Opinion
Civil Action 22-cv-00167-CMA-STV
11-06-2023
LAQUITA JONES; LATEESHA PROCTOR; PATRICK SMITH; and BEN MCCOLLUM, Plaintiffs, v. DISH NETWORK CORPORATION; THE BOARD OF DIRECTORS OF DISH NETWORK CORPORATION; THE DISH NETWORK CORPORATION 401K PLAN COMMITTEE; and DOES 1-20, Defendants.
RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE
SCOTT T. VARHOLAK, MAGISTRATE JUDGE
This matter comes before the Court on Defendants' Motion to Dismiss Plaintiffs' Amended Class Action Complaint (the “Motion”). [#84] The Motion has been referred to this Court. [#87] This Court has carefully considered the Motion and related briefing, the entire case file and the applicable case law, and has heard oral argument on the Motion [#99]. For the following reasons, the Court respectfully RECOMMENDS that the Motion be GRANTED IN PART and DENIED IN PART.
I. FACTS AND MATERIALS PROPER FOR REVIEW
Before proceeding to the Motion, the Court must determine which factual sources it may consider on a Rule 12(b)(6) motion to dismiss. “As a general rule, the only facts [a court] consider[s] in assessing the sufficiency of a complaint are those alleged in the complaint itself.” Emps.' Ret. Sys. v. Williams Cos., Inc., 889 F.3d 1153, 1158 (10th Cir. 2018) (citing Gee v. Pacheco, 627 F.3d 1178, 1186 (10th Cir. 2010)). The Court accepts these allegations as true at this stage of the proceedings. See Wilson v. Montano, 715 F.3d 847, 850 n.1 (10th Cir. 2013) (citing Brown v. Montoya, 662 F.3d 1152, 1162 (10th Cir. 2011)). However, a court “may consider ‘documents that the complaint incorporates by reference,' ‘documents referred to in the complaint if the documents are central to the plaintiff's claim and the parties do not dispute the documents' authenticity,' and ‘matters of which a court may take judicial notice.'” Emps.' Ret. Sys., 889 F.3d at 1158 (quoting Gee, 627 F.3d at 1186).
Defendants attach ten exhibits to the Motion. [See #84-1 (declaration of Defendants' counsel describing the attached exhibits)] Upon review, the Court finds that the following documents may be considered in the context of this Rule 12(b)(6) Motion: #84-2 (Morningstar report entitled 2021 Target-Date Strategy Landscape, referred to in the Amended Complaint [#80 at ¶ 50]); #84-7 (DISH 401(k) Plan's 2016 Investment Policy Statement (the “IPS”), referred to repeatedly in the Amended Complaint [e.g., #80 at ¶¶ 26-30, 33, 38, 51]); and #85-1 (First Quarter Investment Management Review from Cook Street Consulting dated March 31, 2018 (the “2018 Investment Review”), referred to in the Amended Complaint [#80 at ¶¶ 43-47]). In addition, the Court may consider the copies of the DISH 401(k) Plan Committee's minutes from meetings throughout the Class Period [##85-2; 85-4; 85-5; 85-6], as the Amended Complaint both refers to minutes from specific meetings [#80 at ¶¶ 38-39, 42, 47], and makes characterizations of the contents of the Committee's minutes for all meetings conducted during the Class Period [id. at ¶¶ 30, 37, 45, 48, 51]. Plaintiffs do not contest the validity of any of the above-cited documents. [See generally #93] The Court determines that these documents, which are all referred to in the Amended Complaint, are central to Plaintiffs' claims. Accordingly, the Court may look to the contents of these documents, as opposed to relying solely on Plaintiffs' allegations of the contents, in making this recommendation. GFF Corp. v. Associated Wholesale Grocers, Inc., 130 F.3d 1381, 1384 (10th Cir. 1997).
The Court declines to consider the remaining documents [##85-7; 85-8], both of which are Investment Management Reviews from Cook Street Consulting. These documents are not referred to in the Amended Complaint, nor incorporated by reference, and Defendants do not argue that they are appropriate for judicial notice. The Court accordingly determines that these materials are to be excluded from consideration on this Rule 12(b)(6) Motion. See Gee, 627 F.3d at 1186; Fed.R.Civ.P. 12(d).
As discussed above, the facts are drawn from the allegations in Plaintiffs' Amended Class Action Complaint [#80] (the “Amended Complaint”), and the documents attached to Defendants' Motion to Dismiss properly before the Court.
