On September 30, 2022, in Pizarro v. The Home Depot, the United States District Court for the Northern District of Georgia found for defendant plan sponsor/sponsor fiduciaries on cross-motions for summary judgment. The case was brought (in 2018) by participants in Home Depot’s 401(k) plan, claiming that Home Depot and plan fiduciaries violated ERISA prudence requirements. It involves a number of important issues, including what sorts of procedural standards are appropriate for a fiduciary monitoring fees for investment advice and for monitoring fund performance, but in this article we are going to focus solely on the court’s decision with respect to the prudence of the retention in the plan fund menu of the BlackRock TDFs. As most sponsors are aware, the BlackRock TDFs have been targeted in a series of recent high-profile lawsuits.
We begin with a discussion of a procedural issue – the standards for a summary judgment.
The case comes up on motions by both defendants and plaintiffs for summary judgment. This is a little unusual – most 401(k) prudence cases have come up on motions to dismiss, and if the defendant loses, the case is usually settled. Here, however, while Home Depot was unable to get the case dismissed, the parties proceeded to discovery and then filed these cross motions for summary judgment based on the facts developed in discovery.
Because, in summary judgment cases, there has been some fact-finding, the decision is made by the judge not based solely on the law, but also on the facts produced. In that regard, “On cross-motions for summary judgment, the Court views the facts ‘in the light most favorable to the non-moving party on each motion.’” To win a motion for summary judgment, the moving party (e.g., where the defendants are moving for summary judgment, the defendants) must show that “that there is no genuine dispute as to any material fact and [that] the movant is entitled to judgment as a matter of law.”
If there is a “genuine dispute as to any material fact,” then (unless it is settled) the case goes to a full trial on the merits.
While, with respect to the Home Depot BlackRock TDF claims, it looks a lot like the cases filed more recently (against Black & Decker, Cisco Systems, Citigroup, Microsoft, etc.), this case was (as noted) brought in 2018, by a different law firm. Nevertheless, the fundamentals of the challenge to use of the BlackRock TDFs are very similar.
Plaintiffs claim that (quoting the court):
Home Depot Defendants engaged in an imprudent process in retaining the BlackRock TDFs in three principal ways: (1) they relied exclusively on BlackRock’s custom benchmark as their only benchmark for the BlackRock Funds; (2) they failed to investigate the BlackRock TDFs’ supposed consistent underperformance and make a “reasoned decision” to keep the Blackrock Funds, and (3) they failed to consider other TDFs despite that underperformance.
Axiomatically, ERISA prudence is about process – did defendant fiduciaries use a prudent process to arrive at the decisions they did? On motions to dismiss, plaintiffs usually don’t have access to, e.g., committee minutes or committee member testimony, and thus have to rely on “proxies” for the “ultimate” issue of imprudent process, such as apparently excessive fees or underperformance.
Here, however, because there was discovery, plaintiffs did have access to these sorts of facts and based their imprudence argument on, among other things, Home Depot plan committee minutes and depositions of committee members.
Keeping it brief, the court found that there were arguments on both sides of the three issues plaintiffs raised. For instance, the court found that plan fiduciaries “regularly met during the Class Period and received QIRs [Quarterly Investment Reviews] detailing the performance of Plan investments, including the BlackRock TDFs …, though the parties dispute the extent of those discussions.” Because there remained issues of fact on this question of “procedural prudence,” the court found that it could not grant summary judgment for either side – plaintiffs or defendants.
The use of custom benchmarks for TDFs
Before moving on to the critical issue of substantive prudence, it’s worth highlighting an issue raised by plaintiffs here that is also raised in the more recent BlackRock TDF cases (and indeed in many underperformance cases) – whether a plan’s “custom benchmark” is an appropriate “comparator” to determine whether, e.g., a TDF is “underperforming.”
This issue is particularly acute for TDFs because, in TDFs, the glidepath and asset allocation strategy generally will affect performance, and a challenge based on comparing, e.g., funds with different glidepaths is really (in effect) an argument that the glidepath itself is imprudent.
With respect to the plan fiduciaries use of custom benchmarks, Plaintiffs argued “that looking only to the BlackRock TDFs custom benchmarks meant that the [plan fiduciaries] compared the BlackRock TDFs ‘against themselves,’ not peer funds.”
The court was generally skeptical of plaintiffs’ argument:
The fact that other benchmarks may have been available – or were highlighted by the Plan and BlackRock – is not evidence that the custom benchmarks used by the [plan fiduciaries] were imprudent. Likewise, that other TDFs with different strategic approaches (i.e., different glide paths) were available for comparison, too, is not material to affirmatively demonstrating a breach of fiduciary duty. These “apples and oranges” comparisons are disfavored time and again.
Nevertheless, the court found that neither party had established, “as a matter of law,” that “that Home Depot Defendants considered only the custom benchmark throughout the Class Period or that, even if they did, it was necessarily imprudent [or necessarily prudent] to do so.”
Objective or substantive prudence/loss causation
Courts generally agree that, even where there is proven procedural imprudence, if an actually prudent fiduciary “could” have arrived at the same decision, then there is no liability for damages under ERISA. (To be clear, there might be injunctive relief in this situation, e.g., ordering the removal of the imprudent plan fiduciaries.) Quoting Supreme Court Justice Scalia:
I know of no case in which a trustee who has happened – through prayer, astrology or just blind luck – to make (or hold) objectively prudent investments . . . has been held liable for losses from those investments because of his failure to investigate and evaluate beforehand.
This may (in this case and also, e.g., in Brotherston v. Putnam) sometimes be characterized as an issue of “loss causation.” That defendants’ breach “proximately” caused a loss to the plan is an essential element of any claim for liability in these cases.
The idea behind what is (admittedly) a somewhat abstract inquiry into cause is that, if a prudent fiduciary could have made the same investment, then defendants’ procedural imprudence did not result in any actual loss to the plan.
The court’s holding
In this regard, with respect to the retention of the BlackRock LifePath Funds in the plan despite their alleged “underperformance,” the court found “the following undisputed evidence of substantive prudence:”
(1) the BlackRock TDFs tracked their custom benchmark based on annualized returns during the Class Period,
(2) BlackRock charged among the lowest fees of TDF providers,
(3) the BlackRock TDFs are presently a popular target date fund suite, and
(4) Home Depot Defendants’ investment consultant … consistently rated the funds as a “Buy.”
On this basis, the court held that, notwithstanding an issue of material fact with respect to procedural prudence, there was no issue of fact with respect of “objective prudence”/loss causation. That is, for the reasons stated in (1)-(4) above, retention of the BlackRock TDFs was prudent as a matter of law. It therefore granted summary judgment for the defendants.
* * *
Two points: First, the “facts” about the objective prudence of the decision to use the BlackRock TDFs did not, as a practical matter, require discovery – they are well known (generally – item (4) might have required, e.g., the production of an affidavit). Why could this case, then, not have been disposed of on a motion to dismiss? Second, on future motions to dismiss, or for summary judgment, in 401(k) prudence litigation (e.g., in the more recent BlackRock TDF cases), arguing objective prudence looks like a promising line of attack.
We will continue to follow this issue.