BENJAMIN REETZ, individually and as the representative of a class of similarly situated persons, and on behalf of the Lowes 401(k) Plan v. AON HEWITT INVESTMENT CONSULTING, INC.; LOWE‘S COMPANIES, INC.; ADMINISTRATIVE COMMITTEE OF LOWE‘S COMPANIES, INC.
No. 21-2267
United States Court of Appeals for the Fourth Circuit
July 17, 2023
Appeal from the United States District Court for the Western District of North Carolina, at Statesville. Kenneth D. Bell, District Judge. (5:18-cv-00075-KDB-DCK)
Argued: December 7, 2022 Decided: July 17, 2023
Before KING and RICHARDSON, Circuit Judges, and KEENAN, Senior Circuit Judge.
Affirmed by published opinion. Judge Richardson wrote the opinion, in which Judge Keenan joined. Judge King wrote an opinion dissenting in part.
ARGUED: Matthew W.H. Wessler, GUPTA WESSLER PLLC, Washington, D.C, for Appellant. Brian D. Boyle, O‘MELVENY & MYERS LLP, Washington, D.C., for
On behalf of a class, Benjamin Reetz sued Aon Hewitt Investment Consulting for investment advice given to Lowe‘s Home Improvement to help manage its employees’ retirement plan. Aon, first as an investment consultant and later as a delegated fiduciary, owed the plan fiduciary duties under the Employee Retirement Income Security Act. Reetz claims that Aon‘s conduct violated the core duties of loyalty and prudence.
First, the duty of loyalty. While Aon was Lowe‘s investment consultant, it pitched its delegated-fiduciary services. Like it sounds, such services allow a fiduciary—here, the committee that runs Lowe‘s plan—to outsource its duties to a third party. Reetz argues Aon‘s sales efforts were self-motivated and thus violated the duty of loyalty. Also, around the same time, Aon recommended that Lowe‘s streamline the investment menu it offered to plan participants. Reetz suggests that this advice was not solely motivated by the plan‘s best interest, it was shaded by the desire to land the deal, so it was disloyal.
Second, the duty of prudence. After Lowe‘s accepted the recommendation to streamline its investment menu and hired Aon as delegated fiduciary, Aon moved $1 billion in plan assets to a relatively untested investment fund that it created. The fund didn‘t do so well. So Reetz alleges the fund selection and retention breached the duty of prudence. He argues that Aon did not seriously consider alternative funds when it invested the plan assets in the fund and did not properly monitor the fund once it was chosen.
After a five-day bench trial, the district court held that Aon, in fact, did not breach its fiduciary duties. Reetz appeals, but we affirm. To start, Aon‘s sales efforts to obtain the delegated fiduciary work were not investment advice, so Aon owed no duty of loyalty.
I. Background
Lowe‘s Home Improvement sponsors a retirement plan for its employees. The plan—one of the largest in the country—maintains around $5 billion in assets for more than 260,000 employee participants. Lowe‘s tasks the Administrative Committee of Lowe‘s Companies, Inc. with running the plan. This Committee owes fiduciary duties to the plan. But managing the plan is difficult for the Committee because it primarily consists of non-investment professionals. In comes Aon.
Aon provides investment consulting and advice. Lowe‘s, through the Committee, hired Aon in 2008 as an investment consultant. In that role, Aon owed the plan fiduciary duties and advised the Committee—which retained ultimate decision-making authority—on plan management. With Aon‘s help, the Committee crafted a menu of options from
During Aon‘s tenure as investment consultant, it was separately trying to get a foothold in the delegated-fiduciary market.2 Delegated-fiduciary services allow plan administrators—like the Committee—to take a backseat role in plan management. While a plan administrator solicits advice from investment consultants, with a delegated fiduciary, the administrator outsources primary responsibility for plan management.
And Aon had a strategy to push its new services: pitch preexisting consulting clients. This strategy—selling a new service to a client who uses your other services—is called “cross-selling.” Lowe‘s, as a preexisting consulting client with a massive plan, was in Aon‘s crosshairs.
