KEY POINTS: (1) The Captrust fiduciary process model was vindicated in a trial claiming that Prime fiduciaries imprudently chose Fidelity Freedom target-date funds and overpaid Transamerica for recordkeeping fees. The trial decision is yet another example demonstrating how the current slate of excess fee and imprudent investment fiduciary-breach cases constitute improper second-guessing of the discretionary fiduciary decisions of America’s plan sponsors.
(2) When required to prove their manufactured excess fee claims, plaintiff lawyers use junk expert testimony that attempts to distort the fiduciary standard of care from customary industry fiduciary practice into guaranteeing best possible results.
We live in a culture in which star athletes and celebrities use their “platforms” to tell us how to vote and how to live our lives. Because they are good at sports or acting, they somehow believe they are qualified to give advice outside their core competency. Many of us want to tell them to shut up and act.
In the fiduciary world, we have our own poseurs. Plaintiff lawyers have taken a leading role to police how plan sponsors must act to meet ERISA’s fiduciary standard. With no actual benefit plan experience, they claim expertise as to how retirement and health plans should be run – the right fee for plan recordkeeping, and in hindsight, the right investments to choose and replace. They claim the right to second-guess the judgments of plan fiduciaries in hindsight fiduciary-breach litigation based on circumstantial evidence with no evidence of the fiduciary process used to negotiate plan fees or monitor plan investments.
And then we have the curious second act of Marcia Wagner. She is a highly regarded ERISA lawyer who built a leading fiduciary law firm representing plan sponsors. But in the last several years she has joined the ERISA plaintiffs’ bar to accuse companies like Goldman Sachs of fiduciary malpractice by serving as a fiduciary process expert. In the Prime Healthcare case, she lent the credibility of her distinguished resume to help the Miller Shah and Capozzi Adler plaintiff firms survive a motion for summary judgment in a case accusing the Prime multiple employer plan’s fiduciaries of “a glaring breach of fiduciary duty” for maintaining Fidelity Freedom target-date funds and overpaying Transamerica for recordkeeping fees. It was one of the outrageous lawsuits claiming that it was fiduciary malpractice for any institutional plan to stay in the active suite of Fidelity Freedom funds because a Reuters article questioned whether the investment strategy exposed plan participants to excessive risk. The lawsuit she backed falsely claimed that retirement plans were fleeing the Fidelity target-date funds because of an overly risky investment strategy.
Marcia Wagner knows a lot about ERISA fiduciary law. That is a given. But what does a defense lawyer know about the proper investment options to choose in a retirement plan, and when to replace investments that underperform? How does she know whether a recordkeeping fee is reasonable? Yet that didn’t stop her from supporting plaintiff lawyers in accusing Prime plan fiduciaries of “glaring” malpractice and providing “expert” testimony on investment monitoring. Instead of staying in her defense-lawyer lane, she testified that the Prime plan had an “amorphous Investment Policy Statement” that did not provide any effective or practical guidelines that the committee could utilize. She claimed that Captrust’s sophisticated investment performance scoring system was not allowed by Prime’s IPS – even though it was specifically coded into the IPS guidelines. And she testified that Prime plan fiduciaries used the wrong investment benchmarks and acted imprudently by failing to dump any investment that underperformed after three years – no exceptions or discretion allowed.
Wagner’s proffered testimony was enough for the court to deny summary judgment to Prime based on purported issues of fact, requiring the plan sponsor to spend millions of dollars to defend the case. The court does not appear to have studied the credibility of her testimony before trial, which meant that the entire fiduciary imprudence case was validated on the resume of a distinguished ERISA defense lawyer.
But Wagner was exposed at trial for testimony that the court called “conclusory, internally inconsistent, and not credible.” See Findings of Fact and Conclusions of Law, In re Prime Healthcare ERISA Litig. (Case 8:20-cv-01529-JLS-JDE (08/22/2024). The court found that Wagner’s “opinions were litigation-driven and not based on a considered application of her industry experience to the facts with which she was presented.” The core flaw with her “myopic” and “non-sensical” testimony – the judge’s words, not mine – is that she judged fiduciary prudence based solely on the quality of the documentation. It was form over substance. She claimed fiduciary malpractice when the investment policy statement and meeting minutes did not meet her high standard of perfection, regardless of the actual rigorous process of the fiduciary committee. To her, if it wasn’t specifically documented, it didn’t happen. But even worse, she prescribed a formulaic investment approach in which plan fiduciaries have no discretion whether to keep an investment that is on a watchlist for underperformance. Her view of fiduciary investment management opens up fiduciaries to second-guessing in subsequent fiduciary-breach litigation – you are guilty until proven innocent. She and the ERISA plaintiff lawyers get to decide under the shotgun of fiduciary-breach litigation whether you got it right – well after the fact.
