‘Sua Sponte’ Leave Granted to Amend Pioneer Money Market Complaint

The U.S. District Court for the District of Colorado has issued a mixed interim ruling in an Employee Retirement Income Security Act (ERISA) lawsuit targeting Pioneer National Resources.

The lawsuit, Barrett vs. Pioneer Natural Resources, was filed in July 2017 and names as defendants not only the company and the 401(k) committee, but also a number of the energy company’s HR and finance executives. The plan in question is a $500 million 401(k) program.

The list of breaches alleged includes “failing to offer institutional class shares for mutual funds, which resulted in the participants paying excessive costs to invest in the funds; failing to make sure that plan fees were reasonable; and failing to remove the poorly performing money market fund when the better-performing stable value fund was already available, causing losses to plan participants who maintained excessively high cash balances in money market funds rather than the stable value fund, which offered higher returns and the same risk level.”

Plaintiffs put forward similar allegations regarding the plans’ failure to utilize the fee efficiency of collective investment trusts (CITs), as follows: “Vanguard offers five different low-cost collective trust funds to qualified retirement plans, including Target Retirement Trust Select, Target Retirement Trust Plus, and Target Retirement Trust I–III. These target-date funds are managed by the same investment adviser as those mutual funds, but have far lower fees than the Vanguard target-date mutual funds offered as investment options by the plan. The plan offered the higher-cost mutual fund version of the Vanguard Target Retirement Funds, even though much lower-cost collective trust Vanguard Target Retirement Funds were available to the plan.”

The lawsuit caught some additional attention at the time because the plan sponsor is called out for failing to remove a money market fund option that had low returns when a stable value fund was also already available in the plan, and yet other suits had just been filed arguing essentially the exact opposite—that other plans should have offered a money market fund option in place of a stable value fund.

The new ruling in Barrett vs. Pioneer does little to resolve the fundamental issues at hand, offering some points of victory to both sides and implying a new amended version of the complaint is welcome and likely. First, the court finds that defendants’ opposition to plaintiffs’ motion for class certification lacks merit. Therefore, on the arguments presented by the parties, the court says “it appears class certification is appropriate.”

“But the parties’ arguments also reveal a serious defect in plaintiff’s ability to serve as an adequate class representative, namely, he has no standing to seek prospective equitable relief on behalf of those who continue to participate in the retirement plan,” the decision states. “After considering various ways of handling the situation, the court deems it most appropriate to reserve ruling on the matter of class certification and sua sponte grant plaintiff leave to amend so that plaintiff has an opportunity to attempt to cure the defect.”

Details from a short decision

In the text of the decision, the court makes some general observations about what it takes to prove class standing under ERISA Rule 23(a). This rule has essentially four main requirements, as follows: (1) the class is so numerous that joinder of all members is impracticable (numerosity); (2) there are questions of law or fact common to the class (commonality); (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class (typicality); and (4) the representative parties will fairly and adequately protect the interests of the class (adequacy).

The court address each of these considerations in the text of the decision, but the most time is spent discussing “typicality” and “adequacy.”

“Defendants contend that plaintiff’s class definition simultaneously fails the commonality, typicality, and adequacy tests because plan participants ‘did not all pay the same fee.’ Defendants thus present a general attack on these three requirements without clearly distinguishing between them,” the decision explains. “The court finds that this attack is best addressed under the typicality heading.”

Running this analysis, the court concludes that the lead plaintiff seeks to recover on behalf of the plan the difference between the administrative expenses the plan actually paid and the expenses it allegedly should have paid had the plan trustees carried out their fiduciary duties.

“That recovery would likely then need to be distributed to plan participants, but defendants do not argue that distribution is something more than a ministerial, arithmetic exercise applied to existing data,” the decision states. “The court thus rejects defendant’s argument that typicality does not exist. The court further finds that plaintiff is a typical representative of the proposed class. He was a plan participant who allegedly saw lower returns due to defendants’ actions or omissions concerning administrative fees. He was allegedly subjected to the same harmful practices as other proposed class members, thus establishing typicality.”

Interestingly, it is not an argument from defendants but in fact a point of procedure raised by the court itself that causes the lead plaintiff to fail on the question of “adequacy.” Defendants assert, and the lead plaintiff does not dispute, that the plaintiff cannot seek prospective equitable relief because he is a former plan participant with no intent to rejoin the plan.

“Defendants frame this as a flaw in plaintiff’s ability to certify a Rule 23(b)(1)(A) class, but the court views it as a more basic flaw in plaintiff’s adequacy to serve as a class representative under Rule 23(a)(4),” the decision states. “Indeed, it appears plaintiff has framed his current prayer for relief with the knowledge that he cannot seek prospective relief. As a result, the proverbial tail (plaintiff’s limitations as a class representative) is wagging the dog (the court’s remedial powers), likely to the disadvantage of current plan participants.”

Ultimately, the court on this matter agrees with other courts holding that “a class representative with no stake in a prospective injunction has no incentive to vigorously pursue those claims,” and is therefore an inadequate representative.

“On the current record, then, the court cannot grant the motion for class certification,” the decision concludes. “If the court were to refuse class certification on this basis, nothing in the Federal Rules of Civil Procedure, nor any other authority of which the court is aware, would prevent plaintiff from filing a new motion for class certification, should plaintiff be able to cure the adequacy defect. The court predicts plaintiff would search for a new or additional class representative; file a motion to amend the complaint to add that person as a named plaintiff; and, if that motion is granted, file a renewed motion for class certification. Upon consideration, the court concludes that this multi-stage process be a waste of the parties’ and the court’s time and resources. Given the court’s inherent authority to manage its docket to minimize such a waste of scarce judicial resources, the court will sua sponte grant plaintiff leave to amend the complaint to add a co-representative plaintiff (or substitute representative) who is a current participant in the plan.”