Phillips v. Cobham Advanced Electronic Solutions, Inc.

Background

The plaintiffs brought this action under the Employee Retirement Income Security Act (ERISA), alleging that defendants breached fiduciary duties by including American Century Target Date Series funds in the Cobham 401(k) plan. The plaintiffs claimed that the funds underperformed compared with other investments, charged relatively high fees, and were retained despite information allegedly available from the plan’s investment adviser. They also alleged that the defendants failed to monitor the plan committee.

The fourth amended complaint added a claim that the defendants failed to furnish the plan’s Investment Policy Statement (IPS) after a written request. The plaintiffs alleged that Cobham had admitted that the plan had an IPS but had not produced it. The plan’s Charter allegedly required the committee to adopt, periodically review, and comply with an investment policy.

Judicial Notice

The defendants asked the court to take judicial notice of 15 exhibits. The court denied that request as to Exhibits 1 through 5 and 7 through 15 because the defendants primarily offered them to contradict the complaint’s allegations about the challenged funds and comparator funds. The court granted the request as to Exhibit 6, a transcript from an earlier hearing in the same case, because the court could consider its own files and records for the purpose of determining whether the plaintiffs had cured earlier pleading deficiencies.

Fiduciary-Prudence Claim

The court applied the standard for a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). At that stage, a complaint must include enough factual allegations to make the claimed violation plausible, and the court generally accepts well-pleaded factual allegations as true.

The court held that ERISA’s duty of prudence concerns the fiduciary’s process for choosing investments, not simply the results. A plaintiff cannot establish imprudence merely by alleging that another investment produced higher returns, had lower risks, or charged lower fees. The court also explained that fiduciaries are not required to choose a riskier strategy simply because it might produce higher returns.

The plaintiffs relied on Morningstar peer-group comparisons, an S&P target-date-fund index, seven other target-date funds, Beta ratings, Morningstar ratings, fee comparisons, and alleged information from the plan’s investment adviser. The court found these allegations insufficient.

The Morningstar peer group and S&P Index were not meaningful benchmarks because they included funds with differing strategies, risk-mitigation objectives, asset allocations, and other features. The seven individual comparator funds also differed materially from the American Century funds, including in their stock allocations and glide paths. A glide path is the way a fund changes its mix of investments over time as the target retirement date approaches. The court found that these differences reflected different investment strategies and risk preferences.

The court also noted that the complaint alleged that the American Century funds frequently outperformed the Morningstar peer-group median, including during market downturns, and produced positive annualized returns over the relevant ten-year period. In the court’s view, those results were consistent with the funds’ more conservative, risk-mitigation strategy. The court concluded that the allegations did not show that the committee’s decisions fell outside the range of reasonable fiduciary judgments.

The fee allegations likewise did not state a claim. The court held that the availability of less expensive but materially different funds did not plausibly show that the American Century funds charged unreasonable fees. The plaintiffs also failed to establish imprudence through their allegations that the committee ignored information from its investment adviser, because the complaint alleged that much of the relevant performance information was favorable to the challenged funds.

Failure-to-Monitor Claim

The court treated the failure-to-monitor claim as dependent on the fiduciary-prudence claim. Because the plaintiffs failed to state a claim for breach of the duty of prudence, the court granted the motion to dismiss the failure-to-monitor claim as well.

The court noted that the complaint had already been amended four times and that the plaintiffs’ allegations had been found legally deficient three times. It concluded that further amendment would be futile. The court therefore dismissed both the fiduciary-prudence and failure-to-monitor claims without leave to amend and with prejudice.

Failure to Furnish the IPS

ERISA Section 104(b)(4) requires a plan administrator, upon a participant’s or beneficiary’s written request, to furnish specified plan documents and other instruments under which the plan is established or operated. The court considered whether the plan’s IPS fell within that category.

The court relied on Ninth Circuit decisions limiting the phrase “other instruments” to formal documents similar to the documents specifically listed in the statute, such as documents describing the plan, its benefits, its financial status, or documents that restrict or govern the plan’s operation. The court also found persuasive a Fourth Circuit decision holding that an investment policy statement can qualify as a formal document under which a plan is managed.

The court held that the plaintiffs plausibly alleged that this IPS governed an important aspect of the plan’s operation because the plan’s Charter allegedly required the committee to adopt and follow an investment policy when selecting and retaining plan investments. The court therefore concluded that the plaintiffs plausibly stated a claim under ERISA Section 104(b)(4). The court denied the defendants’ motion to dismiss that claim. The court did not decide the plaintiffs’ request for an order requiring production of the IPS because that request involved different considerations and was not the issue before the court on the motion to dismiss.

Disposition

Judge Yumi K. Lee granted the defendants’ motion to dismiss the claims for breach of the fiduciary duty of prudence and failure to monitor, Counts 1 and 2, without leave to amend. Those claims were dismissed with prejudice. The court denied the defendants’ motion to dismiss the claim for failure to furnish the plan’s IPS, Count 3.