The Wagner fiduciary perfection standard epitomizes the flaw in most fiduciary-breach cases alleging excessive fees and imprudent investments. Most excessive fee cases are comparisons to the lowest – i.e, best – fee plaintiffs can find. And most investment imprudence claims are comparisons – improperly in hindsight – to the best performing fund that plaintiffs can identify. These fiduciary-breach complaints give no perspective as to the industry average fee or investment result. These cases accuse plan fiduciaries of malpractice even when they are guided by quality investment advisors and follow the same practices of most other plan fiduciaries in America. In the real world, plan fiduciaries measure themselves against the industry average fee or result. But in the plaintiff lawyer contrived world that Wagner supported, fiduciaries are judged against the industry best result, which is measured after the fact.
Plan sponsors cannot win when judged in hindsight under the Wagner fiduciary standard espoused by plaintiff lawyers in excess fee cases. It is an open license to second-guess plan fiduciaries. You will get criticized, for example, for not having an Investment Policy Statement. But if you do have an IPS, you will get second-guessed for not following it. You will get accused of fiduciary malpractice if you follow and “rubber-stamp” the advice of your investment advisor. But you will conversely get accused of imprudence if you don’t follow the advice of your investment advisor. In a standard that works only for plaintiff lawyers, you are guilty either way. The lawsuits judge you against perfection – not the average or industry standard practice. The Wagner standard only serves to enrich plaintiff lawyers as they use litigation to second-guess the judgments of America’s plan fiduciaries. Why a distinguished ERISA lawyer like Marcia Wagner would support the ERISA plaintiffs’ bar in the litigation abuse of excess fee cases is mystifying, especially in cases where the plan sponsor has a quality investment advisor and an intentional fiduciary process.
It is therefore gratifying when the Prime Healthcare ERISA court exposed the unfairness of these fiduciary breach lawsuits. The shame, however, is that federal courts appear unwilling to dismiss the cases in the initial stages, forcing plan sponsors to endure expensive trials in order to vindicate themselves. The Prime lawsuit was premised on a lie that Fidelity Freedom funds were underperforming and unnecessarily risky investments, and then prosecuted based on junk expert testimony of (a) a lawyer who is unqualified to opine on investment management and (b) an inexperienced former T. Rowe Price employee who knows nothing about the reasonableness of plan recordkeeping fees.
The following is a summary of the Prime excessive fee case and the key issues to learn from the court’s decision, including an examination of investment policy statements and documentation of fiduciary process in meeting minutes. We include a discussion of the 2020 vintage of fiduciary-breach cases involving the Fidelity Freedom Funds, as the Prime decision debunks the theories of the many cases alleging poor performance of these quality Fidelity investments. Many of these cases settled based on improper litigation pressure, but the Prime fiduciaries and their Littler Mendelson defense lawyers should be credited for forcing the Miller Shah law firm to prove these unfounded claims that unfairly defamed the investment professionals at Fidelity.
The Prime Healthcare Lawsuit
The Prime excess fee lawsuit was filed in 2020 by the Miller & Shah and Capozzi Adler law firms. The lawsuit was the classic template used in over two dozen cases alleging fiduciary imprudence for maintaining the Fidelity Freedom target-date funds. The lawsuit claimed that the Fidelity Freedom funds were too expensive, too risky, and underperformed the index funds that were offered at a considerably lower price. There was no comparison to any other funds from any other investment company to give perspective – just a misleading comparison of the Fidelity Freedom active and passive funds. The complaint also alleged that a handful of other plan investments had underperformed.
The Prime Healthcare plan is a multiple employer plan with sixty-eight different contributing employers. It had 44,421 participants and $1.1b in assets as of December 31, 2019. Captrust served as the 3(21) investment advisor, and Transamerica was the plan’s recordkeeper.
Although we did not see it anywhere in the court filings that we studied, the Prime plan is noteworthy for the high number of participants compared to the plan assets. The average account balance of only $48,000 is low. It is more like a retail plan with low account balances. With the need to coordinate with sixty-eight different employers and payrolls, it is a complex plan to administer. Many recordkeepers will not even bid on a complex multiple employer plan. This is important perspective when evaluating any claim that the recordkeeping fees were too high, including whether it makes sense to charge recordkeeping fees on a percentage-of-asset basis.
