Bracalente v. Cisco Systems, Inc.

Background

Robert Bracalente and Boris Gdalevich sued individually and on behalf of similarly situated participants and beneficiaries of Cisco Systems, Inc.’s 401(k) plan. The case was a proposed class action under the Employee Retirement Income Security Act (ERISA). Cisco Systems, Inc. was the only remaining defendant; the Board of Trustees of Cisco Systems, Inc. and the Administrative Committee of the Cisco Systems, Inc. 401(k) Plan had been voluntarily dismissed.

The plan offered ten BlackRock LifePath Index Funds, which were target-date funds designed to change their investment mix as a participant approached a chosen retirement year. Cisco designated those funds as the plan’s default investment option for participants who did not choose another investment.

The complaint alleged that the BlackRock funds performed worse than other large target-date fund series during much of the period from the second quarter of 2016 through the first quarter of 2021. The plaintiffs alleged that Cisco chose the funds to obtain their low fees without adequately considering their ability to generate returns, causing participants to miss out on millions of dollars in retirement-savings growth.

Claims and Arguments

The plaintiffs asserted three claims: breach of ERISA fiduciary duty, failure to monitor fiduciaries and liability for co-fiduciary breaches, and, in the alternative, liability for knowingly participating in a breach of trust. Their main theory was that Cisco imprudently selected and retained the BlackRock funds based on their alleged underperformance compared with other target-date funds.

Cisco moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not allege enough facts to state a legally recognized claim. Cisco argued that underperformance alone could not establish that it violated its fiduciary duties.

Court’s Analysis

The court explained that ERISA’s duty of prudence requires a plan fiduciary to act with the care, skill, prudence, and diligence that a prudent person familiar with such matters would use. The duty is context-specific and includes an ongoing duty to monitor investments and remove imprudent ones.

The court held that allegations based only on investment underperformance did not reasonably support an inference that Cisco acted imprudently. The complaint primarily presented three- and five-year performance comparisons with other target-date funds. In the court’s view, those comparisons showed only that other funds performed better during particular periods; they did not show that Cisco’s decision-making process was flawed or that offering the BlackRock funds fell outside the range of reasonable fiduciary judgments.

The court also noted that the complaint alleged that the BlackRock funds charged low fees and had improved performance beginning in early 2022. The court said the plaintiffs did not identify other fund features or circumstances, beyond the performance data, that would support an inference of imprudence. It therefore did not decide whether the other target-date funds were meaningful benchmarks for comparison.

The court separately rejected the derivative claims. Because the complaint did not adequately allege a primary fiduciary breach, it also did not adequately allege that Cisco failed to monitor the Administrative Committee or knowingly participated in a breach involving imprudent investment options.

Disposition

The court dismissed the first claim for breach of fiduciary duty. It also dismissed the second and third claims. The court granted Cisco’s motion to dismiss and dismissed all claims with leave to amend. The court allowed the plaintiffs 21 days from the date of the order to file an amended complaint, while cautioning that simply adding more measurements or descriptions of the funds’ underperformance was unlikely to cure the stated deficiencies.