Ellis v. Fidelity Management Trust Co.
257 F. Supp. 3d 117
D. Mass.2017Background
- Plaintiffs (Ellis and Perry) brought a class action under ERISA § 404(a) alleging Fidelity breached fiduciary duties by managing the Fidelity Group Employee Benefit Plan Managed Income Portfolio (a stable value fund) too conservatively and pursuing wrap insurance/capacity for Fidelity’s business benefit. The Court certified a class and Fidelity moved for summary judgment.
- The Portfolio is a stable value fund that uses wrap contracts to guarantee book value; Fidelity is trustee and earns fees based on assets under management. Fidelity had to replace two wrap providers (Rabobank and AIG) that exited the business in/after 2009 and secured replacement wraps by 2012.
- The Portfolio’s declared benchmark was the Barclays Government/Credit 1–5 Year Index (1–5 G/C). Fidelity periodically evaluated and kept that benchmark after quantitative analysis and internal review.
- During the class period the Portfolio maintained $1.00 NAV, produced positive returns, outperformed its stated benchmark, and its crediting rate improved relative to median peers from 2010–2014. No investors suffered out-of-pocket losses.
- Plaintiffs’ expert (Dr. Pomerantz) acknowledged a conservative approach can be prudent and conceded that a shorter duration can be justified by wrap-availability and risk concerns; he identified alternative allocations that a prudent manager could adopt but did not identify specific discrete imprudent decisions.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Fidelity breached the duty of loyalty by pursuing wrap capacity to benefit its AUM | Fidelity prioritized growing wrap capacity/AUM and accepted stringent wrap terms for Fidelity’s business benefit, disadvantaging plan participants | Fidelity needed replacement wrap coverage when providers were leaving; obtaining wrap capacity was in Plan’s interest and did not place Fidelity’s interests ahead of participants | Court: No breach — plaintiffs failed to show excess or unnecessary wrap coverage or a conflict of interest; summary judgment for Fidelity |
| Whether Fidelity breached the duty of loyalty by agreeing to unduly conservative wrap guidelines | Fidelity agreed to overly stringent wrap guidelines that harmed the Portfolio’s competitiveness | Plaintiffs did not identify specific unreasonable guideline terms or available alternatives; expert did not find the guidelines imprudent | Court: No breach — plaintiffs produced no evidence that the guidelines were unreasonable or that less-restrictive alternatives were available |
| Whether Fidelity breached the duty of prudence by retaining an unduly conservative benchmark (1–5 G/C) | The benchmark was conservative, insulated PMs and caused underperformance versus peers | Fidelity performed repeated quantitative analyses, considered alternatives and competitor performance, and reasonably retained the benchmark given interest-rate uncertainty and wrap constraints | Court: No breach — benchmark-selection process was procedurally sound and retention was not shown to be unreasonable |
| Whether Fidelity breached the duty of prudence in managing/monitoring the Portfolio (performance and process) | Fidelity structured and managed the Portfolio to underperform peers and delayed corrective action; motives were self-interested | Fidelity employed a comprehensive investment process (PMs, research, trading, oversight committees), adjusted holdings over time, and improved crediting rates; plaintiffs point to no specific imprudent decisions | Court: No breach — plaintiffs failed to show particular imprudent actions or that the monitoring/process was inadequate; summary judgment for Fidelity |
Key Cases Cited
- Celotex Corp. v. Catrett, 477 U.S. 317 (summary judgment burden-shifting)
- Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (summary judgment standard re: nonmoving party evidence)
- Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133 (drawing inferences for nonmoving party; credibility not for summary judgment)
- Anderson v. Liberty Lobby, 477 U.S. 242 (reasonable jury standard)
- Bunch v. W.R. Grace & Co., 555 F.3d 1 (ERISA fiduciary duties discussion)
- Bunch v. W.R. Grace & Co., 532 F. Supp. 2d 283 (procedural/substantive review under ERISA)
- Tibble v. Edison Int’l, 135 S. Ct. 1823 (ERISA duty to monitor investments)
- Fish v. GreatBanc Tr. Co., 749 F.3d 671 (consider both substance and process for ERISA prudence)
- Glass Dimensions, Inc. v. State St. Bank & Trust Co., 931 F. Supp. 2d 296 (focus on methods used to investigate/evaluate investments)