Although Transamerica’s fee was percentage based until the per-participant fee in 2020, the effective per-participant rates based on the total dollar amounts on average, per participant basis were as follows: $42 in 2014; $34 in 2015; $35 in 2016; $43 in 2017; $43 in 2018; $52 in 2019; $50 in 2020; and $41 in 2021. Under Encore benchmarks, these are reasonable fees. The fees are even more reasonable considering the complexity presented by the many employers and payroll systems of a multiple employer plan. Nevertheless, the plan fiduciaries had to defend these fees in a four-year lawsuit.
At trial, plaintiffs threw the kitchen sink at the Prime fiduciary defendants, criticizing everything to plan did. The court called the many theories of liability “sprawling,” and called out plaintiffs for a “pattern of sandbagging” with a “moving target” of evolving claims to impose liability on the plan fiduciaries. The first claim was that Prime fiduciary committee failed to monitor the plan’s investments. Plaintiffs alleged that the plan’s governance structure was inadequate based on a lack of training, the lack of a fiduciary charter, and an “amorphous” Investment Policy Statement. Second, plaintiffs alleged that the plan committee insufficiently documented its decision-making process, which allegedly “resulted in a ‘check-the-box’ exercise” that fell below the ERISA-imposed duty of prudence. Third, plaintiffs contended that the committee reflexively deferred to Captrust when monitoring the plan’s investment options. This included a contention that the committee violated the IPS by retaining certain investments that were favorably rated by Captrust’s scoring system, but which failed to meet the IPS’s criteria. And plaintiffs alleged that the committee failed to identify that Captrust provided an inappropriate benchmark to monitor the Fidelity Freedom Funds. Finally, plaintiffs contended that the committee overlooked the alleged “red flags” from a Reuters reports and capital flight from the Freedom funds.
The second claim was that the committee failed to prudently monitor the plan’s recordkeeping fees. The claim was that the committee insufficiently documented its decision-making process, lacked a “touchstone for the application of a consistent process,” which in turn led to “near total reliance” on Captrust’s analysis of recordkeeping fees. The committee also allegedly never undertook sufficient measures to become informed of a reasonable market rate for the plan’s services, including never undertaking a formal request for proposal. Finally, plaintiffs alleged that the committee failed to ensure the plan’s fee remained reasonable as the assets under the plan grew significantly.
Plaintiff’s fiduciary breach case was based on the testimony of Marcia Wagner and Michael Geist. We summarized the testimony of Wagner in the introduction. Geist is the owner of a consulting firm that has only 10 clients, none of which were identified to evaluate whether they were relevant to a jumbo multiple employer plan with over 40,000 participants. His prior experience was 10 years at T. Rowe Price in which he inputted numbers into a “dummy proof” pricing model that granted no discretion to the sales person. He argued that you cannot conclude plan fees are reasonable if they are “around the average” of what other plans pay for similar services. The court gave no probative value to his testimony based on his “minimal industry experience.” But the court also discounted his testimony based on the “fundamental flaw” that “[h]e appears to misunderstand both ERISA’s requirements and his role as a proffered expert witness in an ERISA case.” The court held that “Geist’s testimony reflects that he believes ERISA requires fiduciaries to have pursued “the best possible course of action at every turn – as judged in hindsight.” He testified to “best outcomes” that should have been achieved. But the court countered that ERISA is about giving “due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.” The test is common industry practice, and is not measured by achieving the best possible results
By contrast, Prime proffered the expert testimony of Steven Gissiner, the owner of Orchard Hills Consulting, LLC for the last twenty years. He has over forty institutional plan clients, and has provided consulting services to thousands of retirement plans at Arthur Anderson and PriceWaterhouseCoopers. The court found his testimony as “highly probative” of common industry practice when it comes to managing plan investments, recordkeeping fees, and share classes. Gissiner was able to provide probative testimony as to how retirement plans are actually managed in America. He directly refuted the Miller Shah-Capozzi Adler excess fee litigation racket designed to accuse any plan in America of fiduciary malpractice, as long as they can find a former participant willing to serve as a plaintiff. He expressly validated that Captrust’s fiduciary model is industry best practice and meets ERISA’s fiduciary requirements.
ISSUE #1: What are the hallmarks of a prudent fiduciary process?
It is too easy for the plaintiff bar to accuse plan sponsors of an imprudent fiduciary process. They make these claims without any proof, and continue to prosecute the case even when the evidence shows that the plan had a good fiduciary process that was guided by a quality investment manager.