A. Factual Background
This putative class action, brought under the Employment Retirement Income Security Act of 1974 (“ERISA”), alleges that Defendants breached their fiduciary duties related to administration of the DISH Network Corporation 401(k) Plan (the “Plan”). [#80] Plaintiffs are former DISH employees and former Plan participants. [Id. at ¶¶ 9-12] Plaintiffs seek to certify a class for a period beginning six years before the filing of this action (i.e. January 20, 2016) and extending until the date of judgment (the “Class Period”). [Id. at ¶ 1] Defendants are Plan fiduciaries, charged with administering, controlling, or monitoring the Plan. [Id. at ¶¶ 5, 13-16]
The Plan is a participant-directed 401(k) plan. [Id. at ¶ 21] This means that participants direct their contributions into various investment options offered by the Plan, with DISH making contributions as well. [Id.] Plan expenses are paid for by Plan assets. [Id.] Thus, the value of a participant's account is determined by the participant's contributions, their employer's contributions, and the market performance of their selected investments-minus any expenses charged to the participant's account. [Id.] This form of retirement plan is referred to as a “defined contribution plan” because of the employer's defined contributions into a participant's account (in contrast to a “defined benefit plan,” under which an employer guarantees a certain level of benefits upon retirement). [Id. at ¶¶ 2-4] By the end of 2020, the Plan had 18,808 participants with account balances and assets totaling about $841 million-placing it in the top 0.2% of all 401(k) plans by plan size. [Id. at ¶ 4]
Defendants were responsible for crafting the Plan's investment lineup. [Id. at ¶ 32] At all relevant times, an Investment Policy Statement (“IPS”) was in place to guide Defendants in carrying out this responsibility. [Id. at ¶ 26; see also #84-7] The IPS contains criteria for monitoring the performance of Plan investments and placing an investment on a “watchlist.” [#80 at ¶¶ 26-27] Such watchlist criteria include: below-median investment performance compared to a peer group over a one-, three-, and/or five-year period; below-median three-year risk-adjusted returns compared to a peer group; and significant turnover or change in an investment's assets under management. [Id. at ¶¶ 26-29; #84-7 at 6]
Among other investment options available to participants, the Plan offers certain “target date funds” (“TDFs”). [#80 at ¶ 31] A TDF is made up of a portfolio of underlying investment vehicles that gradually shifts to become more conservative as a target retirement year approaches.[Id.] The Plan has offered a limited selection of the Fidelity Freedom Fund target date suite (the “Freedom Funds”) since October 21, 2005. [Id. at ¶ 32] The Plan's Qualified Default Investment Alternative (“QDIA”)-or default investment vehicle if a participant does not indicate otherwise-is the Freedom Fund vintage with the target year closest to a participant's assumed retirement age. [Id. at ¶ 34] By December 31, 2020, approximately 47% of the Plan's assets were invested in the Freedom Funds. [Id. at ¶ 35]
The planned shift in the underlying investment allocation is referred to as the TDF's “glide path.” [#80 at ¶ 31]
The Complaint identifies several features of the Freedom Funds that should have alerted Defendants at the beginning of the Class Period that the Freedom Funds were not a suitable investment option (let alone QDIA) for the Plan. [Id. at ¶¶ 33-51] First, since 2013 and 2014, the managers of the Freedom Funds have had discretion to deviate from the fund's pre-set glide path allocations by ten percentage points in either direction in order to time market shifts and locate underpriced securities. [Id. at ¶ 36] This strategy increased the Freedom Funds' risk and was criticized in a 2018 report by Reuters. [Id.] Minutes from DISH Network Corporation 401(k) Plan Committee (the “Committee”) meetings during the Class Period do not address the higher risk incurred by the Freedom Funds or any industry criticism of the Freedom Funds. [Id. at ¶¶ 36-37]
The Freedom Funds were also comparatively underperforming at the start of the Class Period. [Id. at ¶ 38] By the time of the Committee's first meeting during the Class Period, the Freedom Funds had persistently failed to exceed the median three- and five- year trailing returns of “peer TDFs” for seventeen consecutive quarters (from March 2012 through March 2016). [Id.] The underperformance was also apparent at the beginning of the Class Period from the Freedom Funds' trailing three-year “Sharpe ratio”-a calculation of an investment's risk-adjusted returns. [Id. at ¶ 40] The Freedom Funds suite underperformed the median Sharpe ratio of “peer TDFs” for the fourteen quarters leading up to the first meeting of the Class Period. [Id. at ¶ 41-42] Minutes from the Committee's meetings early in the Class Period, however, do not reflect substantive discussion of the Freedom Funds or their performance issues. [Id. at ¶¶ 38-39, 42]
In March 2018, the Plan's investment advisor prepared the 2018 Investment Review. [Id. at ¶ 43; #85-1] The 2018 Investment Review compared the Freedom Funds to three other TDF suites-the FIAM Target Date funds, the Vanguard Target Retirement funds (the “Vanguard Funds”), and the American Funds Target Date funds (the “American Funds”). [#80 at ¶ 43] This comparison, available to Defendants, illustrated the superiority of the American Funds as of March 31, 2018. [Id.] Specifically, eight of eleven American Fund vintages outperformed their Freedom Fund counterparts in three-year trailing returns, and every American Fund vintage outperformed its Freedom Fund counterpart in five-year trailing returns. [Id. at ¶ 44] This outperformance ranged from 0.03% to 1.18%. [Id.] In addition, both the Vanguard Funds' and the American Funds' five-year rolling Sharpe ratios ranked no worse than the top 40th percentile compared to “peer TDFs” for the entire period captured by the TDF Report (June 2012 through June 2017), ranking in the top 20th percentile from March 2014 through the end of the period. [Id. at ¶ 45] The Freedom Funds, in contrast, measured “below the peer median for much of the period.” [Id.] Information available to Defendants also reflected that the American Funds provided better “upside participation” (or, ability to participate in market rallies) and “downside protection” (or, protection against falling markets) than the Freedom Funds. [Id. at 46-47]
Despite the advantages of the American Funds and deficiencies of the Freedom Funds noted above and brought to Defendant's attention, meeting minutes following the release of the 2018 Investment Review reflect only limited discussion regarding the suitability of the Freedom Funds for the Plan. [Id. at ¶¶ 47-48] Based on the minutes, the Committee did not discuss replacing the Freedom Funds with an alternative (such as the American Funds). [Id. at ¶ 47] The Committee Meeting minutes do not reflect an evaluation of the criteria articulated in the Plan's IPS, instead merely noting that the Freedom Funds outperformed the comparators over the last year alone-despite the IPS's assurance that “[g]reater weight will be given to three[-] and five-year performance [than to one-year performance], since longer term market cycles are more meaningful.” [Id. at ¶¶ 47-48; #84-7 at 5]
Finally, the Freedom Funds have experienced asset outflow resulting from a loss of investor confidence. [Id. at ¶¶ 50-51] From 2016 through 2020, the Freedom Funds lost an estimated $35 billion in net outflows. [Id. at ¶ 50] The Plan's IPS recognizes as a watchlist criteria any significant shift in the assets under management of a Plan investment. [Id. at ¶ 51] No minutes of any Committee meeting during the Class Period contain any mention of the capital outflow experienced by the Freedom Funds. [Id.]
