The Supreme Court has asked the United States Solicitor General to provide guidance in the Home Depot excessive fee case alleging fiduciary breaches for poorly performing BlackRock target-date funds and high fees for managed account services. The cert position filed by participants in the Home Depot 401k plan asks the justices to resolve a circuit split over which party in an Employee Retirement Income Security Act lawsuit must prove that alleged losses to a retirement plan were caused by a plan fiduciary’s breach of duty.
Causation is an important check on liability when the fiduciary process did not leave the plan worse off. But it is even more essential for plaintiffs to prove causation in the modern litigation environment, because it is too easy to create issues of fact when challenging fiduciary process. As we show below, that is what happened in the Home Depot case in which plaintiffs challenged plan fees that were lower than 96 percent of all other plans, and included investment performance claims that amounted to the assertion that it is fiduciary malpractice to offer conservative investments in a modern retirement plan. Eliminating the requirement that plaintiffs prove causation would continue the litigation distortion in which plan fiduciaries are effectively becoming insurers or guarantors of performance gains, which is not what ERISA requires.
In any event, the question of which party bears the burden of proof should be simple and straightforward, because the well-established default rule of statutory interpretation requires plaintiffs to prove all elements of their claim, including causation. And there is nothing in the ERISA statute or legislative intent to depart from the ordinary allocation of the burden of proof in ERISA cases. Nevertheless, the Solicitor General has twice taken the position, including in 2019 in the Brotherston v. Putnam case during the first Trump Administration, that trust law requires the burden of proof to shift to the defense. Similarly, the Department of Labor has a track record of taking the same pro-plaintiff position in fiduciary-breach cases, including in the Home Depot appeal before the Eleventh Circuit, that trust law shifts the causation burden to the defense.
The following first analyzes why plaintiff-participants bear the burden of proof on liability, causation and damages under ERISA, and why the Solicitor’s and DOL’s historical burden-shifting position is wrong. The second part of this blogpost addresses the additional issue of objective prudence that is often missed in ERISA causation analysis. As we demonstrate, fiduciaries cannot be held liable for claimed losses if they reached “objectively prudent” results – even if the process was flawed (or alleged to be flawed). As the Chamber of Commerce explained in its amicus brief in the Eleventh Circuit, just like a vacationer has many good destination options – from Barcelona to Paris – a fiduciary committee investing plan assets has hundreds of legitimate and reasonable investment options from which to choose. A proper application of the objective prudence inquiry to ERISA investment challenges is the only way to stop the litigation abuse challenging any investment option that does not meet the investment return in hindsight of top-performing investments. We end by analyzing the facts of the Home Depot case, which demonstrate why there is no justification for courts to deviate from the default rule to help plaintiff lawyers second-guess discretionary plan fee and investment decisions.
The Home Depot Excessive Fee and Investment Performance Case
The Home Depot FutureBuilder 401k plan had 230,000 participants and $9.1 billion in assets as of year-end 2019. The fiduciary-breach case alleged that (1) the plan charged excessive asset-based fees for the Financial Engines managed account investment service; and (2) that four plan investment options were imprudent based on alleged subpar investment underperformance. The challenged investments included the BlackRock LifePath target-date funds that used a more conservative investment strategy than other popular target-date funds, and a JP Morgan stable value fund that also invested conservatively with the goal to preserve capital.
If you analyze the facts, the case is consistent with the Sanford Heisler plaintiff firm fiduciary-breach model in which they bring investment performance challenges against mega retirement plans that chose conservative investments, including Milliman [target-risk funds with an inflation hedge] and UnitedHealth [Wells Fargo target-date funds that avoided volatile technology stocks]. Like these other cases, plaintiffs claimed fiduciary imprudence by comparing conservative investments to the top-performing investments in the market, even though the investment strategies in the comparators were more aggressive than the funds chosen by Home Depot fiduciaries. The underlying (and perverse) premise of these cases is that fiduciaries will be forced to defend a fiduciary-breach lawsuit if they do not select the most aggressive investment strategies.
