Lawsuit Challenges Conservative Investment of Profit Sharing Plan Assets

Denying a motion to dismiss the suit, a judge pointed out the difference between it and others cited by the defense which challenged investments from which participants could choose.

A federal district court judge has moved forward a lawsuit alleging that a profit sharing plan sponsor invested assets of the plan too conservatively for its employee base and failed to prudently manage the plan’s investments.

In denying a motion to dismiss the suit, U.S. District Judge Leo T. Sorokin of the U.S. District Court for the District of Massachusetts pointed out the difference between it and others cited by the defense in their motion to dismiss. The “plaintiff does not allege that one of the investment options plan participants were permitted to choose was managed too conservatively,” the judge noted.

According to the court document, the DeMoulas (Restated) Profit Sharing Plan and Trust had approximately 11,000 to 13,000 participants “with a wide range of retirement needs and objectives,” and between $580 million and $756 million in assets between 2013 and 2017. The plan contains one investment into which participants are automatically enrolled. The plan’s investment policy statement (IPS) called for 70% of the plan’s assets to be allocated into domestic fixed income options and 30% to be put into equities.

The plaintiff—a former participant in the plan whose account was distributed in 2015—alleged that the plan’s one-size-fits-all target allocations are inappropriate even for participants nearing retirement, but are especially inappropriate for participants who are decades away from retiring. According to the court document, in his initial complaint, the plaintiff argued that experts, including one of the managers of the plan’s underlying accounts, recommend that participants have well over 30% of their retirement portfolio allocated toward equities at the time they retire, considering longevity, while recommending that participants further from retirement allocate as much as 96% of their portfolio to equities.

Sorokin noted in his opinion that the plaintiff not only alleged that fiduciaries of the plan were imprudent in their consideration of participants’ varying interests and needs in the plan’s allocation structure and investment choices, but that these failures were compounded by a failure to review and revise those choices over time.

The plaintiff alleged that the defendants often failed to meet their own equity allocation targets, in some years devoting as much as 86% to fixed income options, with the remainder (14%) to equities and, in some years, holding significant allocations to cash that failed to generate meaningful returns. The plaintiff also alleged the defendants failed to procure the lowest-cost share class of bond funds even though the plan was large enough to have the leverage to do so, and that they failed to monitor investment performance or choose better performing options to achieve the plan’s investment goals.

Considering the “totality of the allegations,” Sorokin found the “plaintiff has alleged sufficient facts from which it is reasonable to infer a plausible claim of violation of the duty of prudence” required of Employee Retirement Income Security Act (ERISA) fiduciaries.

Sorokin took as guidance the Supreme Court decision in Fifth Third v. Dudenhoeffer, which explained that “taken in context, [ERISA]’s reference to ‘an enterprise of a like character and with like aims’ means an enterprise with what the immediately preceding provision calls the ‘exclusive purpose’ to be pursued by all ERISA fiduciaries: ‘providing benefits to participants and their beneficiaries’ while ‘defraying reasonable expenses of administering the plan.’” In that decision, the high court also said “the statute’s requirement that fiduciaries act ‘in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of this subchapter’… makes clear that the duty of prudence trumps the instructions of a plan document.”

Sorokin rejected the defendants’ attempt to liken the case to one dismissed by the 1st U.S. Circuit Court of Appeals, Barchock v. CVS Health Corp., and their argument that it should likewise be dismissed for failing to state a claim. The defendants cited the appellate court’s observation that “conservativism in the management of a stable value fund—when consistent with the fund’s objectives disclosed to the plan participants—is no vice,” and the court’s rejection of the allegation that “imprudence could be inferred from the fact that the fund’s cash allocation ‘was a severe outlier when compared to allocation averages for the stable value industry.’”

Sorokin pointed out the markedly different context of the allegations in the Barchock suit and the current case. And he pointed out that the court in Barchock repeated an observation it had made in Ellis v. Fidelity Management Trust Co.: “If informed plans or their participants do not want such funds, they will not select them over the innumerable options available.”

“Plaintiff alleges a series of facts occurring over time regarding both the allocation structure of the investment plan vis-à-vis the interests of the beneficiaries and the implementation of the plan that, taken together, plausibly allege a claim of imprudence,” Sorokin concluded. He noted that his denial of the motion to dismiss was “not a ruling that an ERISA plan must follow any specific path.”