B. This Lawsuit
Plaintiffs filed this lawsuit on January 20, 2022, alleging that Defendants breached their fiduciary duties to the Plan by allowing the Plan to be charged excessive fees and by offering inappropriate investment options (specifically the Freedom Funds and the Royce Total Return Fund) to participants. [#1] Defendants filed a Motion to Dismiss [#30], which was granted [#79]. The original Complaint included no direct factual allegations regarding Defendant's process for monitoring the Freedom Funds. [See ##72 at 24; 79 at 14] Instead, Plaintiff relied on circumstantial allegations that the Freedom Funds undertook risky, unproven investments (particularly when compared to a more conservative passively-managed suite) [#1 at ¶¶ 66-75]; charged more in fees than a passively-managed suite [id. at ¶¶ 76-77]; experienced 3% asset outflow in 2018 [id. at ¶ 78]; underperformed other similarly managed funds by 1% to 3.5% [id. at ¶¶ 79-81]; and received negative media coverage [id. at ¶ 74]. The Court concluded that these “allegations d[id] not give rise to an inference of breach of fiduciary duty with respect to Defendants' retention of the [Freedom Funds].” [#79 at 20]
Plaintiffs were granted leave to file an amended complaint [#79 at 22], and they did so on April 10, 2023 [#80]. The Amended Complaint dropped Plaintiffs' allegations relating to the Plan's fees or retention of the Royce Total Return Fund. [See generally id.] The Amended Complaint alleges three causes of action arising out of Defendants' retention of the Freedom Funds as investment options in the Plan: (1) breach of fiduciary duty under ERISA Sections 404(a)(1)(A), (B), and (D) (codified at 29 U.S.C. §§ 1104(a)(1)(A), (B), and (D)); (2) failure to monitor fiduciaries and co-fiduciary breach; and (3) in the alternative, knowing breach of trust. [Id. at ¶¶ 71-87] Defendants filed this Motion to Dismiss under Federal Rule of Civil Procedure 12(b)(6) on May 9, 2023. [#84] Plaintiffs filed a response [#93], and Defendants filed a reply in support of the Motion [#97]. Defendants filed one notice of supplemental authorities [#100], and Plaintiffs filed two notices of supplemental authorities [##101; 103]-both of which received responses from Defendant [##102; 104]. The Court heard oral argument on the Motion on August 16, 2023. [##99; 105]
III. LEGAL STANDARDS
Federal Rule of Civil Procedure 12(b)(6) empowers a court to dismiss a complaint for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). In deciding a motion under Rule 12(b)(6), a court must “accept as true all well-pleaded factual allegations . . . and view these allegations in the light most favorable to the plaintiff.” Casanova v. Ulibarri, 595 F.3d 1120, 1124 (10th Cir. 2010) (alteration in original) (quoting Smith v. United States, 561 F.3d 1090, 1098 (10th Cir. 2009)). Nonetheless, a plaintiff may not rely on mere labels or conclusions, “and a formulaic recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).
Generally, “[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570). Plausibility refers “to the scope of the allegations in a complaint: if they are so general that they encompass a wide swath of conduct, much of it innocent, then the plaintiffs ‘have not nudged their claims across the line from conceivable to plausible.'” Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008) (quoting Twombly, 550 U.S. at 570). “The burden is on the plaintiff to frame a ‘complaint with enough factual matter (taken as true) to suggest' that he or she is entitled to relief.” Id. (quoting Twombly, 550 U.S. at 556). The court's ultimate duty is to “determine whether the complaint sufficiently alleges facts supporting all the elements necessary to establish an entitlement to relief under the legal theory proposed.” Forest Guardians v. Forsgren, 478 F.3d 1149, 1160 (10th Cir. 2007).
IV. ANALYSIS
Defendants contend that Plaintiffs have failed to state a claim for breach of fiduciary duty, and that the derivative claims of failure to monitor fiduciaries, co-fiduciary liability, and knowing breach of trust necessarily fail as well. [#84] Section 404 of ERISA imposes a duty of prudence and a duty of loyalty upon plan fiduciaries. See 29 U.S.C. § 1104(a). “To properly assert an ERISA claim for breach of fiduciary duty under [Section 404], a plaintiff must allege facts that plausibly demonstrate that: (1) the defendant was a plan fiduciary, (2) the defendant breached its fiduciary duty, and (3) that the breach resulted in harm to the plaintiff.” Kurtz v. Vail Corp., 511 F.Supp.3d 1185, 1196 (D. Colo. 2021) (quoting Troudt v. Oracle Corp., No. 16-cv-00175-REB-CBS, 2017 WL 663060, at *4 (D. Colo. Feb. 16, 2017)). Defendants do not challenge their status as fiduciaries for the purposes of this Motion. [See generally #84]
A. Duty of Prudence and Derivative Claims
Plaintiffs primarily allege that Defendants breached their fiduciary duties by imprudently retaining the Freedom Funds. [#80 at ¶¶ 71-75] As previously explained by Judge Arguello:
Fiduciaries are under a continuing duty to conduct a regular review of their investment decisions and remove investments which have become improper to retain. See Tibble v. Edison Int'l, 575 U.S. 523, 529 (2015). An ERISA fiduciary must discharge his responsibility “with the care, skill, prudence, and diligence” that a prudent person “acting in a like capacity and familiar with such matters” would use. Id. (quoting 29 U.S.C. § 1104(a)(1)). Thus, to establish a claim for breach of the duty of prudence and failure to monitor, a plaintiff must allege facts plausibly establishing that no
reasonable fiduciary would have maintained the investment. It is insufficient to simply allege that an investment did poorly, and therefore a plaintiff was harmed. See Kopp v. Klein, 894 F.3d 214, 221 (5th Cir. 2018). Rather, a plaintiff “must allege facts to support the conclusion that the Defendants would have acted differently had they engaged in proper monitoring-and that an alternative course of action could have prevented the Plan's losses.” Id.; see also Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir. 1983) (“[T]he test of prudence . . . is one of conduct, and not a test of the result of the performance of the investment.”). Courts, therefore, “focus on the process by which [the fiduciary] makes its decisions rather than the results of those decisions.” [Braden v. Wal-Mart Stores, Inc., 588 F.3d 585, 595 (8th Cir. 2009)]. Because plaintiffs may lack information about a fiduciary's process before discovery, courts have held that “even when the alleged facts do not specifically address the process by which a Plan is managed, a fiduciary breach claim may still survive a motion to dismiss if the court can reasonably infer from circumstantial factual allegations that the process was flawed.” Kurtz, 511 F.Supp.3d at 1197; see Braden, 588 F.3d at 596.