As noted above, the fiduciary-breach lawsuit against the Prime Healthcare plan alleged that the plan fiduciaries failed to monitor plan investments and allowed excessive recordkeeping fees. They alleged a “glaring” breach of fiduciary process. Plaintiffs alleged that plan fiduciaries blindly followed Captrust’s advice, which they claimed was flawed because the Captrust quantitative investment scoring system did not match the IPS requirement to replace plan investments that did not match three and five-year performance metrics.
Contrary to the contrived claims in the lawsuit, the fiduciary process of monitoring plan investments was sound, and the court ruled that it did not fall below common industry practice. The court summarized the quality process of the Prime fiduciary committee: “the Committee met quarterly; was composed of well-qualified individuals with diverse professional backgrounds, including multiple individuals with financial and/or investment experience; received and reviewed substantial amounts of information from Captrust, a well-qualified advisor; and actively engaged with the material Captrust presented.” For any plan fiduciary learning from the Prime case, here is a more detailed list of the fiduciary process that plaintiffs claimed was flawed:
- Substantive and Productive Plan Committee Meetings: The plan met quarterly to review investments in the pal, reviewed administrative topics related to the plan, review recordkeeping for the plan, and discuss other relevant plan-related topics;
- Plan Advisors Attended Committee Meetings: Committee members and representatives of Captrust and Transamerica generally attended every committee meeting;
- High-Caliber Committee Members: The committee was composed of key Prime executives, including the Human Resource Benefits Manager; the Vice President of Human Resources; the Chief Financial Officer; the CFO and President of Corporate Finance from a related hospital entity; the President of Hospital Operations; the Corporate Controller and Director of Finance; and the Director of Investments;
- Top-Notch Investment Advisor: Captrust was the 3(21) investment advisor that assisted with monitoring plan investments. Captrust had a least 48 defined contribution plan clients with over $500m in total assets. Mark Davis was the principal Captrust representative for the plan and had serious industry experience. Davis was responsible for more than 40 separate client relationships serving 60 to 70 retirement plans. Captrust differentiates itself from competitors by meeting “face to face” with the investment managers that their clients use;
- High-Quality Investment Research and Analysis: Davis or other Captrust representatives emailed committee members in advance of each quarterly committee meeting and provided them with Quarterly Investment Reports (QIRs). The QIRs contained detailed information regarding the market, updates for the committee regarding their fiduciary duties, the total plan assets in each fund in the plan, the scores under Captrust’s scoring system for each fund in the plan, and detailed commentary regarding each fund in the plan.
Wagner testified that the plan used the wrong glidepath and the wrong benchmark in reviewing the Fidelity Freedom funds. But Wagner is not an economic expert, not an expert in determining the appropriate benchmarks for a fund, and not an expert in assessing “investment performance.” She was out of her depth to opine on any of this.
Nevertheless, the process for reviewing the challenged investments was robust. At each committee meeting, the committee monitored the portion of the plan participants’ assets that were invested in each fund, including the active suite of Fidelity Freedom TDFs, and there was a separate line in each Captrust QIR showing the amount of plan participants’ assets specifically invested in the Fidelity Freedom TDFs. The committee discussed and analyzed the benchmarks used for the active suite.
Plaintiffs challenged five other investments in the plan for alleged underperformance, but these investments showed that the Prime committee was actively engaged.
- First, they replaced the challenged active suite of the Fidelity TDFs with Fidelity’s with the Fidelity blend funds, and conducted a comprehensive review of the blend funds two years later. Of course, not soon enough for plaintiffs, but nothing is ever good enough for the Miller Shah law firm’s standard of fiduciary prudence;
- The challenged Prudential Fund was closely reviewed even when it was in “Good Standing” under Captrust’s scoring system;
- The challenged Invesco Fund was replaced with another investment in 2021 when it received a 70 score under the Captrust scoring system;
- The T. Rowe Price Fund was reviewed closely even though it received a 100 score, because Captrust flagged information for the committee to consider based on performance lagging peers and benchmarks; and
- The Oakmark Fund was removed after Captrust flagged a change in the company’s investment strategy.
This close monitoring of funds on the watchlist and the track record of investment changes is proof positive of a well-functioning fiduciary process.
