Genworth-BlackRock Investment Imprudence Case Survives Dismissal

By Daniel Aronowitz

The modern professional baseball player is taught to swing up on the ball to try for home runs.  A player that hits for power is valued over a player who hits for a high average.  It is all about the splashy three-run homer.  To wit, the leadoff hitter for the playoff-bound Philadelphia Phillies is batting under .200, but has over 45 home runs.

Much like the modern power hitter, the Miller Shah law firm has endured at least eight case dismissals to finally hit a home run when one of its twelve fiduciary imprudence lawsuits involving BlackRock LifePath target date funds survived a dismissal of the second amended complaint in Trauernicht v. Genworth Financial Inc. (No. 3:22cv532 E.D. Va. decided September 13, 2023).  The case against Genworth is the same contrived fiduciary malpractice claim that it was imprudent for large plan fiduciaries to maintain the Morningstar number-one rated BlackRock target-date funds because the funds did not match – measured in hindsight – the returns of the top-performing, most popular target-date funds.  The Genworth case has no more merit than the other eleven cases.  But how the firm survived the third motion to dismiss in the Genworth case has alarming implications for all plan sponsors.

After striking out eight previous times, not including the first two times in the Genworth case, Miller Shah finally succeeded in getting past the pleading stage by adding two types of “evidence” of what it claims was a flawed fiduciary process:  (1) that the “sparse minutes” of the Genworth fiduciary committee did not mention monitoring the performance of the BlackRock investments and thus the committee did not monitor the investments; and (2) the Genworth IPS instructed plan fiduciaries to compare S&P 500 investments to the BlackRock investment results.  Both of these claims are distorted and manipulated accounts of the fiduciary process and IPS according to Genworth’s motion to dismiss, but it worked in convincing the court in that it was enough evidence to meet the plausibility standard for a fiduciary imprudence claim.

The concerning implication of the Genworth case is that courts that allow discovery of plan fiduciary committee meetings open up plan fiduciaries to unfair mischaracterizations and second-guessing of their fiduciary process.  After hundreds of cases with no evidence of the actual fiduciary process, we now have a case in which plaintiffs were allowed to cherry-pick evidence of the fiduciary process to manipulate a claim of fiduciary imprudence – all based on the minutes of one plan meeting that did not expressly document review of the BlackRock TDFs.  If plan fiduciaries are not allowed to defend their process at the pleading stage, which is what happened in the Genworth case, then plan sponsors have no ability to prevent second-guessing of even routine investment decisions.  At a minimum, the pleading standard must require plaintiffs to show that fiduciaries in other plans avoided or left the investment being challenged.  This type of evidence was completely missing in the Genworth case, and thus a fabricated claim of investment underperformance with a $100 million fake damages model was allowed to proceed.

The Genworth Decision

Genworth filed two motions to dismiss the Second Amended Complaint (SAC).  The first motion was filed under rule 12(b)(1) on the grounds that the court lacked subject matter jurisdiction for the reason that the plaintiffs lacked standing to seek prospective injunctive relief  because they were no longer invested in the plan.  The Court granted this partial motion and held that the claim for prospective injunctive relief was dismissed with prejudice.

The second motion sought dismissal under rule 12(b)(6) on the more common basis of failure to state a claim.  Genworth argued that count one failed to state claims for breach of its duty of prudence for two primary reasons:  (1) there was a sufficient monitoring process; and (2) the SAC fails to adequately plead loss causation.  First, Genworth asserted that plaintiffs did not plausibly allege that Genworth failed to monitor the plan’s investments because Genworth did indeed monitor the investments.  Genworth claimed that it monitored the investments because it (1) sought and received outside financial and legal expertise to inform the monitoring process ; (2) the plan committee regularly met and even exceeded the IPS requirement of meeting annually; and (3) it received regular updates on the investments’ performance as evidenced by presentations of investment advisors to the committee.