Following discovery and cross-motions for summary judgment, the district court concluded that several genuine disputes of material fact existed as to whether Home Depot fiduciaries had complied with their duty of prudence while monitoring the investment advisory and managed account fees, as well as whether it had complied with that duty while monitoring three of the four challenged investment options. For example, there were disputes as to whether plan fiduciaries had conducted competitive bids for the managed account services, and how quickly they should have removed underperforming investment options. But the district court went on to find that even if these disputes were resolved in the plaintiffs’ favor, they could not show that the violations had caused participants any financial loss. In other words, even if Home Depot did not appropriately monitor and evaluate the service providers’ fees and the plan’s investments, the court concluded that plaintiffs had not shown that Home Depot’s investment choices were objectively prudent. And that, in turn, meant that any losses to the plan were not caused by any failure in Home Depot’s fiduciary process.
On appeal to the Eleventh Circuit Court of Appeals, the case presented the twin questions of (1) which party has the burden to show loss causation; and (2) how to meet that burden. On the first issue, the court held that the ordinary default rule applies in ERISA cases, which requires the plaintiff to prove all elements of the claim, including causation. As to the next question of what will satisfy the burden, the court held that to recover damages, plaintiffs must show that the investments made were not objectively prudent. The Eleventh Circuit included significant commentary as to why the investments and managed account fees were objectively prudent. This included the fact that the managed account fees were lower than 96 percent of all other plans in the marketplace; and the investment challenges were flawed to the extent they identified only short time periods in which the respective funds underperformed meaningful benchmarks [not the aggressive benchmarks proffered by plaintiff lawyers with riskier investment strategies].
The plan participants appealed to the Supreme Court, arguing that ERISA must be interpreted through the lens of trust law, which they claim supports the burden-shifting approach. Home Depot countered that the Eleventh Circuit handled this “relatively unimportant issue” correctly, and the dismissal should stand. As noted, the Supreme Court asked the federal government in April to weigh in on the dispute over the burden of causation in an ERISA case.
We agree with Home Depot on the substance, but disagree that the burden of causation is unimportant. We think it is crucial to protect plan fiduciaries from unfair claims of fiduciary imprudence by requiring proof of causation, given the ease with which plaintiff lawyers can withstand summary judgment by creating issues of fact on the prudence of the fiduciary process.
KEY POINT #1: ERISA plaintiffs are required to prove loss causation as an essential element of their case under the well-established default rule for allocating the burden of proof on federal statutory claims.
Under section 409 of ERISA, a fiduciary who breaches its duties is personally liable for “any losses to the plan resulting from each such breach.” 29 U.S.C. section 1109(a) (emphasis added). From this statutory language, Section 1109 requires that the breach of the fiduciary duty be the proximate cause of the losses claimed by the plaintiff. ERISA does not require fiduciaries to guarantee investment returns, and thus the loss-causation requirement recognizes that some process errors are harmless. If proof of causation is properly required, fiduciaries are only liable for harm that would not have occurred with a prudent process in place.
The starting point, or touchstone, of any statutory interpretation is supposed to be the statute itself. The text of ERISA does not explicitly assign or specify, however, who bears the burden of proof on loss causation. Nevertheless, the Supreme Court has held that the “ordinary default rule” is that plaintiffs bear the burden of persuasion regarding the essential aspects of their claims. Exceptions to the default rule are extremely rare, and only arise when there is some reason to believe that Congress intended to depart from the ordinary allocation of the burden of proof. For example, the burden shifts when the statute has elements that are affirmative defenses or exemptions, like ERISA’s prohibited transaction rules [the ERISA provision at issue in the recent Cornell Supreme Court decision]. Many courts have thus held that loss causation is a core element of a claim for breach of fiduciary duty under ERISA, not an affirmative defense or exemption. In sum, ERISA’s text and structure do not signal that Congress intended to place the burden of proof anywhere other than where it usually falls – upon the party seeking relief.