Plaintiffs also argued that the plan fiduciaries failed to ensure the lowest net cost share class of plan investments. They argued that eliminating revenue sharing led to a higher net cost. But Captrust worked with fund managers to investigate whether the plan could qualify for lower-cost share classes. This is an example of the concern that the court had with “Plaintiffs’ pattern of sandbagging in this case – raising issues and presenting evidence in a manner that leaves Defendants with a moving target of what to defend against.” The elimination of revenue sharing is proof positive of an engaged fiduciary process. But again, when plaintiff lawyers are the ERISA police, you are damned if you, and damned if you don’t. It is why plaintiff lawyers cannot be allowed to sue every plan that they target. There must be a method to weed out meritless cases well before the expense and resource drain of trial.
ISSUE #2: Do you need a fiduciary charter?
Marcia Wagner testified that Prime fiduciaries were imprudent because they lacked a fiduciary charter prior to 2019. She opined that “[w]ithout a[] charter . . . that tells [the Committee members] what to do and how to accomplish their roles and responsibilities, they really don’t know what to do . . .” But she acknowledged that not all plans have charters, and she did not even know what percentage of plan actually have charters. By contrast, the more experienced defense expert Gissiner testified that it is not a “universal industry practice” to have a written charter.
The fiduciary charter theory is just another example of plaintiff lawyers creating makeweight arguments that are form over substance. Plan fiduciaries do not need a charter to know what to do, especially when they are guided by a quality 3(21) advisor like Captrust. In her testimony in the Prime and Goldman Sachs cases, Wagner seemed to think that plan fiduciaries cannot engage in a thoughtful process without every action being documented by specific rules. She admitted that ERISA does not designate specific best practices, but then she supported lawsuits alleging specific best practices. If she wants every plan to have a fiduciary charter, she should start by calling the Department of Labor, or her Congressional representatives. Until then, she has no right to invent rules and then try to impose liability for her own made-up rules. We don’t need a fiduciary nanny-state in which every action needs to be documented by specific rules.
ISSUE #3: A Investment Policy Statement should afford discretion for fiduciaries to make sound and reasoned decisions, not a list of formulaic rules.
Wagner opined “that the [Prime] IPS did not provide any effective or practical guidelines that the committee could utilize.” But, according to the court, she never described what industry practice is for the content of an IPS; nor did she identify any particular clauses or sections that she believed were either missing or inadequately drafted in the plan’s IPS. More importantly, she does not appear to have read the Prime plan’s IPS, because it had robust guidance on how to select, monitor and remove funds from the plan.
The Prime IPS, including appendices, was a twenty-page document that overviews the selection of funds, their monitoring, their removal, Captrust’s advisory role to the Committee, and Captrust’s scoring methodology. This is the IPS that Wagner called “vague and amorphous.” Again, there is no possible way that she read it, and that is why the court found her testimony lacked credibility.
The IPS established a prudent process:
- (1) For selecting appropriate investment options: the IPS provided screening criteria to apply for actively managed options, including review of fees, style consistency, volatility and diversification, performance, management and organization, and additional factors. For example, the performance criteria required “all actively managed investment options should rank in the top-50% of their given peer group for the 3 or 5 year annualized period at the time of their selection.” But it also stated that “[i]n addition to performance, the Committee should consider other variables . . . in order to develop a holistic view about a strategy and its appropriateness within the Plan.”
- (2) For monitoring investment options: provided that the committee may consider the ranking of investment options relative to their peers using a comprehensive scoring system proprietary to the plan’s investment advisor.
- (3) Methods for replacing existing investment options that do not comply with the terms of the IPS: the focus was on long-term asset accumulation for participants and beneficiaries, and thus “it is not expected that either the investment universe or specific investment options will be changed or deleted frequently.”
- (4) Captrust’s role and Scoring System: The IPS provided that Captrust would be responsible for educating the committee on selection of investment options, and the on-going review of the performance of selected investment options. The IPS also provided a scoring system for evaluating actively managed funds relative to their peers using a comprehensive scoring system proprietary to Captrust. The scoring system measured eight quantitative areas and two qualitative ones, including risk-adjusted performance on a 3- and 5-year basis.
Gissiner testified that the Committee’s IPS is “very similar to others” in the industry. Of course it is. The Prime IPS is a model used by many Captrust clients, and is similar to what other plans use that are advised by high-quality investment advisors. It gives general direction and guidance, but is leavened with the ability to apply discretion in the selection and monitoring investments. The key is discretion so that fiduciaries can make informed judgements without having to follow overly prescribed rules.
