When its investment decisions proved to be disastrous, Onset misrepresented the value and performance of the assets under its management. By 2021, Onset represented to the Pension Fund that the Infrastructure Fund had a value of almost $55 million, far more than the true value of roughly $12.275 million. Meketa had relied on Onset’s valuation without further investigation.
ERISA fiduciary duties and delegation
ERISA Section 404 holds plan fiduciaries responsible for running retirement plans solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses. Fiduciaries are held to what is known as the “prudent expert” standard. This presents a quandary, however, for many in-house boards and management committees who do not have sufficient expertise to direct plan investments.
The solution for the first tier of plan fiduciaries is to hire investment advisors and managers to make these decisions and to shoulder most of the legal liability. The second tier of advisors and managers may, in turn, hire their own experts, delegating tasks and fiduciary responsibility still further.
At each level of delegation, however, some residual fiduciary liability generally stays with the delegator. Legal liability is notoriously sticky. What sticks is the requirement to oversee the hired expert’s performance, including fees and investment returns.
The heart of the matter in this ERISA lawsuit is the allegation that Meketa breached its fiduciary duties to the Pension Fund by failing to keep its eyes on Onset. The specific allegations against Meketa include:
- Inadequate due diligence: The Pension Fund claims that Meketa did not conduct proper due diligence in the selection and monitoring of the investment managers and products within the Pension Fund's portfolio. For example, Onset was the only manager recommended to the Pension Fund’s board. Chambers, in fact, had a direct role in Onset’s creation. The principals of Onset had never worked together before;
- Inappropriate investment choices: The plaintiffs contend that Meketa recommended and approved investments that were too expensive, had high ongoing fees, and offered lower returns. For example, Onset, through Meketa, invested almost $4.1 million of the Pension Fund’s money into an investment that an independent valuation firm concluded was worth zero by December 31, 2020;
- Lack of transparency: The lawsuit also highlights a lack of transparency regarding the fees and expenses associated with the investments chosen for the fund. Transparency is a key element in ensuring fiduciary responsibility because participants have the right to understand the costs associated with managing their retirement savings; and
- Failure to monitor investments: Plaintiffs allege that Meketa failed to adequately monitor the investments within the Pension Fund's portfolio, potentially leading to underperformance and adverse financial consequences for the Fund and its participants. For example, the Complaint alleges that Onset, under the alleged supervision of Meketa and Chambers, manipulated the valuation process by using speculative and baseless methods for valuing different investments. These actions allegedly reveal a conscious effort to provide a false view of the individual companies and to present to the Pension Fund ever-rising values, when in fact the portfolio was declining precipitously.
Implications for future ERISA breach of fiduciary duty lawsuits
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The ruling in this lawsuit could also set a legal precedent for similar cases in the future, serving as a benchmark for determining whether investment advisors have met their fiduciary obligations under ERISA. The case may lead to changes in regulatory requirements and standards for investment advisors, particularly those who manage retirement plans.