Plaintiffs’ key support for its imprudence claim was that the plan committee minutes produced in discovery failed to mention a discussion of the BlackRock LifePath funds, which were the plan’s qualified default investment option and constituted more than half of the plan’s assets.  Genworth responded that it was not required (nor was it plausible) to review those investments during every single meeting, and that the minutes do not necessarily detail every discussion that occurred during each meeting.  Further, Genworth asserts that the minutes reveal the discussion of other non-BlackRock investments that it placed on a watch list or removed, which shows that it was engaged in an active monitoring process.  Genworth further argued on causation grounds that even if it failed to monitor the BlackRock investments, this did not cause the alleged losses because plaintiffs offer no well-pled allegations that a prudent fiduciary in Genworth’s position would have removed the funds from the plan.  Moreover, plaintiffs offered no examples of a similarly situated fiduciary who did remove the investments.  Next, Genworth argued that its IPS does not require it to drop poorly performing investments.  Rather, the decision to remove or replace investments is left to the discretion and expertise of the committee.  Finally, Genworth argued that the complaint failed to allege “significant underperformance,” or that there were external warning signs to alert a prudent fiduciary that the BlackRock TDFs should be removed from the plan or that a prudent fiduciary would just remove investments from the plan because they were performing poorly in a limited period of time.  The defense was that plaintiff had failed to show that Genworth’s actions caused the loss.

Plaintiffs responded that Genworth’s arguments, including that it had a monitoring process and consulted with financial advisors, are factual disputes that are not appropriate for resolution at this stage of the proceedings.  As to the loss-causation arguments, plaintiff contend that it is reasonable to infer from the SAC that the lack of sufficient monitoring caused the plaintiffs’ loss.  Citing to the Seventh Circuit in Hughes v. Northwestern, plaintiffs argued that when “alternative inferences are in equipoise,” the plaintiff must prevail on the motion to dismiss.  Finally, as to whether they are required to show that other prudent fiduciaries dropped the BlackRock TDFs, plaintiff argue that it only has to plausibly allege a breach of the duty of prudence at the pleading stage of the case.

The Court held that the “Plaintiffs are right” that Genworth’s defense based on meeting minutes and consultant reports “can be considered as the case progresses, but they do not bear on the legal sufficiency of the SAC.”  According to the Court, seeking the advice of outside advisors is not dispositive of an adequate monitoring process, and does not alone establish that there was not a deficiency in the monitoring process.  The Court also refused to consider the meeting minutes from a defense perspective because it cannot be properly considered at the motion to dismiss stage.  Second, the Court noted that while Genworth contended that the committee met regularly, the SAC alleges that the Committee failed to meet after each quarter, which prevented it from adequately monitoring the BlackRock TDFs.  Even if the Court could consider the meeting minutes at the motion to dismiss stage, the court held that “it is reasonable to infer that, because the minutes do not reflect that the Committee reviewed the performance of the BlackRock TDFs, the Committee failed to do so, which is a plausible allegation that Genworth breached its duty to monitor.”  [Euclid note:  The Court allowed plaintiffs’ to infer imprudence from the meeting minutes, but did allow the defense to counter the imprudence assertion with the same meeting minutes].

As to the comparator TDFs, the court held that “it is beyond serious doubt that the SAC in this case sufficiently alleges why the Comparator TDFs were selected and why BlackRock TDFs’ performance can be judged against these other TDFs.”  Thus that Court held that plaintiff had alleged a plausible claim that there was a deficient monitoring process because the committee failed to draw these comparisons to the popular TDF benchmarks proffered by plaintiffs.

As to loss causation, the Court rejected all four of Genworth’s arguments.  Notably, the court rejected Genworth’s argument that plaintiffs had failed to allege significant underperformance of the fund.  Instead, the court accepted as true from the SAC that the losses total over $100 million, “which is not an insignificant amount of money.”  In response to Genworth’s argument that the SAC does not allege any external warning signs that a prudent fiduciary would have seen to indicate that the BlackRock TDFs should be removed from the plan, the Court held that the SAC did affirmatively allege red flags and “alarm bells for prudent fiduciaries” to replace the funds.  The court further held that requiring plaintiffs to prove that other fiduciaries had replaced BlackRock funds “is based on a higher pleading standard than is required at this stage of the litigation.”