[#79 at 13-14] To summarize, in order to state a claim for failure to monitor plan investments, a plaintiff must plausibly allege that: (1) the defendants engaged in a faulty review of plan investments or employed a deficient monitoring process; (2) had defendants engaged in a proper review, a reasonably prudent fiduciary would have replaced the allegedly injurious investments; and (3) an alternative course of action would have prevented losses by the plan. [Id.]; see Kopp, 894 F.3d at 221; Birse v. CenturyLink, Inc. (“Birse II Recommendation”), No. 17-CV-02872-CMA-NYW, 2019 WL 9467530, at *8 (D. Colo. Oct. 23, 2019) (recommendation of then-Magistrate Judge Nina Wang on a motion to dismiss, which was ultimately denied as moot following a grant of summary judgment).
The Court first considers whether Plaintiffs have plausibly alleged that Defendants' monitoring process was faulty. Unlike in Plaintiffs' original Complaint, Plaintiffs' Amended Complaint does include factual allegations directly relating to Defendants' monitoring process. Specifically, Plaintiffs allege that Defendants maintained an IPS, which articulated the relevant criteria for the Plan's fund selection, monitoring, and removal processes. [#80 at ¶ 26] According to the IPS, each investment option is to be evaluated against “relevant market indices and peer groups” over trailing one-, three-, and five-year periods, with “[g]reater weight [being] given to three[-] and five-year performance, since longer term market cycles are more meaningful.” [Id.; #84-7 at 5-6] An investment option must be “carefully scrutinized” if it experiences “consistent[] under-perform[ance] in terms of risk and return.” [#80 at ¶ 27-28; #84-7 at 5-6] Other factors listed by the IPS include an investment's “three-year risk adjusted return (Alpha and/or Sharpe)” compared with “the peer group's median,” and “significant turnover or change in [the investment's] assets.” [#80 at ¶¶ 27-29; #84-7 at 6] The IPS states that, “a review of all of these factors together will form the basis for any Committee decision” to retain or terminate one of the Plan's investment options, but that “[n]o one factor will be determinative.” [#84-7 at 6]
Despite the existence of the IPS, Plaintiffs allege that the monitoring process set forth by the IPS did not occur, particularly with respect to the Plan's retention of the Freedom Funds. [See, e.g., #80 at ¶¶ 30, 33, 38-51] According to the Amended Complaint, the Freedom Funds met several of the IPS's criteria for increasing the scrutiny or possible watchlist placement. [Id. at ¶¶ 38 (alleging that the Freedom Funds' three-and five-year returns underperformed the median returns of peer TDFs for sixteen consecutive quarters leading into the Class Period), 40-41 (alleging that the Freedom Funds' three-year risk-adjusted returns underperformed the median three-year risk-adjusted returns of peer TDFs), 50-51 (alleging consistent outflow of assets from the Freedom Funds)] Yet despite the alleged presence of these negative indicators-which were selected by Defendants as the relevant factors for “form[ing] the basis for any Committee decision” [#84-7 at 5-6]-minutes from the Committee's meetings to discuss Plan investment options indicate that the relevant criteria were not reviewed or discussed by the Committee.[#80 at ¶¶ 30, 39, 42, 45, 47-48, 51] This is true even though the Freedom Funds had been designated as the Plan's QDIA, and nearly 50% of the Plan's assets were invested in the Freedom Funds. [Id. at ¶¶ 34-35] Plaintiffs also allege that the Freedom Funds' deficiencies and the availability of a particularly suitable alternative- the American Funds-were specifically brought to Defendants' attention through the 2018 Investment Review prepared by the Plan's investment advisor. [Id. at ¶¶ 43-48] Meeting minutes, however, reflect only minimal analysis by the Committee of the 2018 Investment Review's findings, and again fail to reflect a meaningful analysis of the criteria set forth by the IPS or factors that a reasonable fiduciary would consider. [Id. at ¶ 47; see also #85-2 at 2-3] Thus, Plaintiffs have alleged a deficient monitoring process that would have placed a reasonably prudent fiduciary on notice of deficient performance.
Defendants briefly argue that the allegations in the Amended Complaint misstate the terms of the IPS because “[n]owhere does the IPS require that a fund must be removed from the Plan if it underperforms a ‘peer group' for a certain number of quarters on any trailing basis.” [#84 at 21-22] Plaintiffs never allege as much. As stated, Plaintiffs instead allege that the IPS calls for a review of the Plan's investment options based on certain enumerated criteria, that this review did not occur, and that had the review occurred a prudent fiduciary would have replaced the Freedom Funds. [See, e.g., #80 at ¶ 48] Plaintiffs do not allege that the IPS required the removal of any fund from the Plan, and Defendants' recharacterization of Plaintiffs' allegations is meritless.
