By Daniel Aronowitz
Key Points
(1) The Eastern District of Virginia dismisses two BlackRock LifePath investment imprudence lawsuits with prejudice.
(2) The key finding is that “ERISA simply does not provide a cause of action for fiduciary breaches based solely on a fund participant’s disappointment in the fund’s performance.”
ERISA excessive fee lawsuits started out with some potentially legitimate arguments that certain large plans had high administrative and investment fees, which could have been lowered with more fiduciary diligence. But then copycat law firms got greedy. Instead of focusing on the tiny minority of plans with egregious fees, they overstepped by claiming the imprudence of entire suites of investments that are chosen by hundreds of well-managed plans based on the advice of quality investment advisors. To this end, the excess fee plaintiffs’ bar filed many cases in the last three years claiming that the entire suite of Fidelity Freedom target-date funds was imprudent based on faulty and misleading allegations. Other cases have alleged that the Northern Trust, JP Morgan SmartRetirement, Flexpath and Wells Fargo target-date investment suites were imprudent. For courts to find these imprudence cases plausible, however, it would require the implication that hundreds of other plans and their investment advisors were all guilty of fiduciary malpractice. It is a step too far.
Alas, the reductio ad absurdum of investment imprudence cases was the eleven lawsuits filed in August 2022 by the Miller Shah law firm claiming that any plan fiduciary who chose Morningstar’s number-one rated BlackRock LifePath target-date funds was guilty of fiduciary malpractice for chasing low fees because the investment performance was allegedly “deplorable.” But like the shepherd boy who cried wolf too many times in the fairy tale, Miller Shah’s specious claims have met their deserved fate in the rocket docket of the Eastern District of Virginia only six months after the meritless cases were filed. After dismissing the fiduciary imprudence cases against Capital One and Booz Allen on December 1, 2022 by granting the initial motions to dismiss from the bench, Judge Michael S. Nachmanoff issued March 1 and 2 formal opinions that dismissed both cases, this time with prejudice. Judge Nachmanoff ruled that plaintiffs, even after amending their complaint, had failed to set out circumstantial factual allegations from which the Court could reasonably infer that the decision to retain the BlackRock TDFs was the product of a flawed decision-making process.
The dual decisions stand for the proposition that simply pointing to another investment with alleged higher performance is not enough to allege fiduciary imprudence. With another overstep by the plaintiffs’ bar, they are helping to create useful judicial ERISA guidance that is getting closer to a fair and more uniform pleading standard for fiduciary imprudence cases. We have not achieved a national and coherent pleading standard, but the Capital One and Booz Allen decisions add to the growing jurisprudence that should stop some of the most cynical lawyer-profiteering against the ERISA plans sponsored by large companies. Plaintiff law firms have only themselves to blame for filing implausible imprudence cases involving quality investments held by hundreds of retirement plans that are advised by top-notch investment advisors.
The Capital One and Booz Allen Investment Imprudence Lawsuits
The claims of the eleven Miller Shah BlackRock LifePath investment imprudent lawsuits are well-known, but less has been written on the new arguments they raised in their amended complaints in an attempt to salvage their fiduciary imprudence claims.
The eleven BlackRock LifePath TDF lawsuits are full of hyperbole claiming that the BlackRock TDFs have suffered “repeatedly inferior returns”; “consistently deplorable performance of the BlackRock TDFs”; plan fiduciaries engaged in an “irrational decision-making process”; and that Plan fiduciaries “appear to have chased the low fees charged by the BlackRock TDFs without any consideration of their ability to generate return.” The key claim is that BlackRock TDFs “are significantly worse performing than many of the mutual fund alternatives” offered by other TDF providers. The lawsuits compared BlackRock LifePath Index’s trailing performance starting in 2016 with the five other series with the most assets as of the end of 2021: Vanguard Target Retirement; T. Rowe Price Retirement; American Funds Target Date Retirement; Fidelity Freedom; and Fidelity Freedom Index. Miller Shah’s argument was that it did not matter if the comparator TDFs had the same exact investment strategies – including whether they were to-retirement or through-retirement, or even passive versus active investment strategies – because the Booz Allen and Capital One plan fiduciaries would most likely have chosen one of the five most popular funds. This was based on their claim that 75% of all retirement plans are invested in the top six TDF funds [or 65% of the top five fund families if you exclude the Fidelity Freedom Funds, as Miller Shah is one of the opportunistic law firms disparaging this TDF family of investments – but see Smith v. CommonSpirit Health].