Plaintiffs in the Home Deport cert petition admit that there is nothing in ERISA that requires the causation burden to shift to the defense. But they instead argue that the “starting point” of interpreting ERISA is trust law, not the statute. They argue that trust law applies unless inconsistent with ERISA. They contend that the Eleventh Circuit “inverted” the statutory construction analysis by ruling that the ERISA statute does not change the default rule because it is silent on the issue. This is completely backwards.
Like the Solicitor General, the Department of Labor has argued in amicus briefs presented to the First Circuit in the Brotherston v. Putnam case and the Eleventh Circuit in the Home Depot case for a judge-made burden-shifting rule drawn from trust law. DOL does not identify any ERISA textual basis for departing from the “ordinary default rule.” Instead, it argues that burden-shifting is justified based on informational imbalances between plaintiffs and defendants. DOL argues that a departure from the default rule is justified because “the burden may be allocated to the defendant when he possesses more knowledge relevant to the element at issue.”
Plaintiffs may not know the fiduciary process employed by the fiduciary committee when the lawsuit is filed, but this is a pleading issue. DOL ignores that plaintiffs have access to complete information about the fiduciary process through ordinary case discovery under the federal rules. Plaintiffs may start without process information, but they have full discovery in litigation to access complete information to prosecute their case. Loss causation is an objective inquiry that asks whether a hypothetical prudent fiduciary would have arrived at a different result. The Home Depot participants suing had years of discovery to analyze how plan fiduciaries chose investment options, and how they evaluated the managed account fees. There was no informational disparity after years of litigation discovery – a burden that asymmetrical applies to the plan sponsor.
What makes ERISA so unique that the courts should make an exception to the burden-of-proof default rule? Nothing. Burden-shifting has no basis in the ERISA statute. The plaintiff has the burden of proof on all elements of a fiduciary-breach claim. No justification exists for courts to depart from the ordinary allocation of the burden of proof that would favor plaintiffs. Any change to the default rule is an unjustified gift to plaintiff lawyers.
Finally, there is also the compelling argument that trust law did not require burden-shifting prior to the 1974 enactment of ERISA. The cases cited in the DOL’s amicus briefs advocating burden shifting are from post-ERISA trust law. It is not clear that the Restatement of Trusts in the 1950s addressed this issue. Consequently, none of this recent jurisprudence should apply when Congress has enacted a statute that governs fiduciary law.
KEY POINT #2: Regardless of which party bears the burden of proof on loss causation, fiduciary defendants cannot be held liable for damages under ERISA if they arrived at objectively prudent results.
ERISA makes fiduciaries monetarily liable only for losses that actually “resulted from” a breach of fiduciary duty. Congress adopted this limitation because in benefit plan management, some errors are harmless. Sometimes, a fiduciary breaches the duty of prudence by bungling the process steps, but still winds up with an objectively prudent decision – i.e., one that a prudent fiduciary could well have made after a fully ERISA-compliant process. There is no reason to impose a monetary remedy when the fiduciary’s breach turned out to be harmless. We would go even further by suggesting that proof of causation is essential because it is too easy to allege that plan fiduciaries bungled the fiduciary process. It doesn’t mean they did – it just means that it is very easy to claim fiduciary imprudence.
ERISA’s duty of prudence focuses on the process of the fiduciary’s conduct preceding the challenged decision. But a procedural breach [or claim of procedural breach] does not necessarily mean that that the ultimate decision was a bad one. It simply means that the fiduciary’s decision-making process was deficient. As then Judge Scalia famously noted in the investment context, even a faulty process can sometimes wind up – “through prayer, astrology or just blind luck” – with “objectively prudent investments (e.g., an investment in a highly regarded ‘blue chip’ stock).”