In the Motion, Defendants largely ignore the allegations concerning their deficient monitoring process, arguing instead that the Amended Complaint relies only upon allegations of minor underperformance, which the Court has already found are too insubstantial to state a claim. [#84 at 7-19] The Court recognizes that the underperformance alleged by Plaintiffs, taken alone, would not suffice to state a claim for breach of the duty to monitor plan investments. Again, “[t]o properly assert an ERISA claim for breach of fiduciary duty under [Section 404], a plaintiff must allege facts that plausibly demonstrate that: (1) the defendant was a plan fiduciary, (2) the defendant breached its fiduciary duty, and (3) that the breach resulted in harm to the plaintiff.” Kurtz, 511 F.Supp.3d at 1196 (quoting Troudt, 2017 WL 663060, at *4). In evaluating the second element, whether the defendant breached its fiduciary duty, courts must “focus on the process by which [the fiduciary] makes its decisions rather than the results of those decisions.” Braden, 588 F.3d at 595. Thus, with no other factual support, an allegation of underperformance (or other performance metric) must be strong enough to support the inference that fiduciaries underwent an imprudent process. Kurtz, 511 F.Supp.3d at 1197 (“[C]ourts have recognized that even when the alleged facts do not specifically address the process by which a Plan is managed, a fiduciary breach claim may still survive a motion to dismiss if the court can reasonably infer from circumstantial factual allegations that the process was flawed.” (citations omitted)). And considering the context-specific inquiry faced by plan fiduciaries and the wide range of appropriate considerations, simple underperformance will rarely-if ever-permit such an inference. See Smith v. CommonSpirit Health, 37 F.4th 1160, 1167 (6th Cir. 2022). Accordingly, this Court previously determined that underperformance of 1% to 3.5%, measured at a single point in time, did not suffice to establish the inference of an imprudent monitoring process. [#72 at 32-33] And as Judge Arguello noted in affirming this Court's earlier recommendation, an allegation of “‘disappointing [investment] performance by itself does not conclusively point towards deficient decision making,'” especially when the allegation only concerns “short term underperformance[,] [which] may be reasonably explained by market conditions and investment strategies.” [#79 at 19 (quoting Smith, 37 F.4th at 1167 (emphasis added)]
But unlike Plaintiffs' earlier complaint, the operative complaint's underperformance allegations are part and parcel of direct allegations that Defendants ignored their own selected criteria for evaluating and monitoring the prudence of Plan investments. The IPS specifically directs the Committee to “evaluate [the Freedom Funds] in terms of its performance compared to relevant . . . peer groups over trailing one[-], three[-], and five-year periods[,]” with “[g]reater weight” being given to three[-] and five-year performance.” [#84-7 at 5] Should the Freedom Funds “consistently under-perform[] in terms of risk and return,” the IPS directs the Committee to “carefully scrutinize[] [the Freedom Funds] to determine if action is warranted.” [Id.] The IPS does not define a threshold of underperformance in setting forth this guidance. [Id.] Plaintiffs plausibly allege that consistent underperformance occurred, as well as other signs of unsuitability based on the Plan's own selected criteria, but contemporaneous minutes reflect that the requisite careful scrutiny did not occur. [See, e.g., #80 at ¶¶ 30, 38-49] Thus, Plaintiff relies on more than underperformance allegations alone to plausibly support an inference of imprudent process.
Defendants next minimize the relevance of the alleged underperformance, arguing that it “ha[s] no bearing on the Committee's monitoring process” during the Class Period because the alleged underperformance predated the Class Period. [#84 at 11-13] Defendants further speculate that omission “was not an accident,” as the Freedom Funds performed favorably to peer groups later in the Class Period. [Id. at 12] As an initial matter, Defendants seek to introduce facts outside of the Amended Complaint and materials properly before the Court. [Id. at 12-13 (citing a 2021 Investment Report not referenced or relied on in the Amended Complaint)] As discussed above, the Court declines to consider any facts drawn from this source, such as the allegation that the Freedom Funds' performance compared to peer TDFs improved. See Fed.R.Civ.P. 12(d). Moreover, the Court finds that Plaintiffs' allegations regarding investment conditions going into the Class Period suffice to support an inference of improper monitoring at the outset of the Class Period. “[T]he content of the duty of prudence turns on the circumstances . . . prevailing at the time the fiduciary acts.” Hughes v. Nw. Univ., 595 U.S. 170, 177 (2022) (quotations omitted); see 29 U.S.C. § 1104(a)(1)(B) (requiring a fiduciary to discharge her duties “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man 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”). Courts therefore consistently dismiss cases premised on “hindsight” allegations, instead instructing plaintiffs to focus allegations on “the information defendant had available to it at the time it was making decisions regarding the Plan.” Kurtz, 511 F.Supp.3d at 1197; see also Pension Benefit Guard Corp. ex rel. St. Vincent Catholic Med. Ctrs. Ret. Plan v. Morgan Stanley Inv. Mgmt. Inc. (“St. Vincent”), 712 F.3d 705, 716 (2d Cir. 2013) (“We judge a fiduciary's actions based upon information available to the fiduciary at the time of each investment decision and not from the vantage point of hindsight.” (quotation omitted)); Birse v. CenturyLink, Inc. (“Birse I”), No. 17-CV-02872-CMA-NYW, 2019 WL 1292861, at *5 (D. Colo. Mar. 20, 2019) (dismissing claims that “improperly rely on hindsight to allege [the defendants] should have offered a better performing fund rather than indicating how an investigation would show an improvident process”). Heeding that instruction, Plaintiffs here properly include allegations regarding the prevailing circumstances (i.e., the Freedom Funds' consistently poor returns and risk-adjusted performance in preceding years) at the time of the alleged breach (i.e., the beginning of the Class Period). Such allegations, indeed, are necessary to state a claim of imprudent investment monitoring beginning at the outset of the Class Period. See 29 U.S.C. § 1104(a)(1)(B); St. Vincent, 712 F.3d at 716. Moreover, as discussed below, the Court finds that the Amended Complaint adequately alleges an injury caused by the allegedly imprudent monitoring process. Any argument that the Freedom Funds experienced a later performance improvement, thereby establishing either a prudent process or a lack of injury from an imprudent process, is not appropriate for consideration at this stage.
