Phillips v. Cobham Advanced Electronic Solutions, Inc.

Background

Michael Phillips, Brenda Paclik, and Crystal Franklin sued CAES Systems LLC; Cobham Advanced Electronic Solutions, Inc.; the companies’ boards of directors; and the companies’ 401(k) plan committees. They brought the action individually, on behalf of similarly situated plan participants and beneficiaries, and for the benefit of the plan. The plaintiffs alleged violations of the Employee Retirement Income Security Act of 1974, or ERISA.

The plaintiffs alleged that the committee breached its fiduciary duty of prudence by retaining American Century target-date funds in the plan. They claimed those funds had underperformed comparator funds and industry benchmarks for years, and that the defendants failed to use a prudent process to evaluate the funds and their fees. The plaintiffs also alleged that the company and the boards failed to monitor the committee.

Standing

The defendants argued that the plaintiffs lacked constitutional standing because they did not identify which target-date funds they invested in or when they invested. The court rejected that argument. It found that the plaintiffs had alleged that each of them invested in the American Century target-date series and suffered injury to their plan accounts. Because the plan was a defined-contribution plan, the court held that those allegations sufficiently showed a personal injury. The plaintiffs could therefore seek recovery on behalf of the plan for broader injuries allegedly suffered by the plan.

Claim One: Fiduciary Duty of Prudence

The court dismissed the claim against the committee. It explained that poor investment performance, by itself, does not support a reasonable inference that a fiduciary breached the duty of prudence. The court found that the plaintiffs’ allegations about the funds’ performance and low “Beta” rankings were still allegations about underperformance, not allegations showing that the defendants ignored other information or used a flawed process.

The court also found that the complaint did not identify process failures beyond a conclusory statement that the defendants failed to use a prudent process. Because the plaintiffs had not alleged omissions, conduct, or other information from which imprudence could reasonably be inferred, the court dismissed the first claim. The court did not reach the defendants’ other arguments concerning the comparator funds and the specificity of allegations about the target-date-fund series, although it encouraged the plaintiffs to add allegations concerning the comparator funds.

Claim Two: Failure to Monitor

The plaintiffs’ second claim alleged that the company and the boards failed to monitor the committee. The court dismissed that claim because it depended on the primary prudence claim, which did not survive.

Disposition

The court granted defendants’ motion to dismiss the second amended complaint. It held that amendment was not futile because the court had not previously ruled on the sufficiency of an earlier operative complaint. The dismissal was with leave to amend, and any amended complaint was due within 14 days after entry of the order.