ERISA recognizes that fiduciaries make many decisions with no single right answer, particularly in the context of selecting investment options, service providers, and negotiating compensation arrangements in the context of fierce competition that typifies the modern-day retirement plan marketplace. This perspective is lost in the hundreds of excessive fee fiduciary-breach cases second-guessing the decisions of plan fiduciaries in the modern retirement system. Fiduciaries have thousands of reasonable options from which to choose. Indeed, there are over 3,000 mutual funds used in large retirement plans today. There is no one single right answer. Even when the fiduciary’s decision-making process is lacking or less than optimal – and usually that is a factual dispute like in the Home Depot case in which plan fiduciaries are forced to defend themselves in a litigation system in which you are guilty [i.e., imprudent] until proven innocent – the final decision is objectively prudent if it falls within what the Supreme Court called in the Northwestern case “the range of reasonable choices” that a prudent fiduciary could make. Again, contrary to what the plaintiffs’ bar proffers in excessive fee cases, there are thousands of reasonable and acceptable investments options for retirement plans – not the two or three investment options that plaintiff lawyers selectively pick after ten years of excellent performance.
The Chamber of Commerce’s analogy provides an effective way to frame the issue. As they observed in their amicus brief to the Eleventh Circuit drafted by the O’Melveny law firm, “an objectively prudent investment is one a prudent fiduciary would select, in the sense that Paris is a city that Rick Steves would recommend. There may be other good investments from which to choose, just as there may be other European destinations worth visiting, but so long as the fund actually chosen is reasonable, any fiduciary missteps along the way cannot have caused any harm.” The key point is that there are thousands of reasonable investments for retirement plans, contrary to the premise of excessive fee lawsuits like the Home Depot case in which fiduciaries are judged in hindsight against the best performing investments.
The district court in the Ramos v. Banner Health excessive fee case followed a commonsense approach to understand objective prudence: a course of action is objectively prudent if it is among the options a prudent fiduciary would consider in light of the goals and objectives of the plan and the circumstances then prevailing. The inquiry asks whether “no reasonable fiduciary would have maintained the investment and thus [the defendants] would have acted differently” absent a procedural breach. An objective prudence inquiry recognizes that – just like there are many good vacation destinations – there are many prudent investments available to plan fiduciaries.
The objective prudence inquiry is naturally informed by ERISA’s fiduciary standards described by the Supreme Court in Hughes v. Northwestern University, which accommodate the full “range of reasonable judgments a fiduciary may make based on her experience and expertise.” The market offers a broad assortment of administrative services and investment products for fiduciaries to consider, and fiduciaries face complex, multi-faceted choices in evaluating those offerings. Reasonable fiduciaries may easily arrive at different conclusions when doing so. Indeed, 100 prudent fiduciaries selecting an investment option for a 401k plan menu might make 100 different choices. The reasonable range of alternatives are all likely objectively prudent choices. ERISA does not require fiduciaries to follow the crowd, but that is what hindsight underperformance challenges entail. In sum, plaintiffs cannot credibly claim to have been harmed by fiduciary decisions that fall securely within the reasonable range of investment alternatives.
KEY POINT #3: The facts of the Home Depot excessive fee case demonstrate why it is unfair to force plan sponsors to bear the causation burden, as the case involved second-guessing of managed account fees that were lower than 96% of all other plans, and unfair challenges to conservative investment strategies. None of these dubious claims justify the extraordinary judicial step of modifying the ERISA statute to help plaintiffs win their case.
The district court held that there were factual issues as to whether Home Depot followed a prudent process, but that does not mean that the plan fiduciaries acted imprudently. It only means that there were disputes of fact that could not be resolved on summary judgment. Home Depot would likely have won in a trial in which they had the opportunity to present evidence of their fiduciary deliberations and advice from a highly qualified investment advisor. It is important, therefore, to investigate the factual disputes to have a proper perspective on the case, as it informs whether there is a legitimate public policy rationale for the judiciary to help plaintiff law firms to second-guess discretionary retirement plan fiduciary decisions.