At a December 1 joint hearing for both lawsuits, the Court rejected the fiduciary imprudence claim because plaintiffs had failed to offer sufficient evidence from which the court could infer that the decision to retain BlackRock TDFS was the product of a flawed decision-making process. Plaintiffs had failed to demonstrate facts that demonstrate BlackRock TDFs severely underperformed the comparison TDFs, or even that those comparators were meaningful benchmark comparators. The Court specified that the popular TDFs comparators were not meaningful benchmarks because the complaint lacked facts showing that the TDFs shared the same investment style, risk profile, or asset allocation. The Court gave plaintiffs the right to amend, but gave a stern warning that “plaintiffs should think carefully” before filing an amended complaint, because plaintiffs needed to address the insufficiency of the comparators purporting to show investment underperformance.
The Amended Complaints in both cases consisted of repackaged allegations that recycled the same comparisons against the four most popular TDFs that the court had already rejected because they do not share the “same investment strategy, investment style, risk profile [and] asset allocation.” Plaintiffs also took out two years of data from the original complaint that did not support their underperformance claims. Specifically, plaintiffs dropped their performance-related charts comparing BlackRock TDFs from 2019 forward. This meant that the Amended Complaints were now focused on an even more truncated time period – three years from 2016 to 2019. This is a critical factor, because three years of even “deplorable” performance should not be enough evidence to prove fiduciary malpractice, because prudent fiduciaries do not change investments without proper cause. In the firm’s trademark clever use of analogies, Morgan Lewis described the amended complaints as “rearranging deck chairs on a sinking ship.”
Plaintiffs tried one new comparator and one new argument as additional metrics to resuscitate their fiduciary breach claims. First, plaintiff added the S&P Target Date Index as the only new comparator. But plaintiffs admitted that the S&P Target Date Index is not a fund, as it is an amalgamation of all TDF suites in the market. The Amended Complaint described the S&P index as “a composite of the disparate strategies and styles present in the broad universe of investable alternative TDFs.” At oral argument, plaintiffs’ lawyer argued that the Genworth plan – one the eleven companies sued – has used the S&P Target Index in the Investment Policy Statement. They argued that this showed that the S&P TDF market index was an actual comparator used by plans choosing BlackRock LifePath TDFs, but the Judge stated that this could only be relevant in that case. Nevertheless, it is useful to learn what Miller Shah will argue in other cases.
Finally, Plaintiffs introduced the “Sharpe ratio” as a new metric to advance their claims. A Sharpe-ratio is a measurement of investment performance that considers “risk-adjusted returns.” According to plaintiffs, the Sharpe ratio “accounts for differing levels of risk by measuring the performance of an investment, such as a TDF, compared to the performance of similar investments, after adjusting for risk.” The ratio, according to Plaintiffs, therefore “enables the comparison of suites with disparate equity and fixed income allocations as well as both ‘to’ and ‘through’ management styles . . . by controlling for those differences.”
The Eastern District of Virginia Dismisses Both the Capital One and Booz Allen Cases With Prejudice
The Court began with noting that Plaintiffs in both cases allege in “conclusory fashion” that the plan fiduciaries employed “a fundamentally irrational decision-making process.” The Amended Complaints are “completely devoid of facts about the particular decision-making process undertaken by Defendants” with respects to the two plans. Instead, plaintiffs rely exclusively on circumstantial evidence of “significantly worse performing” BlackRock TDFs that they claim could not have supported a prudent decision by plan fiduciaries to retain the investments. The court agreed with the defendants’ motions to dismiss with two key findings: (1) allegations of underperformance alone fail to state a plausible fiduciary imprudence claim; and (2) plaintiffs fail to allege any meaningful benchmarks by which to assess the performance of the BlackRock TDFs.
Finding #1: Allegations of poor performance, standing alone, are insufficient to state to state a claim for breach of the duty of prudence: First, the Amended Complaint fails to state a claim for fiduciary breach under ERISA because plaintiffs rely solely on the performance of the BlackRock TDFs. In other words, plaintiffs asked the court to infer that the plan fiduciaries breached their fiduciary duties solely based on circumstantial allegations that the BlackRock TDFs allegedly failed to outperform the S&P composite index and four comparison funds based on annualized returns for fourteen quarterly periods. The court held, however, that to survive a motion to dismiss, “Plaintiffs must set forth some additional factual matter from which this Court can reasonably infer misconduct under ERISA.” Citing Smith v. CommonSpirit Health, 37 F.4th 1160, 1166 (6th Cir. 2022), a claim of imprudence cannot “come down to simply pointing to a fund with better performance.” In CommonSpirit Health – which the court did not say, but involved a wholesale attack on the prudence of Fidelity Freedom TDFs – the Sixth Circuit held that the mere factual allegation of a better-performing fund is not sufficient. Investment imprudence claims require that “an investment was imprudent from the moment that the administrator selected it, that the investment became imprudent over time, or that the investment was otherwise clearly unsuitable for the goals of the fund based on ongoing performance.”