To complete a “cross-sell,” Aon would enlist the investment consultants assigned to that client.3 After all, the consultants already knew the client and had relationships with
Around the end of 2012, Aon and the Committee became concerned with the investment menu offered to participants. It was too complicated.4 So the Committee asked Aon to present alternative plan structures. Aon obliged at a June 2013 meeting, where it recommended streamlining the menu with more intuitively named options. But the Committee didn‘t jump at the recommendation; instead, they requested a “ground up” review to identify “the ideal plan.” J.A. 1865.
Aon reported its findings from the “ground up” review at a November 2013 meeting. Through Abshire and Punnoose—who had replaced Van Den Brink between the June and November 2013 meetings—Aon outlined three possible structures: Traditional, Alternative, and Emerging. The Traditional structure was effectively the status quo for Lowe‘s. The Emerging structure proposed drastic streamlining, whittling the menu down to a few investment options. And those options had objective-based names that were easy to grasp (e.g., the Growth option and the Inflation Protection option). The Alternative
But the Committee was still not ready to decide. So Aon again presented on plan structure at a December 2013 meeting. Shortly before the meeting though, a significant event occurred: Punnoose mentioned Aon‘s delegated-fiduciary services to Lowe‘s for the first time. He had been speaking with Aon‘s sales executives on how to pitch Lowe‘s. And he wanted to give a presentation on the services at the December meeting, but it was scrapped when Aon‘s compliance compartment failed to approve it. Still, Punnoose mentioned the service in a pre-meeting email to Committee members. He sent information about Aon‘s delegated-fiduciary services and said it “dovetails nicely” with Aon‘s recommended changes to the plan structure. J.A. 1877. Lowe‘s essentially rebuffed the overture.
During the December 2013 meeting, Aon again recommended the Alternative structure. And the Committee seemed to agree. So going away from the meeting, Aon planned to next present on implementing the Alternative structure. But before it had the chance, there were delays: a cancelled March 2014 meeting and a June 2014 meeting that took up other matters. By the time the Committee was ready to turn back to plan structure, they needed another high-level discussion. So an October 2014 meeting was scheduled for that purpose.
Before the October 2014 meeting, Aon again raised its delegated-fiduciary services. It requested that the Committee allow Aon‘s sales team to accompany and pitch
At the end of the October 2014 meeting, the new plan structure went to a vote. Despite earlier interest in the Alternative structure, the Committee ultimately decided (with several new members) that the Emerging structure would be “easier to communicate to participants.” J.A. 6206. So the Committee formally adopted the Emerging plan structure. Although the Committee understood that delegated-fiduciary services was a distinct matter from plan structure (i.e., the Emerging structure could be implemented with or without a delegated fiduciary), they also went ahead and voted to engage a delegated fiduciary. But—at least to Aon‘s belief5—the Committee had not yet selected a delegated fiduciary. So Aon‘s sales pitch continued. Aon held an informal December 2014 meeting with
So Aon closed the deal. Reetz claims this was a conflict of interest. But that‘s not all. Reetz also challenges Aon‘s conduct after becoming delegated fiduciary. Reetz is dissatisfied with one fund Aon chose for class assets. To understand the allegation, we need to take a step back. When Aon moved into the delegated-fiduciary market, it created a Collective Trust. The trust was a vehicle for Aon to create investment funds catered to delegated-fiduciary clients. This included three multi-asset-class objective-based funds: the Growth Fund, Income Fund, and Inflation Strategy Fund. Using more than one asset class—equities and bonds, for example—these funds sought to achieve a given objective: growth, income, or inflation protection.
Aon‘s role in running each fund was a manager-of-managers role. That is, the fund invested in other funds—sometimes called a fund of funds. Aon dictated asset allocations in the fund. And it chose various asset managers (all of whom were unaffiliated with Aon). But Aon themselves did not pick the assets to invest in, the asset managers did. Aon‘s management of the asset managers was done through its Delegated Portfolio Oversight Committee.