Finally, the Court addressed how the Genworth SAC was different from the Tullgren v. Booz Allen Hamilton case dismissed in the same Eastern District of Virginia.  In the Booz Allen case, the court found that the amended complaint failed to state a claim for breach of fiduciary duty because it was “completely devoid of facts about the particular decision-making process taken by” the defendants.  The Court contrasted that the Genworth SAC case “provides ample detail on the underperformance of the BlackRock TDFs and how the underperformance would have signaled the need for a change to a prudent fiduciary.”  In addition, the Court found that the Genworth case was different because it alleged that Genworth fiduciaries failed to follow its IPS when measured against the criteria listed in the IPS.  Specifically, plaintiff asserted in the SAC that the IPS requires a benchmark “candidate fund have sufficient assets under management such that the Plan assets would not represent a disproportionately large share of the fund’s assets,” which is why the Comparator TDFs of the six largest TDFs in the market “were viable alternatives.”  The Court also accepted as true the claim in the SAC that certain “BlackRock TDFs are considerably more aggressive than the Comparator TDFs. “  The Booz Allen court had also criticized the use of the S&P Index and the Sharpe ratios as performance metrics because the two are not actual funds.  But the Court held that “[t]his argument ignores the fact that Genworth’s own IPS provides the S&P Target Date Index as a benchmark to measure the performance of the BlackRock TDFs.”

The Euclid Perspective

After every previous court deciding the same fiduciary imprudence claims involving BlackRock LifePath funds granted motions to dismiss, we are shocked by this decision.  The court accepted as true everything that Miller Shah claimed in its fiduciary imprudence claims without any real evidence:  that the plan fiduciaries failed to monitor the BlackRock TDFs despite having two investment advisors, all because the committee meeting minutes did not mention the BlackRock TDFs; that plan fiduciaries should have replaced the BlackRock funds notwithstanding that plaintiffs proffered no evidence of even a single other large plan fiduciary committee that switched out of the BlackRock investments; as well as the claim that the BlackRock funds had significant investment underperformance.  None of this is true.  Most importantly, we know of no plan that replaced BlackRock LifePath investment funds because of any concern about underperformance, but the court held that this was not required to meet the plausibility standard.  The only entity that has ever cried wolf about the investment performance of BlackRock LifePath TDFs is the Miller Shah law firm trying to make millions of dollars in attorney fees.

This disappointing decision shows once again that we do not have a national pleading standard for fiduciary imprudence cases.  The pleading standard for ERISA class actions remains a capricious and unpredictable crapshoot.  Fiduciary imprudence lawsuits regarding the same exact investments are allowed before some judges, and dismissed by other judges.  It encourages plaintiff law firms to bring a high volume of cases against multiple plans with the exact same investment product, because all you need is one case to survive a motion to dismiss in which to assert $100m+ of damages and score high attorney fees.  It is not about batting average – plaintiff firms only need to win one case to hit a home run.  If you file enough cases across the country, you will eventually find a judge who will accept every characterization of fiduciary malpractice as “true” for the purpose of a motion to dismiss.  That is what happened in the Genworth case.

The second key aspect of this case is the impact of allowing discovery during the pleading stage of the case before the motion to dismiss is decided.  In nearly every other excess fee or performance case, plaintiffs rely exclusively on circumstantial evidence of an alleged disappointing result to infer fiduciary malpractice.  They have no evidence of the fiduciary process.  The court found that the Genworth case was somehow different because plaintiffs had alleged a flawed fiduciary process.  But the fiduciary process claims were based on mischaracterizations of the fiduciary plan committee minutes.  According to the brief supporting the motion to dismiss, plaintiff had taken extensive discovery and had full access to meeting minutes, agendas and presentations to the fiduciary committee from investment advisors.  Plaintiffs cherry-picked the meeting minutes and claimed that the plan fiduciaries were negligent in failing to discuss the BlackRock investment results at committee meetings.  The Court found this sufficient evidence to support a plausible failure to monitor the claim.  But when the defense attempted to rebut these distorted claims of fiduciary imprudence, the Court held that it could not consider any extrinsic evidence at this premature stage of the case.  In other words, plaintiffs were allowed to cherry-pick from the evidence to manipulate a claim of fiduciary imprudence, but the defense was not allowed to defend itself.  Any defense was considered an issue of fact that was not proper to consider at the pleading stage.