Wagner also contended that the committee “routinely” violated the IPS that she found so anemic. She opined that it is inappropriate for a fiduciary to imbue a single consideration with a “formulaic” quality and she further opined that qualitative considerations are important in addition to quantitative ones when assessing an investment option’s performance. But she nevertheless testified that the Prime IPS required removal of any investment that did not meet the 3- and 5-year performance metrics. Wagner read the 3- and 5-year performance metrics specified in the IPS to be standalone, categorical requirements: that once an investment falls in the bottom-half of its peer ranking for either of those lookback periods, the investment must be removed. She also viewed the Captrust scoring methodology as “inconsistent with the IPS,” and thus the committee acted imprudently by using that scoring methodology to assess investment options. But as we described above, they were specifically incorporated into the Prime IPS. These “unexplained internal inconsistencies” are why the court suggested that Wagner’s opinions were “litigation driven” and not credible
The court viewed Wagner’s reading of the IPS as “nonsensical.” First, the Captrust scoring system cannot be “inconsistent with the IPS” because that scoring system is itself part of the IPS.” (emphasis by the court). The IPS expressly provides that the committee will evaluate the performance of investment options according to the Captrust scoring methodology. Second, the IPS contemplates that it provides “guidelines” and that plan fiduciaries can exercise discretion. Contrary to Wagner’s formulaic approach, fiduciaries do not automatically have to replace an investment that drops below the 50% benchmark – they have discretion to make an informed judgment call. The 50% guideline is just one of five considerations for the plan. The IPS did not require “blind adherence” to a single consideration to the exclusion of all other relevant information. If it did so, it would likely violate ERISA. Finally, the IPS expressly contemplates that investment options should not “be changed or deleted frequently. As the court held, “[t]hat would not be possible if, as Plaintiffs contend, an investment option was required to be removed as soon as it fell in the bottom half of its peer group for either the 3- or 5-year lookback period.”
The IPS claim is a part of the “I gottcha game” of fiduciary breach litigation. Plaintiffs rig the litigation system so that you are guilty either way: you either have a deficient IPS, or you violated your IPS. The Prime IPS was robust. Any claim to the contrary was just plain wrong and insulting to conscientious plan fiduciaries and Captrust advisors. But more importantly, the key takeaway of the Prime IPS is that it allowed discretion to plan fiduciaries to make informed judgments. It was not formulaic and allowed discretion to do what is right under the totality of the circumstances. The key to an effective IPS is to allow sufficient discretion to make informed fiduciary decisions, and that is exactly what the Prime IPS provided.
ISSUE #4: How detailed do meeting minutes need to be to document fiduciary practice?
Plaintiffs alleged that committee “insufficiently documented its decision-making process,” and instead followed a check the box exercise” that fell below the ERISA fiduciary-imposed duty of prudence. Wagner piled on, contending that outside of meeting minutes, “[t]here was nothing to tell me what was discussed and what wasn’t.”
The court rejected this contention as implausible and “myopic.” Wagner “artificially limited” her opinion of the scope of the Prime fiduciary committee’s process to what was documented in committee meeting minutes. Wagner conceded that meeting minutes “are not meant to be treatises,” but she still asserted that the Prime fiduciary committee was negligent even though she didn’t have the entire understanding of the committee’s actions. This is another makeweight argument of the plaintiff bar’s attempt to second-guess the work of fiduciary committees.
Captrust’s advisor Mark Davis credibly testified that the meeting minutes “focus[ed] on changes to be implemented and responsibilities for those changes.” The court credited other evidence of fiduciary deliberation, including Captrust introductory emails and presentation, and Quarterly Investment Reports.
As the court ruled, there is no credibility to any contention that plan fiduciaries should be judged exclusively on the content of plan minutes. The assertion is unfair. But this type of unfair conclusory assertion is the basis of many fiduciary-breach cases. The court in the Wentworth case, for example, allowed a case to proceed based on cursory meeting minutes that did not explicitly mention challenged investments. Even though it is unfair, it is a lesson of fiduciary-breach litigation to expand what is documented in plan committee minutes. Every investment should be documented in each quarterly committee meetings, even if the investment performance is fully described in the investment manager’s quarterly report. It is ridiculous to require this type of make work, but it is necessitated by a world in which federal court’s allow plaintiff lawyers to second guess plan fiduciary decision in class action litigation.
ISSUE #5: What constitutes fiduciary training?