The Growth Fund—the only fund at issue—was essentially the trust‘s equity fund. In developing the fund, Aon reviewed alternative “growth” funds on the market. But it
When Aon became the Committee‘s delegated fiduciary, “it was up to Aon to pick” which investment fund to use for the three objective-based options6 in the Emerging plan menu. J.A. 1888. It didn‘t take Aon long to make its selections. It chose the Growth Fund from its collective Trust as the Emerging structure‘s Growth option. In fact—given that Aon was tracking the Growth Fund‘s performance, and it was already familiar with other options from its market review during the creation of the Growth Fund—it did not compare the Growth Fund to comparable funds at the time of selection. Once the fund was chosen, all plan assets previously invested in the plan‘s eight equity options were transferred to the Growth Fund (unless the participant directed otherwise). But this all came as no surprise to Lowe‘s; it had “effectively assumed that Aon would likely use its own funds from the time that Aon was selected as the delegated fiduciary.” J.A. 1891.
While unsurprising, the fund might be described as an unconventional choice. It didn‘t have much of a record. And the record it did have was underwhelming. At the time
Returns for investments in equities were “substantially higher” than projected during the relevant period. J.A. 1906. Unfortunately for the fund participants, the Growth Fund‘s asset allocation meant that it didn‘t fully capitalize on these strong markets. But as designed, the Growth Fund showed less volatility. And as markets shifted in early 2021, the Growth Fund “performed very well.” J.A. 1920. Still, there is no avoiding the bottom line: the fund‘s performance “lagged the returns of comparable growth funds and benchmarks.” J.A. 1912. And with so much money invested, even a small difference in rate of returns results in eye-popping differences in returns. By some calculations, if plan assets had been invested in other funds, the class would have between $70 and $277 million more saved for retirement. So plan participants were not happy.
Alleging that Lowe‘s, the Committee, and Aon breached their fiduciary duties, Reetz—a former Lowe‘s employee and participant in the plan—filed this class action. A class was certified of all plan participants “whose Plan account balances were invested in the Aon Growth Fund at any time on or after October 1, 2015.” J.A. 1846 (cleaned up). After the district court denied the parties’ cross-motions for summary judgment, Lowe‘s and its Committee settled with the class. But Aon elected to go to trial. The district court
II. Discussion
Aon owed fiduciary duties to the plan under ERISA, including the duties of loyalty and prudence. See
A. Loyalty
Reetz argues that Aon violated the duty of loyalty in two ways. First, by cross-selling its delegated-fiduciary services. But under ERISA, § 1104‘s duties only attach “to the extent” a fiduciary is acting in his capacity as fiduciary. See
a. Cross-selling
Determining whether a person was performing a fiduciary function starts with ERISA‘s text. Section 1002 says a person only acts as a fiduciary “to the extent” it engages in certain conduct.
Reetz‘s position can‘t stand. Start with the idea that selling (but not yet cross-selling) services is not investment advice. For this point, there‘s plenty of out-of-circuit case law. See, e.g., Santomenno v. Transamerica Life Ins. Co., 883 F.3d 833, 837–38 (9th Cir. 2018) (“[A] plan administrator is not an ERISA fiduciary when negotiating its compensation with a prospective customer . . . [because it is] not rendering investment advice.“); McCaffree Fin. Corp. v. Principal Life Ins. Co., 811 F.3d 998, 1002–03 (8th Cir. 2016); Renfro v. Unisys Corp., 671 F.3d 314, 324 (3d Cir. 2011); Hecker v. Deere & Co., 556 F.3d 575, 583 (7th Cir. 2009). And it makes perfect sense. When trying to sell services, a hopeful fiduciary does not render investment advice. See Santomenno, 883 F.3d at 838.
Is there good reason not to extend the same analysis to cross-selling? No. Just like on an initial sale or negotiation, when a cross-seller pitches his other services, he is performing an “arms-length negotiation” that doesn‘t constitute a fiduciary function. McCaffree, 811 F.3d at 1002. The only aspect of the relationship that has changed is the cross-seller does owe fiduciary duties in other capacities, while with the initial sale, no fiduciary duties have attached yet. See Renfro, 671 F.3d at 324 (reasoning that when selling
Aon‘s sales efforts were not investment advice. Accordingly, it was not acting as a fiduciary so owed no fiduciary duties.
b. Plan structure
When Aon advised Lowe‘s about the investment menu offered to plan participants, it was acting as a fiduciary. So it was required to act loyally. The duty of loyalty stems from § 1104‘s charge that a fiduciary act “solely” in the plan‘s interest.
