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On June 26, 2025, the United States District Court District of Massachusetts issued a decision in Waldner v. Natixis Investment Managers, L.P., et al., holding, after a full trial, for defendants “on all counts.”
This was an “underperformance” case, in which plaintiffs alleged that the sponsor (Natixis, an investment manager) and the fiduciary committee for its in-house 401(k) plan had violated their ERISA duties of loyalty and prudence by including in the plan’s fund menu proprietary funds that “underperformed” – that is, generated lower returns than would have been generated by other (non-proprietary) funds.
The court found that the duty of loyalty issues generally turned on fact-specific questions of subjective motivation. In this article we are going to focus on the court’s decision on the prudence issues and its articulation of what constitutes a “prudent process.”
Why this decision matters to plan sponsors
Axiomatically, (quoting the court) “prudence is about process, not results.” Unfortunately, most District Court defined contribution plan prudence litigation ends at the motion to dismiss stage, because, as Justice Alito recently observed in his concurring opinion in Cunningham v. Cornell University:
In modern civil litigation, getting by a motion to dismiss is often the whole ball game because of the cost of discovery. Defendants facing those costs often calculate that it is efficient to settle a case even though they are convinced that they would win if the litigation continued.
At the motion to dismiss stage the courts never get to the issue of process, because the plaintiffs (typically) do not have information about, critically, the specifics of committee deliberations with respect to key decisions. That is what discovery is for.
So, instead, at the motion to dismiss stage, many courts look at (alleged) indirect indications of (or “proxies for”) an imprudent process, e.g., in a suit like this one, a retrospective comparison of the performance of the plan’s funds vs. those of an (alleged) benchmark/comparator.
In this case, however, the defendant, after losing its motion to dismiss, did decide to go through a full trial, complete with testimony by committee members and by dueling experts. As a result, the judge was able to consider the committee’s process in detail and make a determination that in this case that process met ERISA’s prudence standard, and, in the course of his opinion, providing a useful roadmap for fiduciaries.
The duty of prudence, practically speaking
The court describes (generally) the plan fiduciary’s ERSIA duty of prudence (quoting Tatum v. RJR Pension Inv. Comm. (Fourth Circuit 2014)) as follows:
Prudent procedures include “appointing an independent fiduciary, seeking outside legal and financial expertise, holding meetings to ensure fiduciary oversight of the investment decision, and continuing to monitor and receive regular updates on the investment’s performance.” … These procedures are not a “uniform checklist,” but rather indicators that a fiduciary is “engag[ing] in a reasoned decision-making process, consistent with that of a prudent man acting in a like capacity.”
It then notes that the Natixis committee “showed [its] prudence in several ways”:
Seeking and taking the counsel of experts: While the committee did not appoint an “independent fiduciary,” it did “seek outside legal and financial expertise,” receiving quarterly reports from its outside consultant, Mercer, and often taking Mercer’s advice with respect to fund menu decisions. It also retained a qualified, independent ERISA counsel who (among other things) provided the committee three separate sessions of fiduciary training and helped the committee draft its Investment Policy Statement and make “changes to the share classes of several funds on the Plan to ensure it was complying with ERISA.” A representative of Mercer and of its ERISA counsel attended every committee meeting.
Regular meetings: While at the beginning of the relevant period the committee “met sparsely” (around once a year), since 2019 it met at least three times a year.
Regular review of fund menu policy: While the committee did not conduct a formal “investment structure review” for much of the relevant period, “[a]t each meeting, it reviewed a detailed report from Mercer on the performance of every fund on the Plan.” These reports could also identify strategic fund menu issues, such as the need for a “small/mid-cap equity” option or the need to remove duplicative options.
Taking prudent actions with respect to underperforming funds: The committee also “acted prudently in responding to underperforming funds,” regularly adding/removing funds to a watch list “based on performance or changes in fund management or strategy,” and making changes to the plan’s fund lineup.
Adopting a fundamentally prudent fund menu structure: Finally, the court found that the plan’s “overall makeup” was prudent, providing a non-proprietary (and passive) default target date fund, a set of non-proprietary (and passive) “core” options, a set of nineteen actively managed “Active Core Options” (fourteen of which were proprietary), and four “specialty options” “for participants with more financial knowledge.”
Review of three specific cases
The court also considered (and applied the foregoing principles) to committee decisions with respect to specific funds:
AlphaSimplex Global Alternatives Fund (“an actively managed fund that focused on global equity, bond, currency, and commodity markets to mimic the risk and return characteristics of a diversified portfolio of hedge funds (i.e., a ‘fund of hedge funds’)”). The court found that “[t]he Committee put the fund on the Watch List at its first meeting after the underperformance became apparent.” And that “Mercer included a review and recommendation on ASG in each quarterly report while the fund was on the Watch List.” Finally, the court found that plaintiffs had not “shown that ASG’s performance was so bad that a prudent fiduciary would have removed it from the Plan earlier [than it did].”
Delafield Fund (“an actively managed fund that invested in the equity securities of undervalued domestic companies”). The court found that the committee followed a prudent procedure in reaching a decision that this fund had to be replaced, but that its (over-two-year) delay (after the removal vote) to actually remove the fund was imprudent. In this one instance of committee imprudence, however, the court found plaintiffs had failed to prove that the committee’s imprudence caused any loss, holding that plaintiffs’ comparators (the allegedly “better” funds proposed by plaintiffs that the committee could have chosen) were inapposite.
Gateway Fund (a fund that “seeks to garner returns close to those of the equity market but with less risk by essentially buying insurance against large negative returns, giving up a claim on large positive returns in the process”). The court credited testimony by committee members that the alleged “under-performance” issue with respect to this fund was a function of the use of an incorrect benchmark. The committee asked Mercer to recommend an alternative, which the committee adopted. Quoting the court: “This process was thorough, reasoned, and, ultimately, prudent.”
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This case usefully illustrates the axiom that a fiduciary’s ultimate defense against a challenge to its prudence is a prudent and well-documented process.
We will continue to follow this issue.