Marcia Wagner opined that “[t]here was no adequate training for the committee members at all.” From her review of meeting minutes, formal fiduciary training “was minimal and sporadic.” The court derided her testimony as ignoring any evidence that ran counter to her proffered opinions, calling it a “no-true-Scotsman approach.” Specifically, Captrust routinely provided fiduciary-duty litigation updates at the start of each quarterly meeting. Captrust flagged these fiduciary-training sections in the quarterly investment reports in the emails that preceded the committee meetings. Wagner dismissed those updates as not constituting fiduciary training, or “training light.”
The question is what constitutes fiduciary training. Quarterly updates about fiduciary litigation are absolutely training to understand fiduciary responsibilities. Who knows what Marcia Wagner wants for fiduciary training. It would be ideal if every committee member attended classes on fiduciary responsibility every year. But in the real world, training happens on-the-job. And that is why hiring a Captrust-type investment advisor is so important. The Prime fiduciary committee may not have been trained the way the Wagner law firm trains their clients. Nevertheless, they hired Captrust, and followed the Captrust investment monitoring model. Any plan sponsor who follows this rigorous fiduciary model will receive on-the-job training that meets the standard of prudence.
ISSUE #6: The claim of “rubber-stamping” the recommendations of your investment advisor is a no-win situation for plan fiduciaries.
Plaintiffs further argued based on Wagner’s testimony that the Committee “reflexively deferred to Captrust when it came to monitoring the plan’s investment options.” We reject any notion that it would violate ERISA to follow the quality advice that Captrust gave to this plan, and there is no ERISA requirement that you have to reject advice just to create a record to defeat a plaintiff’s lawyer’s claim that you “rubber stamped” the advice of your investment advisor. But this shows how plaintiff lawyers will go to any extent to second-guess and ridicule a plan’s fiduciary process in the quest to profit off settlements. The lesson is that plan fiduciaries need to document that they were thoughtfully engaged in committee meetings, asking probing questions to understand plan fiduciary decisions. But we must push back on the meaningless claims in fiduciary litigation that plan sponsors rubber-stamped their investment advisor, especially when the investment advisor has a high-quality fiduciary process like Captrust. There is damage to participants when you follow good advice.
ISSUE #7: Do you need to conduct formal RFPs for RK fees?
Starting with the original Schlichter excessive fee lawsuits, the ERISA plaintiff trial bar has tried to force formal RFPs as the ERISA fiduciary standard. This is the most expensive and time-intensive type of information gathering exercise for evaluating recordkeeping fees. The same argument was pushed in the Prime case. Plaintiffs argued that the plan committee’s review of recordkeeping fees was deficient because they did not conduct a formal RFP, notwithstanding its efforts to test the market every two or three years.
The court rejected the assertion that it is industry custom to always conduct a RFP. Gissiner testified that the committee’s combination of a RFI and vendor-fee benchmarks was “pretty robust” and “consistent with industry practice” based on what the court called his “substantial experience in the retirement-benefits industry.” The court stated that “Gissiner also credibly testified that RFPs are not industry standard.” Gissiner cited a 2017 survey of plans that found only about 18% of plans used RFPs to assess recordkeeping fees. Instead, the “most common was that plan sponsors benchmark[ed] recordkeeping fees” was “using a consultant database,” like that used by Captrust in its vendor-fee benchmarks, with about 50% of plans taking such an approach.
Even Marcia Wagner testified that “ERISA does not mandate best practices” and that “Plan fiduciaries can obtain the same information as an RFP without incurring the expenditure of time and resources that an RFP requires through benchmarking services, industry surveys, and the like.” Simply put, RFPs are not the only reliable way for a plan fiduciary to maximize its bargaining position for recordkeeping fees. This was the one area in which Wagner’s testimony matches industry custom.
The quality results of the Prime plan’s periodic recordkeeping surveys demonstrates that a RFP is not needed to ensure that plan recordkeeping fees are reasonable. The committee conducted a formal review of Transamerica’s fees and services every few years. Specifically, the plan conducted requests for information in 2012, and its 2015, 2017, and 2020 vendor-fee benchmarks. Gissiner testified that the committee’s monitoring was consistent with what he has seen over the course of his career in the retirement-benefits industry. The periodic reviews yielded quality results for the plan committee.
For example, in 2012, Captrust conducted a Request for Information and prepared a vendor fee benchmark presentation for the Committee to assess Transamerica’s fees. The exercise resulted in a fee decrease from .23% to .21%.
The 2015 Vendor-Fee Benchmark included proposals from Prudential, Milliman, and Fidelity. The exercise resulted in an improved service level from Transamerica, including an increase in the size of its team dedicated to the plan.