The duty, however, does not mean a fiduciary is disqualified whenever it has a conflict of interest. See, e.g., DiFelice, 497 F.3d at 421. Nor does it necessarily mean that a fiduciary acts disloyally where the proposed action aligns with its own interest. See Donovan v. Bierwirth, 680 F.2d 263, 271 (2d Cir. 1982). But it does mean that a fiduciary must act as if it is free of any conflict. Bedrick, 93 F.3d at 154. In short, a fiduciary can have self-interest, it just can‘t act on it.
So Aon had an interest in Lowe‘s adopting a streamlined menu. But the problem for Reetz is he must also show that Aon acted on that interest—that is, it failed to act as if it were free of any conflict. See Bedrick, 93 F.3d at 154. And, to the contrary, the district court found—in a factual finding to which we give deference—that Aon did not act disloyally. Reetz reads the district court‘s order differently. He says the district court held that Aon‘s employee Punnoose acted disloyally by “allow[ing] his sales efforts to color his restructuring recommendations.” Appellant‘s Br. at 34–35 (quoting J.A. 1938). He argues
A quick review of that other evidence helps explain the district court‘s finding. The foundational June 2013 presentation where Aon recommended structural change was requested by Lowe‘s given certain challenges the plan was facing. There was no evidence that Aon had “any thought of starting a sales effort in developing the June 2013 presentation.” J.A. 1936. Even when Aon‘s sales efforts were in full stride by the October 2014 presentation, their investment advice remained evenhanded. The written recommendations at that meeting were consistent with Aon‘s longstanding recommendation: adopt the Alternative structure, “which was less likely to lead to the engagement of a delegated fiduciary.” J.A. 1936. And while the Committee‘s meeting minutes recorded an “ultimate recommendation” of the Emerging structure, Aon “present[ed] a balanced view between the Alternative and Emerging structures.” J.A. 1873. In fact, when the Committee started tilting towards the Emerging structure during the meeting—in part because they thought it would be “easier to communicate to participants,” J.A. 6206—Aon suggested adding a tier of passively managed funds which likely would have reduced any fee they were entitled to as a delegated fiduciary. So Aon acted as if it were free of any conflict.
In considering this evidence after the bench trial, the district court articulated the correct legal standard—and we will not lightly assume it disregarded it. See J.A. 1929
B. Prudence
The duty of prudence is shorthand for a fiduciary‘s responsibility to act “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”
Start with the selection of the Growth Fund. Aon created the Growth Fund after an extensive review of the available options on the market left them dissatisfied. So by the time Aon was selected as delegated fiduciary, it had already decided where the plan‘s Growth-option assets were headed: the Growth Fund. This means that—once chosen as delegated fiduciary—Aon did not “consider[] any funds other than the Aon Growth Fund for the ‘Growth’ equity option in the Lowe‘s Plan.” J.A. 1893. According to Reetz, that‘s the end of the analysis—it makes no difference whether Aon engaged a full consideration of comparable funds before becoming delegated fiduciary. But Reetz‘s position ignores the context specific aspect of the duty of prudence.9 See Fifth Third Bancorp, 573 U.S. at 425. A simple example makes the point. Imagine that one week before becoming a fiduciary, an investment advisor does an exhaustive review of options in the market. Would anyone contend the advisor—a week later when he becomes a fiduciary—must re-review the market? No, otherwise our instruction that when reviewing a decision for prudence, there can be no “uniform checklist” and “a variety of actions can support a
On that question, the record is clear. When Aon created the Growth Fund, it considered “other potential investment funds and strategies.” J.A. 1893. In fact, it considered the very funds that Reetz now points to. So Aon “investigat[ed], research[ed], and review[ed] the options.” See Pepper, 663 F.3d at 216 n.8. But it just didn‘t like what it saw. The available funds did not allocate assets in a way “consistent with Aon‘s thinking.” J.A. 1893. In other words, Aon thought it could do better. So in a sense, Aon went beyond the duty. It didn‘t merely investigate, it created.10 It tweaked the available options to chart its own path based on its market research. And while Aon created the Growth Fund in 2013, it had been “closely tracking the Growth Fund‘s performance since its inception and understood how it compared against benchmark and peer funds” when it selected the Fund for Lowes. J.A. 1898. Maybe—in hindsight—Aon was wrong that it could do better (or maybe it was right and hit the market at the wrong time). Again, though, prudence looks for process, not results. The process here was reasoned and calculated to maximize the benefits of the plan, so Aon cleared the prudence bar.
