Compliance September 22, 2020

Court Ruling Mixed on Home Depot Dismissal Motion

While a court has ruled the plan’s advisers should be carved out of the litigation, the counts against Home Depot fiduciaries will proceed.

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The U.S. District Court for the Northern District of Georgia has ruled on a set of dismissal motions in an Employee Retirement Income Security Act (ERISA) lawsuit targeting Home Depot and its retirement plan services providers.

The plaintiffs in the case allege a broad range of claims against a number of defendants—including Home Depot Inc.; the administrative committee of the Home Depot Futurebuilder 401(k) Plan; the plan’s investment committee; Financial Engines Advisors; Alight Financial Advisors; and some 30 or more individuals from these firms.

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The claims included in the 98-page complaint are extensive, echoing the language of the numerous excessive fee and failure to monitor ERISA litigation cases that have been filed in recent years. Plaintiffs here suggest Home Depot has selected multiple poorly performing funds for its 401(k) plan, allowed investment advisers to charge its employees unreasonable fees, and turned a blind eye to what amounts to a kickback scheme between an investment adviser and the plan’s recordkeeper.

The court’s ruling addresses respective motions to dismiss filed by Alight Financial Advisors, Financial Engines Advisors and the Home Depot defendants. In short, the court has granted the Alight and Financial Engines motions to dismiss, in which the defendants argued they are not, given their contracted roles and inability to set their own compensation levels as service providers, liable for the fiduciary breach claims alleged in the suit. The dismissal motion filed by the fiduciary Home Depot defendants, on the other hand, has been denied.

As to why the Home Depot motion was denied, the court finds the plaintiffs have specifically and sufficiently alleged that Home Depot’s process in managing the plan “was faulty and tainted by imprudence because the decisionmaking process allowed for the retention of chronically poor performing investments when there were better investments available to the plan. Although plaintiffs have not identified the specific flaws in Home Depot’s decisionmaking process, the court acknowledges that plaintiffs would likely have no access to Home Depot’s particular decisionmaking process at this stage of the litigation. In circumstances such as this, courts have held that plaintiffs may rely on circumstantial factual allegations to show a flawed process—particularly one that involves the fiduciaries’ management of underperforming investments.”

Taking into consideration all the circumstantial factual allegations surrounding Home Depot’s retention of Financial Engines Advisors and Alight Financial Advisors, the court found that plaintiffs have alleged sufficient facts to support an inference of an imprudent process.

In their respective motions to dismiss, Financial Engines Advisors and Alight Financial Advisors contended that they cannot be held liable for any fiduciary breach with regard to their fees because they did not act as fiduciaries with respect to negotiating or collecting their fees.

“Here, plaintiffs do not allege that [Financial Engines Advisors and Alight Financial Advisors] functioned as fiduciaries in any capacity other than by providing investment advice,” the decision states. “Yet, they fail to allege facts sufficient to show that [the advisers] breached their fiduciary duties to provide investment advice. Instead, plaintiffs allege fiduciary breaches arising out of [the advisers’] negotiation and collection of their fees. Such allegations are insufficient. It is well established that a service provider does not become a fiduciary simply by negotiating its compensation in an arm’s-length bargaining process—particularly where, as here, the service provider is not alleged to have had the ability to determine or control the actual amount of its compensation.”

The court similarly rules in favor of the advisers’ motions to dismiss claims alleging prohibited transactions.

The full text of the order is available here. 

Investing September 22, 2020

PSNC 2020: Time to Get Serious About ESG?

Environmental, social and governance investing is slowing becoming pervasive in DC plans, particularly as Millennials are poised to become the majority of the workforce.

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The important thing for retirement plan sponsors to consider when deciding whether to include environmental, social and governance (ESG) funds in their plans’ investment lineups is if it will improve their participants’ performance—not whether it is making a difference in the world, said Ed Farrington, executive vice president, institutional and retirement, Natixis Investment Managers—U.S. Distribution, at the virtual 2020 PLANSONSOR National Conference.

“There is growing evidence that ESG can help plan sponsors and advisers identify and manage risks,” Farrington said. “Demand will increasingly grow. By 2025, 75% of the workforce will be Millennials, and, as such, they will wield influence over the workforce, and, therefore, the benefits world. The important thing for plan sponsors is to meet this demand while also meeting their fiduciary duties.”

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Cammack Retirement’s client base includes many universities and public sector plans, including a leading organization in wildlife conservation, and “these clients have taken a keen interest in ESG investing,” said Michael Volo, senior partner at the advisory practice. “There has been a lot of growing momentum in the past 12 months.”

“Investor interest is running years ahead of regulation, if not decades,” said Hernando Cortina, head of index strategy, at ISS* ESG. “There has been massive growth in ESG investing in the past 12 months. ESG now comprises 10% of ETF [exchange-traded fund] assets, totaling $6.2 billion. Net flows into ESG ETFs are 10% of the market, which is quite meaningful.”

Farrington noted that the Department of Labor (DOL) first issued guidance on ESG investing in 2008, under the George W. Bush administration. “Every presidential administration since has had some opinion on incorporating ESG into a retirement plan menu,” he said. “It is critical that plan sponsors understand that and ensure they are meeting their fiduciary duty while also innovating by including ESG to offer a better investment process.”

There are several ways plan sponsors can include ESG strategies in their investment lineups, Farrington said. They can find standalone ESG funds, he said. However, it is more common for them to find target-date funds (TDFs), balanced funds or managed accounts that include ESG principles in their investments, he said. What sponsors may not realize, Farrington said, is that “90% of the companies in the S&P 500 issue data on how they behave in terms of ESG policies. For the past decade, research analysts have had access to data to see how ESG impacts performance.” Many funds that do not explicitly say that they are ESG focused actually incorporate these principles, so sponsors can ask their retirement plan advisers to find out what the ESG exposure in their investment lineup is, he suggested.

As to how ESG affects performance, “there are plenty of studies that emphasize that integrating ESG into the fund selection process can lead to similar, if not better, returns,” Farrington said. “Managers who can integrate this will have an information advantage.”

Again, however, Farrington said it is critical that when considering ESG investments, sponsors look to ensure that they are adding to the “economic benefit of the participant, not the collateral benefit. This is really critical when it comes to the role of a plan sponsor serving the needs of a plan participant.”

The DOL’s proposed rule on ESG investments, which it issued this summer, emphasized that including such investments in a retirement plan lineup “has to be for the economic benefit of the plan,” Volo said. “Most read the proposal as pushing back against ESG, but, at the end of the day, the DOL was reiterating that fiduciaries have to do what is in the best interests of participants and that ESG investment returns have to be at least on par with non-ESG investments.”

Of the 1,500 comments the DOL received in the condensed, 30-day comment period it gave the public, most of the remarks were negative, asking the DOL to alter its guidance, Volo noted.

“DOL’s proposed rule may slow down ESG momentarily, but not in the long term,” Volo said. “There is a lot of momentum and data behind ESG investments. I believe we are reaching an inflection point,” he said. “But I still think we are in the early innings for ESG in retirement plans.”

*Editor’s note: PLANSPONSOR Magazine is owned by Institutional Shareholder Services (ISS).

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