Bracalente v. Cisco Systems, Inc.

Background

The plaintiffs are individual participants in Cisco Systems, Inc.’s 401(k) Plan. They brought a putative class action alleging that Cisco breached fiduciary duties under the Employee Retirement Income Security Act (ERISA) by offering and failing to properly monitor BlackRock LifePath Index Funds, which the opinion calls the BlackRock target-date funds (BlackRock TDFs). The plaintiffs alleged that this failure caused plan participants to lose tens of millions of dollars in potential capital appreciation.

The court had previously dismissed the original complaint and the second amended complaint, each time allowing amendment. The third amended complaint again asserted a primary claim that Cisco breached its fiduciary duty by failing to monitor the BlackRock TDFs. It also asserted a derivative claim for failure to monitor fiduciaries and co-fiduciary breach.

Legal standard

Cisco moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not state a legally valid claim. At this stage, the court accepts well-pleaded factual allegations as true and asks whether they plausibly support an entitlement to relief.

The court explained that ERISA’s duty of prudence requires fiduciaries to act with the care, skill, prudence, and diligence that a prudent fiduciary would use under the circumstances. That duty includes monitoring investments and removing imprudent ones. A plaintiff may rely on allegations about the fiduciary’s knowledge, methods, or investigation, or on circumstantial facts that support a reasonable inference that the fiduciary’s process was flawed.

The proposed Dynamic TDF comparison

The plaintiffs alleged that Cisco’s plan committee should have considered a different suite of BlackRock funds, the Dynamic TDFs. They alleged that the Dynamic TDFs had the same glide path and strategic asset allocation as the BlackRock TDFs, added active management, were expected to outperform the BlackRock TDFs by 50 to 100 basis points annually, and would add little or no additional risk.

The court held that the plaintiffs had not plausibly alleged that the Dynamic TDFs were a meaningful benchmark or viable alternative. First, the Dynamic TDFs were introduced in December 2016, but the plaintiffs relied on promotional materials from November and December 2021. The court reasoned that fiduciaries could not reasonably be expected to choose or switch to a fund before it had a performance history based only on later promotional statements. The plaintiffs’ own allegations identified past performance as a necessary factor and three- and five-year performance periods as key monitoring metrics.

Second, the plaintiffs did not plausibly allege that the committee should have known about the Dynamic TDFs during the relevant period. The allegations relied on promotional materials published years after the funds were introduced and did not explain how the funds’ comparative performance would have been knowable to the committee in real time. The court viewed the allegations as impermissibly based on hindsight.

Third, the court noted that the Plan had approximately $4 billion invested in the BlackRock TDFs, while the Dynamic TDFs had approximately $2 billion in total assets under management. The plaintiffs did not explain why the Dynamic TDFs could still be a relevant alternative despite their significantly smaller asset base. The court also observed that the complaint itself said that target-date funds with substantially smaller assets would not be relevant comparators if the Plan could not responsibly invest in them.

Other fiduciary-breach theories

The court rejected the plaintiffs’ renewed arguments that the custom benchmark was inappropriate, that the committee should have compared the BlackRock TDFs with the S&P Indices, that the BlackRock TDFs were wrongly categorized as passive rather than active, that the committee failed to compare them with other comparable investment suites, and that meeting minutes did not show a rationale for investment decisions.

The court stated that the third amended complaint did not cure the deficiencies identified in the prior order. Regarding the custom benchmark, the court maintained its prior analysis that the allegations did not plausibly establish an imprudent process. The court noted that the Plan’s investment policy statement required measurement against custom indices and that the plaintiffs acknowledged the committee complied with that document. The court clarified, however, that its earlier order had found only that following the custom benchmark did not plausibly establish an imprudent process; it had not determined that Cisco in fact followed the investment policy statement.

Derivative claim

The court dismissed the claim for failure to monitor fiduciaries and co-fiduciaries because it was derivative of the alleged underlying fiduciary breach. Since the plaintiffs had not plausibly alleged that the BlackRock TDFs were imprudent, Cisco could not have knowingly participated in breaches based on permitting the Plan to offer those investment options.

Disposition

The court granted Cisco’s motion to dismiss and dismissed the third amended complaint with prejudice. It explained that the plaintiffs had already received two opportunities to amend and had failed to plausibly state a claim, making further amendment unwarranted.

The court also granted both parties’ requests for judicial notice of specified publicly available materials and granted the plaintiffs’ unopposed administrative motion to file a statement of recent decisions.