Plaintiffs’ first claim asserted that the managed account fees paid to Financial Engines were excessive. Their main argument was that Home Depot fiduciaries failed to conduct competitive bidding to justify the fees. But there is more to the story. To begin, the record shows that Home Depot negotiated and secured three separate fee decreases in the professional management fees. The fees dropped in 2014, and again in 2017 before a broader overhaul in 2021 resulted in new asset thresholds and lower fees for the pricing tiers. [We note that the fees were filed under seal and not publicly disclosed, which usually means that the fees were lower than most other plans. The most logical rationale to hide the fee levels is that Financial Engines did not want its other clients to learn that Home Depot got a better deal].
There is also the issue of complexity and the ability to integrate managed account services with the plan’s recordkeeping platform, something that most managed account providers could not accommodate. Financial Engines was [and remains] the most popular and leading managed account service provider for mega-sized 401k plans because they offer better service and technology for complex plans with tens of thousands of participants. The managed account services were already integrated with Home Depot’s recordkeeper Aon/later rebranded Alight Solutions. Other firms that Home Depot could have selected were smaller or lacked the seamless integration with Aon’s website and other services. Home Depot thus did not have unlimited choices and flexibility to drive lower fees alone.
Whether the fees were excessive was hotly contested. Plaintiffs used the same excessive fee playbook of finding a few large plans, out of thousands, to contend that Home Depot’s managed account fees were excessive. But even using plaintiffs’ misleading comparators, the fee charged to over ninety percent of plan participants was, according to the court, “at or better than the median in two years during the class period, and was never worse than the second quintile.” As the court further noted, given that the fees for half of all plans will, by definition, be worse than the median, a fee somewhat higher than the median in a handful of years during the class period is a “far cry from being such an objectively unreasonable charge for providers’ services that a prudent fiduciary would not have stayed the course.” For the judiciary, this is a revolution of common sense missing in most purported “excessive fee” cases relying on comparators of the lowest fee plans plaintiff lawyers can put into a chart.
Every other, less biased, comparison resulted in what the court called a “much better” outlook for Home Depot. In terms of dollars per participant, Home Depot paid lower fees to Financial Engines and Alight Financial Advisors than 96 percent of all other plans in every year during the class period. And in terms of basis points, the top-tier fee charged to Home Depot was equal to or lower than the top-tier fee of at least half of all other plans in every year during the class period. Based on this evidence, the court found that the fees to Home Depot’s investment advisors were objectively prudent.
We note that plaintiffs added a late argument that the fees were excessive because they were inflated by an alleged “kickback” paid by Financial Engines to the plan’s recordkeeper, Aon Hewitt/Alight. They argued that Home Depot was imprudent for failing to recoup the value of this revenue-sharing payment from Financial Engines. But the theory was judged to be raised too late in the case. We still believe that this would have been shown consistent with standard industry practice, but we want to give the full perspective on the case.
The second claim for alleged investment underperformance asserted that Home Depot should have dropped four specific investment funds from its 401k plan. The challenges involve the three key issues in investment underperformance cases: (1) what is the proper benchmark – i.e., a meaningful benchmark with the same investment goal and strategy – from which to assert underperformance?; (2) what level of underperformance rises to the level of imprudence; and (3) when (how quickly) do you need to remove underperforming investments.
All three questions involve discretionary judgment calls. We would proffer that plaintiff lawyers and Article III judges are not the proper umpires to judge investment performance. And that is why there must be a high hurdle to allege fiduciary imprudence in investment decisions.
To start, the court held that all four investment challenges suffer from the same fatal flaw that the principal evidence was drawn from only short time periods during which the funds underperformed their peers. According to the court, “[a] few here-and-there years of below-median returns, however, are not a meaningful way to evaluate a plan’s success as a long-term investment vehicle.” Again, common sense.
Starting with the BlackRock TDFs, plaintiffs argued that they underperformed their peers in the third quarter of 2013. But the court noted that these funds were popular with other complex mega plans, and consistently received positive ratings from industry analysts. Consequently, a short calendar quarter of underperformance is not enough time to justify a claim of imprudence.