The Court held that this case was similar to CommonSpirit Health because “[u]nderperformance of the BlackRock TDFs is all that Plaintiff alleges.” Plaintiff cannot meet the CommonSpirit Health test because (a) it has provided no factual allegations from which the court may reasonably infer that the choice of the BlackRock TDFs was imprudent from the moment the administrator selected it; (b) that the BlackRock TDFs become imprudent over time; or (c) that the BlackRock TDFs were otherwise clearly unsuitable for the goals of the fund based on ongoing performance. “Plaintiff alleges nothing beyond data allegedly indicating the BlackRock’s purportedly disappointing performance” relative to Plaintiff’s “preferred alternatives over the course of a limited period of time.” The Court thus reasoned that the addition of the Sharpe ratio and S&P Index to the Amended Complaint do not change the analysis, as “these are merely additional measurements of investment performance. That the Sharpe ratio is alleged to analyze performance on a risk-adjusted basis is therefore immaterial.” In sum, the key finding is that “ERISA simply does not provide a cause of action for fiduciary breaches based solely on a fund participant’s disappointment in the fund’s performance.”
Because the Court held that the Amended Complaints’ performance-only allegations were legally deficient, it did not address two key issues. First, it did not rule whether the performance charts in the complaint actually prove that the BlackRock TDFs exhibited “consistently deplorable performance” and were “consistently and dramatically outperformed” by the comparator TDFs. Second, the court did not address whether the time period reflected in plaintiffs’ performance charts is legally sufficient to demonstrate long-term underperformance as a matter of law. It is disappointing that the Court did not reach these issues, but the core finding is nevertheless helpful in other cases with wholesale challenges against widely held investments.
Finding #2: The BlackRock complaints failed to provide a sound basis for comparison or meaningful benchmark. The Court next held that the Amended Complaints failed for the second and independent reason that plaintiffs had not pled meaningful benchmarks against which the Court could assess the allegations of fiduciary imprudence because “funds that have ‘distinct goals and distinct strategies’ are ‘inapt comparators.’” The Court had concluded in the first hearing that the four comparator TDFs of popular TDFs available in market were not meaningful benchmarks because they did not share the “same investment strategy, investment style, risk profile, or asset allocation.” The Court held that plaintiffs had not remedied this deficiency in the Amended Complaint with the S&P Index and Sharpe ratio as two additional performance metrics.
First, the S&P Index is not a meaningful benchmark, because it is not a fund. Rather, it is a composite of disparate strategies and styles, and thus is not a meaningful benchmark against which the Court could assess the performance of the BlackRock TDFs.
Second, the Sharpe ratio is not a meaningful benchmark, because it is just another way to compare the performance returns of any two investments. Citing to Morgan Lewis’ clever characterization in the motion to dismiss, “Sharpe ratios are not magic wands that equalize any two investments as meaningful benchmarks.” The Sharpe ratio of any investment is “not in itself a TDF – it is simply a metric one can use to compare the risk-adjusted returns for any two kinds of investments.” Courts that reject TDF comparisons have not done so because plaintiffs advanced the wrong metrics, but rather “because the underlying investment strategies and styles were meaningfully different to start.” Not that it mattered, but the Amended Complaint never actually gave the numerically Sharpe ratio for the BlackRock TDFs. Thus, the Court concluded that the Sharpe ratio did not substitute making two funds comparable in the first place.
The Euclid Perspective
The Miller Shah law firm will have a hard time pursuing these cases on appeal, because the opinions are virtually foolproof, particularly because of the citations to the Sixth Circuit’s decision in CommonSpirit Health. And the opinions will make it much harder for the firm to prosecute the other nine remaining cases involving BlackRock LifePath TDFs. But these cases never had any merit. They were an overreach based on dubious successes by enterprising plaintiff law firms in challenging other widely used investments – going further and further out on a limb until the cases became attenuated and absurd. These BlackRock decisions are helpful perspective demonstrating that the proliferation of excess fee cases lacks credibility. By alleging fiduciary malpractice for choosing investments in which hundreds of plans are similarly invested – and almost all of the plans sued selected investments with the advice of investment advisors – the cases were reduced to the absurd. Plaintiff law firms have no legitimate standing to challenge quality investments from premier investment firms like Fidelity and BlackRock. But when the Sixth Circuit saw the challenge to Fidelity Freedom funds, the court appropriately blew the whistle. It was about time. Now the Eastern District of Virginia has similarly called foul play on the more attenuated and exaggerated claims against the highly regarded BlackRock funds.
There is a lesson for the plaintiffs’ bar if they are humble enough to learn it. It is from another fairy tale about killing the goose who lays the golden eggs. For plan sponsors, we have another court that is instilling fairness back to the liability scheme for retirement plans. But we have more work to do until the playing field is fully leveled. Plaintiff law firms should only be allowed to challenge egregious fees or underperformance for the serious offense of malpractice. Anything else makes a mockery of our judicial system.