This does not meet the context-specific pleading standard required in Hughes v. Northwestern.  The case is nevertheless a warning to plan fiduciaries that production of meeting minutes and investment reports will be improperly used by plaintiff law firms to file more fictitious claims of fiduciary malpractice.  We interpret this case as allowing plaintiff law firms to second guess anything plan fiduciaries do, and argue that it is a factual issue that must be litigated.  If that is the test, then every plan is at risk.

The lesson of this case is that we must advocate for a national pleading standard that applies before plaintiffs are entitled to discovery.  Beyond this, we see three issues that deserve more exploration.

ISSUE #1:  “Sparse” Meeting Minutes That Did Not Expressly Document Review of the BlackRock Funds

According to Genworth’s motion to dismiss, it followed standard best practice in choosing and monitoring the BlackRock LifePath TDFs.  It had top-notch ERISA counsel from Alston & Bird, and used both Alight Solutions and Hewitt Advisors as investment advisors.  It held regular committee meetings, and reviewed the performance of the plan investments against a variety of benchmarks.  It placed underperforming investments on a watchlist, and even removed underperforming investments.  Plaintiffs criticized a gap in committee meetings between June 2016 and September 2017, but the plan met three times in 2016 and two times in 2017.

Based on our reading of the case, the only real difference from the previous BlackRock LifePath cases that were dismissed is that plaintiffs in the Genworth case used the plan minutes to argue that Genworth plan fiduciaries never discussed the BlackRock investments in committee meetings and that the committee did not meet for over a year between 2016 and 2017.  All of the other arguments were the same, including Miller Shah’s arguments that the BlackRock TDFs should be compared against the four most popular TDFs in the market.

The concerning implication of the Genworth case is that most plan fiduciary committee streamline their meeting minutes.  Fiduciary lawyers teach plan committees in plan committee meetings to avoid providing play-by-play accounts of committee minutes to reduce potential liability.  Most plans have what could be considered “sparse” meeting minutes that do not document everything that took place in the meeting.  But this backfired in the Genworth case when plaintiffs alleged that the plan fiduciaries failed to review the BlackRock investments because they were not specifically mentioned in the meeting minutes.

This case should cause plan fiduciaries to reexamine fiduciary committee meeting minutes.  They should be written with an eye towards reducing liability, but the minutes need to demonstrate and document that the plan fiduciaries followed a robust fiduciary process.  It must document the monitoring of all service providers, all plan administration and investment fees, and the performance of all plan investments.  The minutes cannot be so limited that it allows plaintiff lawyers to allege that material investments were not monitored.

On a related note, most rule 104 ERISA fiduciary imprudence cases ask for plan meeting minutes.  We have always assumed that plan fiduciaries should proactively give meeting minutes and investment advisor reports to demonstrate that most large plans have robust fiduciary investment monitoring with the aid of quality investment advisors.  But this case shows that plaintiff law firms will manipulate and distort anything they can get their hands on.  It is a lesson to prevent plaintiff lawyers from accessing anything that can be distorted.  This does not mean that plans can ignore information requests, but it provides grounds to be appropriately cautious.

ISSUE #2:  Is the S&P 500 or the Largest TDFs in the Market Meaningful Benchmarks for the BlackRock TDFs?

The Miller Shah template for all twelve BlackRock LifePath imprudence cases is that the BlackRock TDFs underperformed compared to the top six most popular target-date funds available in the market, with the exception of the Fidelity Freedom funds that plaintiffs do not like.  Four federal appellate courts have held that investment underperformance must be measured against meaningful benchmark, which means a comparison to investments with the same investment strategies and goals.  Miller Shah continues to swim against the tide by arguing that large plans must compare their TDFs against the most popular TDFs irrespective of underlying investment makeup because these are the most realistic investments that plan fiduciaries would have chosen.  Many other courts have rejected this assertion, but Miller Shah injected a new argument in the Genworth case by claiming that the Genworth IPS required the plan to compare the BlackRock funds to the S&P 500 and only against investments that were large enough to be appropriate for the jumbo Genworth plan.

