U.S. District Judge Sidney H. Stein of the U.S. District Court for the Southern District of New York found the participants’ claims were not filed outside ERISA’s statute of limitations, which effectively says all plaintiffs must file suit no later than six years after a breach, but a participant who acquires “actual knowledge of the breach” must bring a claim within three years of acquiring “actual knowledge.”

According to the court opinion, Citigroup contends the plaintiffs’ action is untimely because they possessed “actual knowledge” of the alleged breach more than three years before they originally filed suit in 2007 (see “Citigroup Hit with 401(k) Suit over ERISA Violations”). In April 2003, ten unaffiliated funds were eliminated from the plan and new funds were added, including three Citigroup-affiliated funds. At that time, participants’ investments in eliminated funds were transferred to new or remaining plan funds—four of which were affiliated funds.

The Citigroup defendants point to documents distributed to participants listing the fees and effectively disclosing the affiliated status of the funds as evidence the participants had “actual knowledge” of the alleged breach. However, Stein found the defendants presented no evidence that participants knew that the affiliated funds’ fees were higher than alternatives with comparable performance. “What matters are the facts plaintiffs possess, not the facts they suspect or could discover,” the opinion says.

According to Stein, essential to the plausibility of the participants’ claims was the allegation that the affiliated funds “charged higher fees than those charged by comparable Vanguard funds—in some instances fees that were more than 200% higher than those comparable funds.” To demonstrate plaintiffs’ actual knowledge of the breach, defendants must show either that participants possessed, through plan communications or otherwise, comparisons of the affiliated funds to the alternatives or knew in some other way that the fees were excessive, Stein said, adding that the defendants have not even attempted to offer such evidence. 

In their lawsuit, participants allege that Citigroup defendants committed an ongoing breach-by-omission by failing to remove the affiliated funds from the plan, starting in October 2001; breached their duty of prudence by selecting three affiliated funds when adding new funds in April 2003; and imprudently transferred investments in four of the eliminated unaffiliated funds to four of the affiliated funds. According to the court opinion, each of these claims is premised on two common allegations: The funds at issue were affiliated with Citigroup, and they charged fees that were excessive when compared to fees of funds that performed comparably. 

“[B]y causing plan assets to be invested in affiliated mutual funds that charged higher fees and performed less well than comparable unaffiliated funds, the committee defendants acted in the interests of Citigroup rather than the Plan and failed to act with the skill, prudence, and care required,” the participants alleged. 

The opinion in Leber v. The Citigroup 401(k) Plan Investment Committee is here.