Falberg v. The Goldman Sachs Group, Inc.

Background

Leonid Falberg, a participant in the Goldman Sachs 401(k) Plan, brought a proposed class action on behalf of the Plan and similarly situated participants. He sued The Goldman Sachs Group, Inc., the Goldman Sachs 401(k) Plan Retirement Committee, and John Does 1-20. Falberg alleged violations of the Employee Retirement Income Security Act of 1974 (ERISA), including breaches of fiduciary duties, prohibited transactions, and failure to monitor fiduciaries.

The Plan offered five Goldman Sachs proprietary actively managed mutual funds from 2013 until their removal in 2017. Falberg alleged that these funds charged higher fees and generally performed worse than comparable investment options. He also alleged that the defendants did not apply available fee rebates to the Plan, moved the Plan from institutional shares to more expensive retail shares, failed to replace the funds with better alternatives, and maintained the funds because of benefits to Goldman Sachs and its affiliates.

Motion-to-dismiss standard

The defendants moved to dismiss under Rule 12(b)(6), which tests whether a complaint alleges enough facts to state a legally plausible claim. Judge Ramos explained that, at this stage, the court generally accepts factual allegations as true and draws reasonable inferences for the plaintiff, but does not accept legal conclusions or unsupported assertions. The court considered the complaint, documents incorporated into it, certain public regulatory filings, Plan documents, and investment-performance disclosures.

Threshold arguments

The defendants argued that the claims were untimely under the Plan’s two-year limitations period. The court declined to dismiss them on that basis because ERISA’s statutory limitations period applied to the fiduciary-breach claims, and the court found no controlling authority allowing the parties to replace that statutory period with a shorter contractual period.

The defendants also argued that Falberg had failed to exhaust the Plan’s claim and appeal procedures. The court denied dismissal on this ground. It explained that the Second Circuit had not resolved whether exhaustion is required for statutory ERISA claims brought under Sections 1132(a)(2) and 1132(a)(3), and noted that courts in the district had repeatedly declined to require exhaustion for such claims.

The court also rejected the standing argument. Although Falberg had invested in only three of the five funds at issue, he alleged personal losses in his Plan account and alleged that the defendants’ conduct raised the same concerns for participants who invested in any of the Goldman Sachs funds. The court concluded that a fund-by-fund inquiry did not defeat standing at this stage and distinguished standing from the separate question of whether a class should be certified.

Fiduciary-duty claims: Count I

The court denied dismissal of Falberg’s claim that the defendants breached the duty of prudence. ERISA requires fiduciaries to act with the care, skill, prudence, and diligence that a prudent person would use in similar circumstances. Falberg alleged that the defendants kept the Goldman Sachs funds despite persistent underperformance, higher fees than comparable funds, the availability of lower-cost alternatives, and the availability of separate accounts and collective trusts.

The court held that these allegations were sufficient to proceed. It emphasized that fiduciaries have a continuing duty to monitor investments and remove imprudent ones, and that the reasonableness of the fees could not be resolved on a motion to dismiss. The court also found that allegations concerning the performance of non-proprietary funds, the Plan’s increasing importance to certain Goldman Sachs funds, and the timing of the funds’ eventual removal supported an inference that the defendants may have treated proprietary funds less critically or maintained them for their own benefit.

The court separately denied dismissal of the duty-of-loyalty claim within Count I. Falberg alleged facts from which the court could infer that the defendants maintained the Goldman Sachs funds to benefit themselves or their affiliates, including through fees collected by subsidiaries. The court rejected the argument that the loyalty claim merely duplicated the prudence claim.

Prohibited transactions: Counts II and III

Count II alleged prohibited transactions under ERISA Section 1106(a), including sales or exchanges with a party in interest and indirect transfers of Plan assets for the benefit of a party in interest. The court denied dismissal of both theories. It concluded that Falberg plausibly alleged that Goldman Sachs Asset Management, a Goldman Sachs subsidiary, was a party in interest and that the Plan’s allegedly excessive payments included assets that should have remained with the Plan.

Count III alleged that Goldman Sachs received consideration for its own account from parties dealing with the Plan, in violation of Section 1106(b)(3). The court denied dismissal. It concluded that Falberg’s allegations supported an inference that Goldman Sachs benefited from fees collected by its subsidiaries and that the statute was not limited only to traditional kickbacks.

The defendants also argued that Department of Labor exemption PTE 77-3 protected the transactions involving the affiliated funds. The court denied dismissal of Counts II and III on that basis. The exemption’s application depended on disputed facts, including whether the Plan was treated less favorably than other plans because other plans received fee rebates. The court held that the exemption was not clear from the complaint and the materials properly considered on the motion.

Monitoring claim: Count IV

The court denied dismissal of Count IV, which alleged that the defendants failed to monitor the Plan’s fiduciaries. Because the underlying ERISA claims survived and similar allegations had survived in other cases, the court concluded that the monitoring claim could also proceed.

Disposition

Judge Edgardo Ramos denied the defendants’ motion to dismiss in full and directed the Clerk to terminate the motion, Doc. 30. The opinion resolved only the pleading-stage motion; it did not determine whether Falberg would ultimately prevail on the claims.