Aon staffed a committee to monitor its funds, including the Growth Fund: the Delegated Portfolio Oversight Committee. Through its Oversight Committee, Aon reviewed the underlying managers’ work (recall that Aon did not themselves pick investments; it was a manager of managers). When Aon saw something it didn‘t like, it
True, Aon never asked whether it should abandon the Growth Fund for another fund in so many words. But in this context, it wasn‘t required to. As the district court found, “Aon over time exercised its expertise to keep apprised of alternate investments in the market” and compared the Growth Fund to those alternatives. J.A. 1956. And, through its manager-of-managers role, it could—and did—make underlying tweaks to the Growth Fund without jumping ship entirely. Together, these actions discharged Aon‘s “continuing duty to monitor . . . investments and remove imprudent ones.” Tibble, 575 U.S. at 529.
* * *
While Aon was recommending that Lowe‘s restructure its retirement plan, it was also pitching Aon‘s delegated-fiduciary services. Reetz says the investment advice was intended to spur Lowe‘s into hiring a delegated fiduciary, so Aon violated its duty of loyalty. That‘s not so. Selling services is not investment advice. And the actual investment advice—streamlining the plan menu—was not informed by Aon‘s desire to sell its services.
AFFIRMED.
Because defendant Aon Hewitt Investment Consulting, Inc. (“Aon“) breached the duty of loyalty it owed to the plaintiffs under the Employee Retirement Income Security Act of 1974 (“ERISA“), I dissent from the majority‘s ruling on that issue. As explained below, I would reverse the judgment on the duty of loyalty issue and remand for further appropriate proceedings, including calculation of damages.12
I.
It is axiomatic that “[t]he fiduciary of an ERISA plan must act ’solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits . . . and defraying reasonable expenses.‘” See Bedrick v. Travelers Ins. Co., 93 F.3d 149, 154 (4th Cir. 1996) (quoting
[e]ven the most careful and sensitive fiduciary . . . may unconsciously favor its profit interest over the interests of the plan, leaving beneficiaries less protected than when the trustee acts without self-interest and solely for the benefit of the plan.
Id. (internal quotation marks omitted). To that end, “[t]here is no balancing of interests; ERISA commands undivided loyalty to the plan participants.” Id. (emphasis added). More
II.
Contrary to my friends in the majority, I am satisfied that Aon—which was indisputably an ERISA fiduciary rendering “investment advice” to the Lowe‘s 401(k) retirement plan—did not “make [all] decisions ... with an eye single to the interests of the . . . [plan] participants.” See DiFelice, 497 F.3d at 418 (emphasis added); Bedrick, 93 F.3d at 154. That is, Aon “failed to act as if it were free of any conflict.” See ante at 16. Perhaps that point is best illustrated by the district court‘s findings of fact, which tellingly reveal the extent of Aon‘s self-serving and disloyal conduct. See, e.g., J.A. 1872 (court finding that Aon senior fiduciary consultant Punnoose did not act with “singular focus” toward Lowe‘s 401(k) retirement plan but was “focused on . . . selling additional services and obtaining increased fees“); id. (court finding that Punnoose was “focus[ed] on encouraging, arranging and participating” in cross-selling delegated services “to burnish his candidacy to become a Partner at Aon“); id. at 1938 (court finding that Punnoose “allowed his sales efforts to color his restructuring recommendations” for Lowe‘s 401(k) retirement plan, and that fiduciary investment advice discussions were utilized by Aon “as a springboard for the benefit of [its] ... delegated services sales effort“).13
III.
I respectfully dissent in relevant part and would reverse.