District Court dismisses 401(k) participant suit against Microsoft involving BlackRock TDF

On February 7, 2023, the US District Court for the Western District of Washington, in Beldock v. Microsoft, dismissed plaintiffs’ claim that the inclusion of the BlackRock target date fund “suite” in the Microsoft 401(k) plan violated ERISA’s prudence standard.

The court’s decision on the key issue was relatively straightforward: A plaintiff cannot state an ERISA imprudence claim based simply on the comparison of the alleged underperformance a plan’s fund relative to the performance of selected “comparators.”

In this article we provide a brief note on the court’s decision on this issue, beginning with some background.

Background

Last year, a number of lawsuits were filed against large 401(k) plan sponsors/sponsor fiduciaries (including Microsoft) alleging that their use of the BlackRock TDF was imprudent under ERISA. In support of this claim, plaintiffs in each of these cases (again, including this claim against Microsoft) compared the performance of the BlackRock TDF with target date funds provided by Vanguard, T. Rowe Price, American Funds, and Fidelity.

These cases present a number of issues, including standing and whether, in judging the performance of the BlackRock TDFs, the comparators selected by plaintiffs are appropriate. While a number of recent cases have focused on that latter issue (see, e.g., our recent article Themes in 401(k) prudence litigation: standing and “meaningful benchmarks for comparison”), the judge in Beldock v. Microsoft focused on a much simpler issue: whether the mere allegation of underperformance of a given fund over a selected period is enough to support an imprudence claim under ERISA. He held that it did not.

Plaintiffs’ claim

The court summarizes plaintiffs’ claim on the key issue as follows:

They [plaintiffs] allege that Defendants breached their fiduciary duties by employing a “fundamentally irrational decision-making process.” They do not, however, allege any specific facts regarding that decision-making process. Instead, Plaintiffs compare the BlackRock TDFs’ returns over time to the returns realized by four of the other top-six largest TDF suites (the “Comparator TDFs”) and ask the court to infer, based on the BlackRock TDFs’ alleged underperformance, that Defendants acted imprudently in retaining the BlackRock TDFs in the Plan. Plaintiffs allege that a prudent fiduciary would have measured the returns of the BlackRock TDFs against these “specific, readily investable alternatives” rather than by the fund’s own custom benchmarks and would have switched to a different TDF provider based on the BlackRock TDFs’ alleged underperformance relative to the Comparator TDFs.

The court’s holding

The court held that this “allegation of imprudence based on performance relative to comparators” was insufficient to state a claim under ERISA and thus granted defendants’ motion to dismiss. In doing so, the court found that:

[A] complaint must allege “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Where there are “two possible explanations, only one of which can be true and only one of which results in liability,” Plaintiffs “cannot offer allegations that are ‘merely consistent with’ their favored explanation but are also consistent with the alternative explanation.” Indeed, “[s]omething more is needed, such as facts tending to exclude the possibility that the alternative explanation is true, . . . in order to render plaintiffs’ allegations plausible within the meaning of [the Supreme Court’s decisions in] Iqbal and Twombly.”

In further support of this conclusion, the court cited the 2018 Ninth Circuit decision in White vs. Chevron in which:

The [Ninth Circuit] concluded … that the plaintiffs’ allegations were insufficient to support a plausible inference that the defendant breached its fiduciary duties because they “showed only that [the defendant] could have chosen different vehicles for investment that performed better during the relevant period, or sought lower fees for administration of the fund” and that “[n]one of the allegations made it more probable than not that any breach of a fiduciary duty had occurred.”

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As we discussed above, in dismissing plaintiffs’ claims, the court found that it “need not decide whether the Comparator TDFs are meaningful benchmarks because even if they are, Plaintiffs have not plausibly alleged that Defendants breached their fiduciary duty of prudence by selecting the BlackRock TDFs, failing to monitor them, and retaining them in the Plan.”

Instead, the court simply held that plaintiff cannot make an adequate ERISA fiduciary imprudence claim based solely on alleged underperformance relative to selected “comparators.” This is a much more straightforward, pro-plan sponsor/sponsor fiduciary rule than we have in any other court at this point.

We will continue to follow this issue.