Krohnengold v. New York Life Insurance Company

Background

Seven current or former participants in two New York Life 401(k) plans brought a proposed class action under the Employee Retirement Income Security Act (ERISA). The defendants were New York Life Insurance Company, its Fiduciary Investment Committee, and committee members.

The plaintiffs challenged the defendants’ use of New York Life’s Fixed Dollar Account as the plans’ default investment option and the selection and retention of nine proprietary MainStay mutual funds. They alleged that the Fixed Dollar Account produced relatively low returns and that eight of the nine MainStay Funds had higher costs and worse performance than selected benchmarks or comparable funds. They asserted five types of ERISA claims: breach of fiduciary duties, prohibited transactions, self-dealing, co-fiduciary liability, and violation of ERISA’s anti-inurement provision.

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(1), arguing that some plaintiffs lacked constitutional standing, and under Rule 12(b)(6), arguing that the amended complaint did not adequately state a claim.

Standing and the Fixed Dollar Account

The court held that four plaintiffs—Joseph Bendrihem, Larry Gilbert, Anthony Medici, and Rafael Musni—could not pursue claims concerning the Fixed Dollar Account because they lacked standing. The court dismissed those claims without prejudice for lack of standing. It found that the evidence and allegations did not establish that those plaintiffs were injured by being placed into the account as a default investment option.

The court found that Stuart Krohnengold, Wayne Antoine, and Lee Webber had sufficiently supported standing at this stage. Their affidavits stated that they did not choose an investment when first enrolled and were therefore automatically placed in the Fixed Dollar Account. The court concluded that the defendants’ evidence did not contradict those allegations sufficiently to defeat standing on the motion.

The court nevertheless dismissed Krohnengold’s, Antoine’s, and Webber’s fiduciary-duty claims based on the Fixed Dollar Account as barred by ERISA’s six-year statute of repose. The court reasoned that the alleged designation of the account as the default option occurred more than six years before the lawsuit was filed. It rejected the plaintiffs’ reliance on the continuing duty to monitor investments because the amended complaint challenged the default designation, rather than clearly alleging that the account had to be removed entirely as an investment option.

Fiduciary-Duty Claims About the MainStay Funds

The court allowed the fiduciary-duty claims concerning eight MainStay Funds to proceed: the Income Builder Fund, Epoch U.S. All Cap Fund, Epoch U.S. Small Cap Fund, Retirement 2010 Option Fund, Retirement 2020 Option Fund, Retirement 2030 Option Fund, Retirement 2040 Option Fund, and Retirement 2050 Option Fund.

The court concluded that the plaintiffs plausibly alleged a flawed investment-selection process. Their allegations included persistent underperformance against selected benchmarks or comparable funds, higher fees than similar investment options, limited outside assets or significant investment outflows, and benefits to the defendants from directing plan assets into proprietary funds. The court declined to resolve the defendants’ challenges to the plaintiffs’ comparisons at the motion-to-dismiss stage, stating that those issues were better addressed after discovery.

The court dismissed the fiduciary-duty claim concerning the MainStay MacKay International Equity Fund. The amended complaint alleged only that the fund’s expense ratio was higher than average and that the plans had previously used a more expensive share class, without specifying the amount of the difference or providing additional supporting facts.

Other ERISA Claims

The court denied dismissal of the prohibited-transaction claim. The defendants argued that statutory and regulatory exemptions applied, but the court treated those exemptions as affirmative defenses that could not support dismissal unless their applicability was clear from the complaint. The court found that it was not clear from the pleadings that the exemptions applied.

The court also denied dismissal of the self-dealing claim. The plaintiffs alleged that the defendants’ investment decisions generated direct and indirect fees and other compensation for New York Life and its affiliates, and that the individual committee members could benefit through increased compensation or promotion. The court found those allegations sufficient to plausibly allege violations of ERISA’s self-dealing provisions.

The court denied dismissal of the co-fiduciary-liability claim because the defendants’ only argument was that the plaintiffs had not alleged an underlying fiduciary breach. Since the court found that some fiduciary-duty claims could proceed, that argument did not justify dismissal.

The court granted dismissal of the anti-inurement claim. ERISA’s anti-inurement provision generally prevents plan assets from benefiting an employer or being used for purposes other than providing plan benefits and paying reasonable administrative expenses. The court explained that the plaintiffs had not alleged that plan assets were improperly reverted or diverted to New York Life. Allegations that plan assets were held in New York Life’s general account under a group annuity contract, and that the plans paid withdrawal and administrative expenses, were insufficient without allegations of an improper benefit or use of the assets.

Disposition

The court granted in part and denied in part the defendants’ motion to dismiss. It dismissed without prejudice the Fixed Dollar Account claims of Musni, Bendrihem, Gilbert, and Medici for lack of standing; dismissed Krohnengold’s, Antoine’s, and Webber’s fiduciary-duty claims concerning that account; dismissed the fiduciary-duty claims concerning the MacKay International Equity Fund; and granted dismissal of the anti-inurement claim with leave to amend. The motion was otherwise denied.

Judge Jesse M. Furman granted the plaintiffs leave to file a second amended complaint within four weeks. If they filed one, the defendants were directed to answer or otherwise respond within three weeks after filing. If they did not, the defendants were directed to respond to the remaining claims within six weeks of the opinion and order. The classification is procedural because the order was a Rule 12 dismissal ruling, even though the court analyzed the sufficiency of several ERISA claims.