’ dispute over the propriety of comparing actively managed funds to index funds raises questions of fact and law that have not been addressed by the local circuit—in this case the 6th U.S. Circuit Court of Appeals. As such, the court finds dismissal “would be inappropriate at this point.”

The same apples-to-oranges argument fails the defense on various other claims included in the lawsuit, including the arguments related to the offering the Prudential Guaranteed Index Fund.

“Taking the entire complaint into consideration and drawing all reasonable inferences in favor of plaintiff, the court finds that plaintiffs’ allegations give rise to a plausible inference that AutoZone’s process for selecting and monitoring the [Guaranteed Index Fund] was deficient,” the ruling states. “Here, AutoZone spends much of its time attacking the accuracy of plaintiffs’ comparison of the [Guaranteed Index Fund] to [a supposedly similar Vanguard fund]. However, a motion to dismiss is not meant to resolve arguments regarding the truth of plaintiffs’ allegations or the accuracy of their statements. Instead, the court must take plaintiffs’ well-pleaded factual allegations as true and draw every reasonable inference from them in their favor.”

The full text of the ruling is available here.