Defendants next argue that Plaintiff's allegations relating to an unidentified group of “peer TDFs” should be disregarded because they do not suffice to establish a “meaningful benchmark” against which the Court may accurately measure the Freedom Funds in order to infer an imprudent monitoring process. [#84 at 10-11] To be sure, Plaintiffs make no attempt in the Amended Complaint to identify the “peer TDFs” against which Plaintiffs compare the Freedom Funds.But neither does the IPS, which specifically calls for a review of each investment's relative performance and risk-adjusted returns against a “peer group.” [#84-7 at 5-6] Nor do the Committee's minutes, or the 2018 Investment Review, each of which simply refer to the Freedom Funds' “peers” or “peer group.” [See #85-1 at 61-67; #85-6 at 3] Reading the Amended Complaint and the materials properly before the Court in the light most favorable to the Plaintiffs, the Court construes Plaintiff's allegations relating to the Freedom Funds' “peer TDFs” as encompassing the same or substantially similar funds as those that the IPS directs the Committee to review, and those referred to during Committee meetings and in the Investment Report. The Court finds that Plaintiffs' factual allegations regarding the Freedom Funds' underperformance of peer TDFs plausibly support the inference that conditions triggering close consideration of the Freedom Fund occurred.
In their response, Plaintiffs assert that “the TDFs in the peer group comparisons set forth in the [Amended Complaint] are drawn from a peer group of TDFs formulated by Morningstar.” [#93 at 16 n.8] Plaintiffs, however, may not amend their Amended Complaint through briefing. See In re Qwest Commc'ns Int'l, Inc., 396 F.Supp.2d 1178, 1203 (D. Colo. 2004) (disregarding additional factual claims asserted in briefing on a motion to dismiss, explaining that “plaintiffs may not effectively amend their Complaint by alleging new facts in their response to a motion to dismiss”).
Defendants next argue that the IPS is not a binding plan document, so allegations that it was not adhered to do not state a claim for breach of fiduciary duty. [#84 at 22] Defendants, however, only cite to: (1) two cases finding an IPS is not a required plan document under ERISA [id. (citing White v. Martin, 286 F.Supp.2d 1029, 1040 (D. Minn. 2003), and Falberg v. Goldman Sachs Group, Inc., No. 19-cv-9910, 2022 WL 4280634, at *11 (S.D.N.Y. Sept. 14, 2022))]; and (2) one case expressing “concern” at a district court's finding that an IPS was a binding plan document but declining to resolve the issue [id. (citing Tussey v. ABB, Inc., 746 F.3d 327, 334 n.5 (8th Cir. 2014)]. Defendants reason that, because an IPS is not required by ERISA, it is not binding on a plan once adopted. But courts that have actually considered and resolved the issue have either expressly disagreed, or otherwise found that a failure to comply with an IPS is at least relevant to a fiduciary duty analysis. Lauderdale v. NFP Ret., Inc., No. 8:21-CV-301-JVS-KES, 2022 WL 17260510, at *10 (C.D. Cal. Nov. 17, 2022) (“Fiduciaries who are responsible for plan investments governed by ERISA ‘must comply' with the ‘plan's written statements of investment policy, insofar as those written statements are consistent with the provisions of ERISA.'” (quoting Cal. Ironworkers Field Pension Tr. v. Loomis Sayles & Co., 259 F.3d 1036, 1042 (9th Cir. 2001)); see also Sellers v. Trustees of Coll., 647 F.Supp.3d 14, 3435 (D. Mass. 2022) (finding that plaintiffs stated plausible claims for breaches of both the duty of prudence and the duty to comply with plan documents when the plaintiffs “laid out plausible, reasonable inferences based on the facts available to them to demonstrate that [the defendants] also, potentially, breached their own Plans' Investment policy statement”); Baird v. BlackRock Institutional Tr. Co., N.A., No. 17-CV-01892-HSG, 2021 WL 105619, at *3 (N.D. Cal. Jan. 12, 2021) (holding that “a genuine dispute as to whether Defendants complied with the IPS's direction” was “material to the Court's fiduciary duty analysis” such that summary judgment on the issue was precluded). For the purposes of this Motion, the Court agrees with Plaintiffs that a failure to follow the procedures set forth by an IPS-adopted to “describe[] the prudent investment process the Committee deems appropriate” [#84-7 at 3]-constitutes, at the least, a failure to review the Plan's investment decisions “with the care, skill, prudence, and diligence” that a prudent person “acting in a like capacity and familiar with such matters” would use. Tibble, 575 U.S. at 528 (quoting 29 U.S.C. § 1104(a)(1)).
