A federal district court has removed some fiduciaries but moved forward claims against the M&T Bank 401(k) plan committee in a suit alleging that M&T Bank and its retirement plan’s fiduciaries engaged in self-dealing at the expense of the bank’s employees.
According to the complaint, in 2010, eight of the plan’s 23 designated investment alternatives were M&T Bank proprietary mutual funds that cost significantly more than similar funds and performed worse. Rather than remove these overpriced and underperforming funds, the defendants expanded their proprietary funds offerings in 2011, after M&T purchased Wilmington Trust and added six of Wilmington’s expensive, poor-performing mutual fund offerings.
According to the plaintiffs, had the defendants conducted an impartial review of the Wilmington Funds, they would have discovered that the Wilmington Funds “was consistently one of the worst performing mutual fund families in the United States,” and that their “expenses were above average compared to many alternatives within the marketplace that had a superior performance history.” The failure to remove these proprietary funds from the plan allegedly “cost Plan participants tens of millions of dollars due to excess fees and underperformance.”
The suit also alleges the plan failed to use its bargaining power as a large institutional investor to obtain the lowest-cost class of shares available, and in several instances, failed to prudently monitor the plan to determine whether it had invested in the cheapest possible share class. The plaintiffs also claim the defendants were aware of the benefits of alternative investment vehicles such as collective trusts but failed to offer them to plan participants.
Dismissal of non-fiduciaries
Chief Judge Frank P. Geraci, Jr. of the U.S. District Court for the Western District of New York agreed with the defendants that M&T Bank and M&T are not fiduciaries to the plan and therefore are not liable for the plaintiffs’ breach of fiduciary duty claim. “Plaintiffs rely solely on the doctrine of respondeat superior to assert that Defendants M&T Bank and M&T are fiduciaries to the Plan’s beneficiaries because the companies’ ‘shared Board of Directors appointed or removed members of the Committee,’” Geraci wrote in his opinion.
The defendants also argue that Wilmington Trust Investment Advisors (WTIA), which provided advisory services for the Wilmington funds to the plan, and Wilmington Funds Management Corporation (WFMC), which is the Wilmington Funds’ adviser and manager, are not fiduciaries under the Employee Retirement Income Security Act (ERISA). Geraco noted that to rely on ERISA, which imposes a fiduciary duty on investment advisers, a plaintiff must allege that the adviser has “(A) discretionary authority or control . . . with respect to purchasing or selling securities or other property for the plan” or “ (B) renders any advice . . . on a regular basis to the plan pursuant to a mutual agreement, arrangement or understanding, written or otherwise, . . . that such services will serve as a primary basis for investment decisions with respect to plan assets, and that such person will render individualized investment advice to the plan based on the particular needs of the plan.” He said the plaintiffs have not made any allegations concerning (A) and, as for (B), they raise only the conclusory allegation that “[a]s investment managers, WTIA and WFMC exercised discretionary authority.”
Geraci points out that the 2016 restatement of the plan states that the plan committee has “all necessary authority and discretion” to select the plan’s investment options, and the complaint itself states that “[t]he Committee has the power to manage and invest all Plan assets, as well as to appoint any trustee and investment manager and establish investment and funding policies[,] . . . [and] also has the direct responsibility for selecting and removing designated investment alternatives within the Plan.” The court determined that WTIA and WFMC are not fiduciaries and dismissed claims against them.
ERISA statute of limitations
The defendants argue that the plaintiffs’ allegation that the defendants selected and retained higher-cost, poor-performing proprietary mutual funds as designed investment alternatives for the plan to drive revenues and profits to M&T and its affiliates should be dismissed under ERISA’s three-year statute of limitations. They argue that the plaintiffs had actual knowledge of this from documents provided to plan participants in January 2013 that detailed the proprietary funds’ performance history, expense ratios, and relationship with M&T. According to the defendants, because the plaintiffs did not file this suit until May 11, 2016, their breach of fiduciary duty claims time-barred to the extent that they are based on conduct occurring before May 11, 2013.
However, the plaintiffs argue that although they gained some knowledge from the January 2013 documents, those documents did not supply them with actual knowledge of the violation. This is because they still lacked knowledge of other material facts such as investment alternatives that are comparable to the investments offered within the plan, comparisons of the costs and investment performance of plan investments versus available alternatives within similarly-sized plans, total cost comparisons to similarly-sized plans, information regarding other available share classes, and information regarding the availability and pricing of separate accounts and collective trusts. “Even the most avid news consumer would be forgiven for not being aware of the information underlying this case,” Geraci wrote. “Accordingly, at this stage of the litigation, the Court finds that Plaintiffs’ proprietary funds count is not barred by ERISA’s statute of limitations.”