This argument convinced the Genworth court, but it is a mischaracterization of the Genworth IPS.  Much of the IPS evidence is redacted in the motion to dismiss, but the Genworth IPS instructs the Committee to use a custom benchmark to monitor the BlackRock TDFs to account for the specific asset allocations and the investment objectives of the BlackRock TDFs.  The custom benchmark is based on the underlying asset allocation of the BlackRock TDFs, and “it reflects the [investment] managers’ ability to execute their own particular strategy.”  The IPS also instructs the Committee to compare the BlackRock TDFs to the S&P Target Date Index, but it is the ”applicable S&P Target Date Index.”  (emphasis added).  The S&P Target Date Indices come in different styles, including “to” and “through” glidepaths.  Moreover, the S&P Target Date Indices are “a composite of the disparate strategies” of the entire “TDF industry.”  These indices are an amalgamation of the different characteristics of TDF strategies, including TDFs with actively and passively managed underlying funds, TDFs with different risk profiles, and those with different asset allocations.  They are not intended – and do not – measure the performance of the BlackRock TDFs against their own specific investment strategy or asset allocations.

Most plans compare results to the S&P 500 as a big-picture guidepost.  But that does not mean that the plan investment policy statement requires fiduciaries to replace any investment that does match or exceed the returns of the large-company benchmark.  That is because the S&P 500 contains only equity investments, and will typically exceed the financial returns of any diversified investment instrument that contains bonds and other non-equity positions.  This is why the Genworth decision unfairly opens the door to claims fiduciary imprudence against nearly every existing defined contribution plan.

Just like the level of detail for plan minutes, this case should be an occasion to examine whether the scope of your plan’s IPS is too broad.  Plaintiffs distorted the reference to the S&P 500 benchmark in the IPS, but the court allowed it.  The S&P 500 with 100% invested in equity should have no relevance to target-date funds that are designed to be diversified investment instruments with fixed income and bond allocations.  The IPS must provide flexibility to plan fiduciaries to maximize the discretion to make fiduciary decisions without fear of hindsight liability.  That cannot be eliminated in the current capricious litigation environment, but the IPS must maximize discretion to prevent unfair comparison to investments with different objectives and different investment allocations.

ISSUE #3:  What is the Level of Underperformance to Allege a Plausible Claim of Fiduciary Imprudence?

The Genworth case also raises the common issue as to what constitutes investment underperformance that amounts to fiduciary malpractice.  The BlackRock LifePath funds trailed the S&P 500 by only .45 to .75% in three and five-year lookbacks.  This is a nominal amount to any objective observer.  But if small differences from the S&P 500 or top-performing funds is the measure of underperformance upon which courts will hold plan fiduciaries liable, this would again open up fiduciaries to liability on many investments.  Most, if nearly all, investments in the last ten years have failed to match the historic results of the S&P 500.  Does that mean that nearly every plan fiduciary is guilty of fiduciary malpractice and has to make up the differential?  This is not the ERISA fiduciary standard.  Surely the fiduciary standard is signs of significant distress and substantial underperformance.  Otherwise we have converted ERISA fiduciary liability into guaranteeing the financial performance of every investment in America’s retirement plans.  What fiduciary in America with personal liability is going to sign up for that job?

Final Thoughts

The Genworth decision is disturbing because the Court allowed a claim of fiduciary imprudence in failing to monitor the BlackRock investments based on the feeble assertion that certain meeting minutes did not mention the investments and there was a gap in time between meetings in 2016-17.  If this is the pleading standard, then every plan – no matter how robust of a fiduciary process – is at risk for fiduciary malpractice claims.  There was no evidence of any other plan leaving the BlackRock funds because of concerns of investment underperformance.  Instead, the court accepted as “true” that there were warning signs and “red flags” of underperformance.  But there was no real evidence.  This is total plaintiff-lawyer fiction.

The Genworth case sends the message to the plaintiffs’ bar to focus on volume.  If you file enough meritless cases, you will eventually find a friendly judge to file fiduciary malpractice cases involving any investment you want.  All you have to do is claim failure to monitor and massive underperformance – no actual proof is required.