Defendants argue that the allegations in the Amended Complaint and the materials properly before the Court establish that the Committee satisfied its fiduciary duties and followed the IPS. [#84 at 22-24] Defendants first point to the fact that the Committee retained an investment advisor to assist in evaluating the funds. [Id. at 23-24] But as Plaintiffs point out, the advisor's role was limited to “assist[ing]” and “advis[ing]” the Committee. [#84-7 at 3-4] The ultimate duty to “select[] and monitor[] . . . the Investment Alternatives” rested with the Committee. [Id. at 3] The fact that the investment advisor may have completed a prudent review of investment alternatives does not impute prudence to the Committee's alleged failure to review or engage with the advisor's assistance and advice. See Howard v. Shay, 100 F.3d 1484, 1489-90 (9th Cir. 1996) (explaining that “securing an independent assessment from a financial advisor” in the context of an ERISA claim “is not a complete defense to a charge of imprudence” but is “‘a tool and, like all tools, is useful only if used properly'” (quoting Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir.1983)). Defendant next assert that the minutes cited by Plaintiffs “reflect a thorough review” of Plan investments. [#84 at 23-24] The Court reiterates that, in conducting a Rule 12(b)(6) review, it must view the allegations and documents before it in the light most favorable to Plaintiffs. See Casanova, 595 F.3d at 1124. Considered in this light, the minutes cited in the Amended Complaint and properly before the Court on this review reflect very little specific analysis of any given investment option, let alone the Freedom Funds. [See, e.g., #85-5 at 4 (May 26, 2016 minutes simply stating that “target dates funds [are] not bad); #85-6 at 3 (August 31, 2016 minutes referencing only the Freedom Funds' glide path and observing that it is “in line with peers” with “more risk in the early years”); #85-2 at 3 (June 1, 2018 minutes only referencing the Freedom Funds' fee rate and one year performance)] As this Court previously explained, prudent plan fiduciaries “must balance many competing factors when crafting a plan.” [#72 at 30 (citing Birse I, 2019 WL 1292861, at *5)] Here, the IPS specifically calls for a review of “each Investment Alternative” and sets forth specific criteria for the Committee to evaluate-noting that “a review of all of these factors together will form the basis for any Committee decision” to retain or terminate an investment in the Plan. [#84-7 at 5-6] The meeting minutes, combined with the allegations that the Freedom Funds were contemporaneously exhibiting performance calling for careful scrutiny under the Plan's IPS, plausibly support Plaintiff's conclusion that a meaningful review and balancing of the factors relevant to making a prudent retention decision did not occur. While the minutes at issue do not negate the possibility of a prudent process, to draw such an inference in favor of Defendants at this stage would be inappropriate. See Trauernicht v. Genworth Fin. Inc., No. 3:22CV532, 2023 WL 5961651, at *11 (E.D. Va. Sept. 13, 2023)
Finally, Defendants argue that Plaintiffs' “nitpicking about the Committee's meeting minutes” are inapposite because there is no “length or formatting requirements for meeting minutes.” [#84 at 23-24] Defendants misconstrue Plaintiffs' allegations. Plaintiffs do not allege that Defendants breached their fiduciary duties by recording minutes in the wrong format. Instead, Plaintiffs' factual allegations regarding the contents of the minutes are used to plausibly support the conclusion that a proper review did not take place. [See, e.g., #80 at ¶ 30 (“[I]t is apparent from the minutes of each meeting . . . that no . . . careful evaluation occurred.”)] The Court finds such a factual allegation is perfectly acceptable to support an inference of improper monitoring at the motion to dismiss stage, and Defendants cite no authority to the contrary. See Trauernicht, 2023 WL 5961651, at *11 (explaining, in the context of evaluating the sufficiency of a complaint against a Rule 12(b)(6) motion, “it is reasonable to infer that, because the minutes do not reflect that the Committee reviewed the performance of the [challenged investments], the Committee failed to do so, which is a plausible allegation that [the defendant] breached its duty to monitor”).
Defendants' only citation in support of this point is to Falberg, 2022 WL 4280634, at *13. [#84 at 23] In Falberg, however, the court granted summary judgment to the defendants based upon undisputed evidence that-despite sparse meeting minutes-committee members were well acquainted with the detailed investment reports and engaged in meaningful discussion regarding the plan's respective investments and potential alternatives. 2022 WL 4280634, at **3-7, 12-13. The Court finds no support for the proposition that, in measuring a complaint against Rule 12(b)(6) standards, a court may not draw a non-speculative inference regarding the contents of a meeting from the well-pleaded allegations of the meeting's minutes.
Ultimately, the Court finds that Plaintiffs have sufficiently alleged a procedural failure by Defendants to review the Plan's investment decisions “with the care, skill, prudence, and diligence” that a prudent person “acting in a like capacity and familiar with such matters” would use. Tibble, 575 U.S. at 529 (quoting 29 U.S.C. § 1104(a)(1)). But that does not end the inquiry. “[A plaintiff's] duty-of-prudence claim cannot rest solely on the [d]efendants' procedural failings.” Kopp, 894 F.3d at 221. Rather, a plaintiff “must allege facts to support the conclusion that the [d]efendants would have acted differently had they engaged in proper monitoring-and that an alternative course of action could have prevented the Plan's losses.” Id.; see also In re Lehman Bros. Sec. & ERISA Litig., 113 F.Supp.3d 745, 757 (S.D.N.Y. 2015) (“[T]o make out [a claim for breach of the duty to monitor investments] plaintiffs must allege that . . . the failure to make such a review injured the plan.”), aff'd sub nom. Rinehart v. Lehman Bros. Holdings Inc., 817 F.3d 56 (2d Cir. 2016). Thus, the Court next considers whether Plaintiffs have plausibly alleged that a proper review would have resulted in the removal of the Freedom Funds, and whether Plaintiffs have adequately alleged that an alternative course of action would have prevented losses by the Plan.