Excessive fee allegations
Geraci said the plaintiffs do not have actual knowledge of the defendants’ decision-making processes in selecting investment options for the plan, nor need they possess such knowledge. It is instead sufficient for them to allege “facts that, if proved, would show that an adequate investigation would have revealed to a reasonable fiduciary that the investment at issue was improvident.” He found that the complaint does so by alleging “that a superior alternative investment was readily apparent such that an adequate investigation would have uncovered that alternative.” According to the plaintiffs, the alternative share classes were not materially different from those that the plan offered because “the funds hold identical investments and have the same manager.” The plaintiffs state there was “no reason the Plan, with over a billion dollars in assets . . . should not have been in the lowest fee share class of the same non-proprietary funds already offered in the Plan.”
However, the defendants argue that there are good reasons, such as “increased liquidity,” to use retail shares instead, even if they are more expensive than institutional shares, so it was not imprudent for them to choose retail share classes over institutional share classes. However, “the question of whether the defendants did in fact reasonably weigh the benefits and burdens when selecting retail shares over institutional shares is more appropriately taken up at the summary judgment stage,” Geraci ruled. He said discovery may very well indicate that the defendants had prudent reasons for offering the disputed retail shares or that the plaintiffs’ claim that they are identical to their institutional counterparts is inaccurate, but the court cannot reach that conclusion at this stage of the proceedings.
Likewise, the judge found allegations that the defendants breached their fiduciary duties by failing to consider collective investment trusts and separate accounts are inextricably intertwined with the proprietary funds allegations and, therefore, survive the motion to dismiss. He also said the plaintiffs’ mutual funds alternatives theory also concerns non-proprietary funds. “The factual disputes regarding this theory are for another day,” Geraci wrote in his opinion.
Prohibited transaction claims
According to the opinion, the plaintiffs assert two causes of action under ERISA’s prohibited transactions rules. The first is based on 29 U.S.C. Section 1106(b)(1), which prohibits plan fiduciaries from “deal[ing] with the assets of the plan in his own interest or for his own account,” and Section 1106(b)(3), which bars fiduciaries from “receiv[ing] any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.” The plaintiffs assert this cause of action against the “Company Defendants,” a group comprised of M&T, M&T Bank, WTIA, WFMC, and Wilmington Trust. Since the court found these defendants are not fiduciaries to the plan, Geraci dismissed this claim.
The second prohibited transaction cause of action is under 29 U.S.C. 1106(a)(1)(C)-(D), which forbids a fiduciary from “causing a plan to engage in a transaction if he knows or should know that the transaction constitutes a direct or indirect furnishing of goods, services, or facilities between the plan and a party in interest,” or if he knows that the transaction constitutes a “transfer to, or use by or for the benefit of a party in interest, of any assets of the plan.” The plaintiffs assert this cause of action against all defendants, and the claim concerns only the proprietary funds offered through the plan.
In response, the defendants argue that these claims should be dismissed because a regulatory exemption to the prohibited transaction laws applies to their conduct. Specifically, Prohibited Transaction Exemption 77-3 exempts “transactions that involve the ‘acquisition or sale of shares of [mutual funds] by an employee benefit plan covering only employees of’ the mutual fund or affiliated companies.” However, Geraci noted that PTE 77-3 only applies if the investment is made on the same terms that apply to the rest of the investment public. The parties disagree considerably about whether the dealings between the proprietary mutual funds and the plan were made on the same terms that apply to the rest of the investment public. The complaint states that plan beneficiaries did not enjoy the same terms that the investing public enjoyed because the proprietary Wilmington Funds typically rebated 0.25% of investment management fees to other plans, but it conspicuously failed to do so for the M&T Plan. The defendants respond by dismissing the plaintiffs’ allegations as “entirely speculative.”
“After attempting to follow the volleying between Plaintiffs and Defendants, the Court questions whether the applicability of PTE 77-3 is “clear” from the face of the Complaint, and Plaintiffs’ allegations about rebates do not appear, as Defendants suggest, to be “entirely speculative.” Accordingly, at this time, this prohibited transactions claim survives Defendants’ Motion to Dismiss,” Geraci wrote.
Failure to monitor
The defendants additionally argue that thepPlaintiffs’ failure to monitor claim fails because the complaint baldly asserts the essential elements of a failure to monitor claim but omits sufficient supporting factual allegations. However, “because the appropriate ERISA mandated monitoring procedures vary according to the nature of the plan at issue and other facts and circumstances, an analysis of the precise contours of the defendants’ duty to monitor at this stage is premature,” Geraci wrote. “At this juncture, Plaintiff has plead ‘facts,’ including allegations of excessive fees paid by the Plan, that ‘indirectly show unlawful behavior’ and thus give Defendants ‘air notice of what the claim is and the grounds upon which it rests.’”
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