With 2017 Vendor Fee Benchmark, Captrust measured the .21% fee against plans with over $250m in assets: High: .39%; Average .32%; and Low .25%. The exercise validated that the Prime plan had reasonable fees.
In 2020, Captrust conducted another vendor-fee benchmark. Empower, Fidelity and Milliman all submitted bids: Empower’s bid was $43 per participant; Fidelity’s bid was $36.50 per participant; and Milliman’s bid was $39 per participant. Transamerica’s initial bid was $40 per participant. After negotiations, Transamerica agreed to an even lower fee of $34 per participant, provided that the committee allow Transamerica to offer its Managed Account Services.
This track record of fiduciary oversight and resulting fee reductions and service enhancements is more proof positive of a robust fiduciary process. There was no basis to sue the Prime fiduciary committee for excessive recordkeeping fees.
FINAL THOUGHTS: Plan sponsors need and deserve an earlier off ramp to dispose of meritless fiduciary-breach cases.
It should not be surprising that plaintiff lawyers filing these fake fiduciary-breach cases continue to lose at every single trial. They lose because these cases are based on false and contrived claims of high fees or deficient performance, and supported by experts with junk science testimony that has no probative value of what large plans actually pay for plan services or how plans investments are properly managed. These cases should never get past a motion to dismiss or summary judgment. But the federal courts are failing to serve as adequate gatekeepers of the rampant litigation abuse in ERISA fiduciary-breach cases. They kick the can down the road, and hope litigants will settle the cases before trial. But that prejudices the vast majority of plan sponsors who are unjustly sued in these cases.
A fake comparison to a lower-fee plan or a chart comparing investment performance to an unverified investment benchmark should not count as a plausible claim of fiduciary imprudence. We need a higher standard to plead a fiduciary breach for excessive fees or investment imprudence. And it should not be an “issue of fact” at summary judgment just because a plaintiff lawyer files an expert report that has no credible foundation or basis. Courts need to act as gatekeepers to dismiss meritless cases. Otherwise, every plan sponsor can be sued for fiduciary malpractice, and then has to spend millions of dollars to defend the case. You are guilty until proven innocent. There has to be a better way to weed out meritless cases. And let us make clear, with five straight trials ruling for the defense, most of these excessive fee fiduciary-breach cases are bogus.
The Prime court also exposed the litigation “sand-bagging” of ERISA plaintiff firms when they continually move the goalposts and change theories of liability as the case progresses. The reason that plaintiff law firms cannot be allowed to serve as the primary fiduciary regulators is that they lack prosecutorial judgment to discontinue cases that turn out to lack merit. ERISA is a law of process, but plaintiffs know nothing about a plan’s process. But when they take discovery and learn that the process was guided by a quality investment advisor like Captrust, they don’t withdraw the case. Instead, they double down and then accuse plan sponsors of rubber-stamping bad advice – even when the there is no proof that the advice was bad. Then they start moving the goal posts and changing the allegations. This is what the court called sandbagging.
Finally, there is the issue of the many fiduciary-breach lawsuits, like the Prime Healthcare lawsuit, alleging that plan sponsors breached their fiduciary duties in maintaining Fidelity Freedom funds. Never mind that the Prime plan switched to the lower-fee FIAM blend target-date funds, so the issue should have been moot in the Prime case. The question is whether it was fiduciary imprudence to ignore the supposed red flags that Fidelity changed its investment strategy to allow a higher equity allocation into the glide path, and the supposed loss of market share that plaintiff law firms alleged was based on a lack of investor confidence in the Fidelity Freedom Funds.
These claims were defamatory to the quality investment professionals at Fidelity. Miller Shah never had any proof that investors fled the Fidelity Freedom Funds or that these investments underperformed with an excessively risky investment strategy. There was competition from passive strategies, but that is something faced by all investment managers. The claim that Fidelity’s strategy changed to add risk was also baseless. If you review the top TDF investment results over the last decade, they were achieved by adding additional equity to glide paths. The claim that Prime “defendants severely breached” their fiduciary duties and “heaped” unnecessary risk on participants by offering the active suite of the Fidelity freedom target-date funds was fictional. The Fidelity Freedom funds have returned good investment results. Plaintiffs had no proof in the Prime trial to support the attacks on Fidelity Freedom claims.
We now have evidence that these type of defamatory claims of investment underperformance have no validity. The Fidelity Freedom underperformance claims were works of fiction. Federal courts need to dismiss these lawsuits at the threshold stage, before forcing plan sponsors to spend four years to achieve justice.