Plaintiffs allege that a proper review would have established to the Committee that continued retention of the Freedom Funds was imprudent, particularly in light of the Freedom Funds' designation as the Plan's QDIA. [#80 at ¶¶ 33-34] According to the Amended Complaint, indications of the Freedom Funds' unsuitability for the Plan were apparent at the beginning of the Class Period, but no review occurred. [Id. at ¶¶ 33, 3843] Plaintiffs allege that in 2018, the Committee received the 2018 Investment Review, which specifically set forth the American Funds as a suitable and superior alternative TDF suite. [Id. at ¶¶ 43-49] Specifically, at the time of the 2018 Investment Review, eight of eleven American Fund vintages outperformed their Freedom Fund counterparts in three-year trailing returns, and every American Fund vintage outperformed its Freedom Fund counterpart in five-year trailing returns. [Id. at ¶ 44] In addition, the American Funds' five-year rolling Sharpe ratios ranked no worse than the top 40th percentile compared to peer TDFs for the entire period captured by the TDF Report (June 2012 through June 2017), ranking in the top 20th percentile from March 2014 through the end of the period. [Id. at ¶ 45] The Freedom Funds, in contrast, measured “below the peer median for much of the period.” [Id.] The 2018 Investment Review also reflected that the American Funds provided better “upside participation” (or, ability to participate in market rallies) and “downside protection” (or, protection against falling markets) than the Freedom Funds. [Id. at 46-47] During the same time that the Defendants received the 2018 Investment Review, and over the Class Period more generally, many investors decided to remove investments in the Freedom Funds, with the suite losing about $35 billion over the course of the Class Period. [Id. at ¶ 50] According to the Amended Complaint, had Defendants followed suit and decided to replace the Freedom Funds with the American Funds at the beginning of the Class Period, the Plan would have avoided over $10 million in losses. [Id. at ¶ 48]
Defendants argue that the Amended Complaint does not sufficiently establish the American Funds as a “meaningful benchmark” to compare the Freedom Funds. [#84 at 16-17] But, as the Amended Complaint alleges, the Committee's own investment advisor selected the American Funds as a direct comparator to the Freedom Funds. [#80 at ¶¶ 43-48; #85-1 at 57-72] This satisfies Plaintiffs' burden at the pleading stage to “provide a sound basis for comparison” between the two suites. Meiners, 898 F.3d at 822. Defendants also argue that the underperformance between the Freedom Funds and the American Funds is too slight to state a claim. [#84 at 19] Again, Plaintiffs do not base their claim on allegations of underperformance alone, but on allegations directly indicating that the Committee was ignoring relevant factors in monitoring the Plan's investments and that this monitoring deficiency prevented the Committee from replacing the Freedom Funds with a suitable alternative. As discussed above, Plaintiffs have plausibly alleged that Defendants committed a breach of their duty to prudently monitor the Plan's investments. Now, Plaintiffs allege that the American Funds reported superior returns and risk adjusted performance, established greater adaptability to changing market conditions, and were recommended by the Plan's investment advisor as a specific TDF suite to “evaluate” as a potential replacement for the Freedom Funds. [#80 at ¶¶ 43-48] Such allegations-particularly in light of the Freedom Funds' ongoing underperformance of peer TDFs, investor flight, and negative media coverage-plainly “support the conclusion that [Defendants] would have acted differently had they engaged in proper monitoring-and that an alternative course of action could have prevented the Plan's losses.” Kopp, 894 F.3d at 221. The Amended Complaint therefore plausibly alleges an injury resulting from Defendants' imprudent monitoring process sufficient to survive a Rule 12(b)(6) motion to dismiss.
For the foregoing reasons, the Court RECOMMENDS that the Motion be DENIED to the extent that it seeks dismissal of Plaintiffs' claim of breach of fiduciary duty arising under 29 U.S.C. §§ 1104(a)(1)(B) and (D), and the derivative claims of failure to monitor fiduciaries, co-fiduciary breaches, and knowing breach of trust.
Defendants' only argument for dismissal of the derivative claims is that “[b]ecause the underlying fiduciary breach claims fail, the derivative claims must be dismissed.” [#84 at 25]
B. Duty of Loyalty
Plaintiffs also appear to assert a claim for breach of the duty of loyalty. [#80 at ¶ 72] Under ERISA, fiduciaries must act “for the exclusive purpose of providing benefits to participants and their beneficiaries.” 29 U.S.C. § 1104(a)(1)(A)(i). “A breach of the duty of loyalty requires factual allegations that a defendant's actions were for the purpose of providing benefits to himself or someone else-having that effect incidentally is not enough.” Kurtz, 511 F.Supp.3d at 1202. “Furthermore, ‘a plaintiff must do more than simply recast purported breaches of the duty of prudence as disloyal acts.'” Id. (quoting Sacerdote v. New York Univ., No. 16-cv-6284, 2017 WL 3701482, at *5 (S.D.N.Y. Aug. 25, 2017)).
As in the original Complaint, the Amended Complaint includes no factual allegations that Defendants' actions were for the purpose of benefitting themselves or anyone else. [See generally #80] The Court finds that dismissal is appropriate for the same reasons articulated in the Order dismissing Plaintiffs' original Complaint. [#79 at 21 (“[T]here are simply no factual allegations that Defendants' ‘operative motive was to further [their] own interest[s],' as required to show a breach of the fiduciary duty of loyalty.” (quoting Smith 37 F.4th at 1170)); see also #93 at 30 n.21]
Accordingly, the Court respectfully RECOMMENDS that the Motion be GRANTED to the extent that it seeks dismissal, with prejudice, of Plaintiffs' claim for breach of the duty of loyalty.
V. CONCLUSION
For the reasons set forth above, the Court respectfully RECOMMENDS that the Motion to Dismiss [#84] be DENIED except to the extent that it seeks dismissal of Plaintiffs' duty of loyalty claim.
Within fourteen days after service of a copy of this Recommendation, any party may serve and file written objections to the magistrate judge's proposed findings of fact, legal conclusions, and recommendations with the Clerk of the United States District Court for the District of Colorado. 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 72(b); Griego v. Padilla (In re Griego), 64 F.3d 580, 583 (10th Cir. 1995). A general objection that does not put the district court on notice of the basis for the objection will not preserve the objection for de novo review. “[A] party's objections to the magistrate judge's report and recommendation must be both timely and specific to preserve an issue for de novo review by the district court or for appellate review.” United States v. 2121 East 30th Street, 73 F.3d 1057, 1060 (10th Cir. 1996). Failure to make timely objections may bar de novo review by the district judge of the magistrate judge's proposed findings of fact, legal conclusions, and recommendations and will result in a waiver of the right to appeal from a judgment of the district court based on the proposed findings of fact, legal conclusions, and recommendations of the magistrate judge. See Vega v. Suthers, 195 F.3d 573, 57980 (10th Cir. 1999) (holding that the district court's decision to review magistrate judge's recommendation de novo despite lack of an objection does not preclude application of “firm waiver rule”); Int'l Surplus Lines Ins. Co. v. Wyo. Coal Refining Sys., Inc., 52 F.3d 901, 904 (10th Cir. 1995) (finding that cross-claimant waived right to appeal certain portions of magistrate judge's order by failing to object to those portions); Ayala v. United States, 980 F.2d 1342, 1352 (10th Cir. 1992) (finding that plaintiffs waived their right to appeal the magistrate judge's ruling by failing to file objections). But see, Morales-Fernandez v. INS, 418 F.3d 1116, 1122 (10th Cir. 2005) (holding that firm waiver rule does not apply when the interests of justice require review).