“Abysmal” or “conservative” – it’s more than just semantics because it gets to the thorny issue of when plan fiduciaries are responsible for poor investment performance. The plaintiffs in a fiduciary breach ERISA lawsuit have to show more than just sub-par or mediocre fund performance. They must show fund performance so awful that it suggests dereliction of a legal duty. Where the line is between the two is still not entirely clear.
Paul Toomey’s Tale
Paul Toomey worked for DeMoulas Super Markets, Inc., which operates the Market Basket grocery chain until 2015, and during his employment he participated in the DeMoulas Profit Sharing Plan. The plan is an uncomplicated profit-sharing plan, not a 401k) retirement plan. It does not permit employee contributions; all the funds are contributed by the employer. During Toomey’s employment, all the money contributed to the plan was invested in a single fund. In that fund, 70 percent was allocated into domestic fixed income options, and 30 percent into equities.
The trustees of the plan assert that their goal was to preserve the value of the company’s contributions to the fund, while providing some modest investment growth. The Complaint, on the other hand, describes the investment strategy as “wildly unsuccessful.”
More specifically, it alleges that:
- the plan’s “one-size-fits-all target allocations” were inappropriate for participants nearing retirement, but especially inappropriate for participants in their twenties, thirties, and forties, who are decades away from retiring;
- the investment strategy was imprudently executed in several ways, often failing to meet the stated targets. Even among fixed income investments, the defendants failed to make appropriate efforts to generate meaningful returns;
- the plan left imprudent sums uninvested ($27 million in 2016 in accounts that earned no interest), and that to the extent they invested in bond funds, they failed to procure the lowest-cost share class of those funds even though, as a large institutional investor, they had the leverage to do so; and finally
- the defendants failed to monitor the performance of their chosen investments or to choose better performing options to achieve those goals.
What is the standard of care for ERISA fiduciaries?
Fiduciaries are required to discharge their duties: “solely in the interest of the participants and beneficiaries and (A) for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan.”
Further, ERISA imposes a duty on plan fiduciaries to manage the plan “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” This duty of prudence includes “a continuing duty to monitor [plan] investments and remove imprudent ones . . . separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset.”
ERISA fiduciaries are not guarantors of investment results. An underwhelming rate of return on plan investments, by itself, a breach of fiduciary duty. It could simply be evidence of an overly conservative investment philosophy. Wretched investment results could be something else, however.
Was the trustees conduct a breach of the ERISA standard?
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But, as Henry David Thoreau noted, “Some circumstantial evidence is very strong, as when you find a trout in the milk.” (This may make more sense if you know that in 1850, at the time he penned this sentiment, there was a well-known scandal about milk watering.”)
The Demoulas Profit Sharing Plan participants clearly thought they had that kind of circumstantial evidence. The defendants may have been willing to settle for the amount they offered because they suspected something fishy, as well.