Bracalente v. Cisco Systems, Inc.

Background

This putative class action was brought by individual participants in Cisco Systems, Inc.’s 401(k) Plan. The plaintiffs alleged that Cisco, as a fiduciary responsible for selecting, monitoring, and retaining the plan’s investment options, breached its duties under the Employee Retirement Income Security Act (ERISA) by offering BlackRock LifePath Index target-date funds. Cisco designated those funds as the plan’s default investment for participants who did not choose another option.

The Second Amended Complaint asserted two counts: breach of ERISA fiduciary duties, primarily the duty of prudence, and failure to monitor fiduciaries and liability for co-fiduciary breaches. The plaintiffs alleged that the BlackRock funds underperformed four comparator target-date-fund series and that Cisco’s investment committee failed to follow a prudent monitoring process.

Legal Standard

Cisco moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not allege enough facts to state a legally recognized and plausible claim. The court had to accept well-pleaded factual allegations as true and evaluate whether those allegations plausibly showed an entitlement to relief.

For ERISA’s duty of prudence, the court explained that plaintiffs may rely on direct allegations about a fiduciary’s knowledge, methods, or investigations, or on circumstantial facts supporting a reasonable inference that the fiduciary’s process was flawed. The inquiry is context-specific and must account for the range of reasonable judgments a fiduciary may make based on experience and expertise.

Judicial Notice and Incorporated Materials

The court took judicial notice of the plan’s Investment Policy Statement and several publicly available sources because they were referenced in the complaint or were not reasonably subject to dispute. It also treated minutes from two plan committee meetings as incorporated into the complaint because the complaint specifically referenced their contents. The court declined to consider other materials presented at committee meetings because the complaint did not reference them and Cisco was seeking to use them to create a defense at the dismissal stage.

Analysis

Monitoring Process

The plaintiffs identified four alleged defects in Cisco’s monitoring process: reliance on custom benchmarks, characterization of the BlackRock target-date funds as passive, failure to compare them with a meaningful peer group, and failure to conduct a prudent review.

The court held that the allegations about custom benchmarks did not plausibly show an imprudent process. The Investment Policy Statement identified custom indices as the benchmark for the BlackRock funds, and the complaint acknowledged that Cisco used those benchmarks. The court rejected the plaintiffs’ argument that Cisco should instead have used an S&P target-date index because the Investment Policy Statement did not identify that index as the required benchmark and the complaint did not provide enough facts showing that it was a meaningful comparison.

The court also found that the alleged characterization of the BlackRock funds as passive did not establish an imprudent process. Even assuming the plaintiffs were correct that the target-date funds were actively managed in an important sense, the Investment Policy Statement used the same benchmark-monitoring criteria for active and passive funds and gave the committee discretion about whether to remove an investment. The complaint did not allege that the BlackRock funds underperformed their designated custom benchmarks.

The court further held that the four proposed comparator fund series were not adequately shown to be meaningful benchmarks. Two were composed of actively managed funds, while the BlackRock funds were composed of passively managed funds. The other two used a “through retirement” glide path rather than the BlackRock funds’ “to retirement” glide path. The complaint did not provide sufficient factual support explaining why the funds could be compared despite those differences.

The plaintiffs also relied on the minutes of committee meetings. The court found that it was reasonable to infer from the October 2016 minutes that the committee did not review the BlackRock funds’ performance at that meeting. But the February 2017 minutes described a review of the funds, including their glide path and diversifying assets, and stated that an advisor considered them a prudent investment choice for plan participants. Considering the allegations and minutes together in the plaintiffs’ favor, the court held that these allegations did not plausibly show a breach of the duty to monitor.

Underperformance Allegations

The court held that the alleged underperformance, without a plausibly deficient monitoring process, did not support a reasonable inference that Cisco acted imprudently. It reiterated that poor investment performance alone is insufficient to show a breach of ERISA’s duty of prudence when selecting or retaining an investment.

Derivative Claim

Because the plaintiffs did not adequately state a claim for breach of fiduciary duty, the court also held that their derivative claim for failure to monitor fiduciaries and co-fiduciary breaches failed. The derivative claim depended on an adequately pleaded underlying fiduciary breach, which the court found lacking.

Disposition

The court GRANTED Cisco’s Motion to Dismiss. It DISMISSED all claims with leave to amend and stated that any amended complaint had to be filed no later than 21 days after the order’s date. The opinion therefore disposed of the Second Amended Complaint under Rule 12(b)(6), rather than entering a final merits judgment after resolving the underlying ERISA claims.