And then there was the question of the proper benchmark from which to judge underperformance. Quantitatively, plaintiffs argued that the BlackRock funds underperformed both the median target date fund in the market and the specific target date funds their expert selected. But the court noted that “[t]arget date funds are not created equal – funds from different sponsors may have different glide paths, which means they also have different risk-return profiles.” The comparison to more aggressive target date funds in a hot equity market “does not mean it is objectively imprudent to adopt a more conservative strategy.” When adjusting for these different glide path choices, the BlackRock TDF returns matched those of their peers and market benchmark “almost perfectly.” Aon, the investment consultant, benchmarked each fund against a custom index created by BlackRock that weighed the universe of comparison target-date funds against the glide path allocation of BlackRock’s offerings, creating an apples-to-apples comparison. BlackRock’s target-date funds’ three- and five-year returns closely matched these custom indexes throughout the entire class period. Plaintiff lawyers always cry foul when target date funds are compared to custom benchmarks that match the investment strategy and equity allocation, but it is fairer than comparing conservative glide paths to more aggressive glide paths. In the end, the court held that “ERISA does not require that fiduciaries choose the maximally aggressive option in each investment class; the plaintiffs cannot show that a prudent fiduciary would not have also retained these funds in light of Home Depot’s investment objectives.”
The second investment claim involved another conservative fund judged against an aggressive benchmark, as the JP Morgan Stable Value Fund was also intentionally conservative to preserve principal. It achieved positive returns in every year of the class period, and met its benchmark five out of six years (and missed the sixth year by only two basis points (0.02%) – a tiny amount). Plaintiff’s argued underperformance by comparing the stable value fund to a different index with a different and more aggressive investment strategy. The court did not allow the unfair comparison to more aggressive stable value funds: “Home Depot offered the stable value fund because it was conservative, advertised it as conservative, and benchmarked it against a conservative metric.”
The third investment option, the Stephens Fund, involved the issue of how long before fiduciaries need to remove an underperforming investment. This investment underperformed its benchmark for three years. But then it rebounded, and outperformed its benchmark and ranked among the very top in its peer group. Later, its performance declined, and Home Depot removed it from the plan. Too little, too late for the plaintiff lawyers who purport to be investment experts. The court nevertheless ruled that objective prudence of a long-term retirement option cannot be measured only by referencing short-term shifts in the market.
The fourth investment claim involved classic plaintiff lawyer second-guessing of plan decisions. This active fund was kept in the plan for four years, before it was removed. Plaintiffs accused Home Depot fiduciaries of rubber-stamping the work of Aon, the investment advisor. But the record showed meeting minutes in which plan fiduciaries asked Aon professionals whether the short-term underperformance of the Stephens Fund justified its continued inclusion in the plan. This is a classic example of how excessive fee and performance lawsuits can spin any claim any way they want to assert malpractice. No decision is ever good enough for plaintiff lawyers. You are damned if you do, and damned if you don’t.
Final Thoughts
The only logical conclusion from studying these facts is that it is very easy for plaintiff lawyers to allege fiduciary imprudence, because courts will often find issues of fact. Home Depot had a deliberative and intentional fiduciary process for fees and investments, with the assistance of a first-rate investment advisor. But plaintiff lawyers were able to create issues of facts on the fiduciary process. Given how easy it is to allege fiduciary prudence, plaintiffs cannot be given a free ride on causation. Many investments are objectively prudent, despite how easy it is to allege fiduciary malpractice. Causation is the protection for conscientious plan fiduciaries who are subject to the class action litigation abuse in the current system. Unless the judiciary is trying to reward and enrich plaintiff lawyers, there is no logical justification to shift the burden of proof away from plaintiffs in this type of excessive fee lawsuit.
It is time for the Solicitor General to follow the law and correct its prior position on the proper burden of proof in ERISA cases.
