Seyfarth Synopsis: A district court recently denied a motion to dismiss a 401(k) proprietary fund class action, continuing an overwhelming trend of allowing these cases to survive pleading challenges. On the bright side, however, the Eighth Circuit recently affirmed a dismissal of such a case, and the first of these cases to be tried resulted in a defense victory, which is on appeal with the First Circuit.
The plaintiffs’ bar sparked a new 401(k) class action trend a few years ago by targeting “proprietary” in- house investment products, alleging that fiduciaries were committing a breach by including their in-house proprietary funds in plans to the exclusion of less expensive, better-performing comparable options.
In most of these cases, plaintiffs have survived initial pleading challenges. Generally courts have found that allegations underlying these cases supported an inference that the fiduciaries engaged in a flawed process. See, e.g., Cryer v. Franklin Templeton Res., No. 16-cv-4265 (N.D. Cal. Jan. 17, 2017); Urakhchin v. Allianz Asset Mgmt. of Am., L.P., No. 15-cv-1614 (C.D. Cal. Aug. 5, 2016).
A district court in Maryland recently continued the trend by denying a motion to dismiss a first amended complaint for a proprietary fund case. See Feinberg v. T. Rowe Price Group, Inc., et al., D. Md. Case No. MJG-17-0427, 2018 BL 298391 (Aug. 20, 2018). In Feinberg, plaintiffs alleged that fiduciaries breached their duties and committed related ERISA violations by, among other things, including in the plan retail-class versions of in-house funds even though purportedly cheaper versions of the same funds were available for commercial customers. Notably, in addressing defendants’ argument that the plan documents required that they select an exclusive line-up of proprietary funds, the court found that the decision to structure the plan that way was a settlor, non-fiduciary function, and “did not provide a blanket defense” for the fiduciaries. The court concluded that plaintiffs pled sufficient allegations to raise plausible inferences to support all of their claims.
Defendants also argued that plaintiffs’ prohibited transaction claim was barred under ERISA’s six-year statute of repose, because no prohibited transaction (i.e. the initial inclusion of the fund in the plan) occurred within six years of the lawsuit. The court noted that while defendants “may have viable defenses,” the claim would not be dismissed now, because the court could infer a plausible timely claim of prohibited transactions, including the continuous monthly fees being paid for the funds at issue.
In contrast to this decision and the plaintiff-friendly trend on pleading challenges for these cases, one defense victory on a motion to dismiss was recently affirmed by the Eighth Circuit. See Meiners v. Wells Fargo & Co., No. 0:16-cv-003981, 2017 WL 2303968 (D. Minn. May 25, 2017); Eighth Circuit No. 17-2397 (Aug. 3, 2018). In that case, the Eighth Circuit expressly acknowledged the “challenging pleading burden” for plaintiffs because they have different levels of knowledge regarding the investment choices the fiduciary made versus how the choices were made. The Eighth Circuit held that the existence of a cheaper fund, as pled by plaintiff, doesn’t mean that a particular proprietary fund is too expensive in the market generally or that it’s otherwise an imprudent choice.
As any litigator knows, losing a motion to dismiss is the loss of merely one battle in what can be a long-fought (and not to mention, costly) war. In fact, in the first of these cases to go to trial resulted in a defense victory, which is pending appeal in the First Circuit. Brotherston v. Putnam Investments LLC, 1:15-cv-13825, 2017 WL 2634361, (D. Mass. June 19, 2017). While some companies avoid protracted litigation and choose to settle these cases at early stages, this is not to say that a sound fiduciary process cannot be ultimately vindicated in court. Stay tuned on further developments. . .