Moitoso v. FMR LLCMoitoso v. FMR LLC
Case Information
*1 UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS ___________________________________
)
KEVIN MOITOSO, TIM LEWIS, )
MARY LEE TORLINE, and SHERYL )
ARNDT, individually and as )
representatives of a class )
of similarly situated persons, )
and on behalf of the )
FIDELITY RETIREMENT SAVINGS PLAN, )
)
Plaintiffs, )
) v. ) CIVIL ACTION
) NO. 18-12122-WGY FMR LLC, FMR LLC FUNDED )
BENEFITS INVESTMENT COMMITTEE, )
FMR LLC RETIREMENT COMMITTEE, )
FIDELITY MANAGEMENT & RESEARCH )
COMPANY, FMR CO., INC., and )
FIDELITY INVESTMENTS INSTITUTIONAL )
OPERATIONS COMPANY, INC., )
)
Defendants. )
___________________________________)
YOUNG, D.J. March 27, 2020
MEMORANDUM & ORDER
I. INTRODUCTION
Kevin Moitoso, Tim Lewis, Mary Lee Torline, and Sheryl Arndt (collectively, the “Plaintiffs”) are former employees of FMR LLC or its affiliates and beneficiaries of the Fidelity Employers’ defined contribution 401(k) retirement plan, the Fidelity Retirement Savings Plan (the “Plan”). Pls.’ Fourth Am. Compl., (“Compl.”) ¶¶ 1, 18-21, 46, ECF No. 77. They have *2 brought this lawsuit pursuant to 29 U.S.C. §§ 1132(a)(2)-(3) on behalf of a certified class of former Fidelity employees, and on behalf of the Plan itself, asserting breaches of fiduciary duty in violation of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended, 29 U.S.C. § 1001 et seq.. Compl. ¶¶ 15, 127-162; Stipulation and Order Regarding Class Certification (“Class Cert.”), ECF No. 83
The Plaintiffs sued two groups of defendants (collectively, the “Defendants” or “Fidelity”). Compl. ¶ 2. The first group consists of the Plan’s named fiduciaries: FMR LLC, FMR LLC’s Board of Directors, FMR LLC Funded Benefits Investment Committee (“FBIC”), and FMR LLC Retirement Committee (“Retirement Committee) (collectively, the “Plan Fiduciaries”). Id. ¶¶ 2, 22-28. The second group consists of the plan’s sponsor, FMR LLC, and the non-fiduciaries Fidelity Management & Research Company (“FMR”), FMR Co., Inc. (“FMRC”), and Fidelity Investments Institutional Operations Company, Inc. (“FIIOC”) (collectively, “Fidelity Entities”). [1] Id. ¶¶ 2, 29-34.
The Plaintiffs first bring claims against the Plan Fiduciaries for breach of the fiduciary duties of loyalty and prudence in violation of ERISA § 404, 29 U.S.C. § 1104(a)(1)(A)- *3 (B), (D) (count I). Compl. ¶¶ 127-134. The Plaintiffs further accused the Plan Fiduciaries of breaching the duty of impartiality, in violation of 29 U.S.C. § 1104(a) (count II), but later withdrew that claim without prejudice. Compl. ¶¶ 135- 141; Pls.’ Opp’n Defs.’ Mot. Summ. J. (“Pls.’ Opp’n”) 10, ECF No. 154. The Plaintiffs also accuse the Plan Fiduciaries of engaging in prohibited transactions with a fiduciary in violation of 29 U.S.C. § 1106(b) (count III). Compl. ¶¶ 142- 147. The Plaintiffs charge FMR LLC with failure to monitor the Plan Fiduciaries (count IV), id. ¶¶ 148-154, and seek from all the Fidelity Entities equitable disgorgement of profits (count V), id. ¶¶ 155-162. See 29 U.S.C. §§ 1109(a), 1132(a)(2)-(3). Fidelity asserts as an affirmative defense that all of the Plaintiffs’ charges are not only barred by a prior court- approved class action settlement but are also time-barred. Defs.’ Supp. Mem. Summ. J. (“Defs.’ Mem.”) 9-12, ECF No. 140. Additionally, Fidelity argues that it has not violated any fiduciary duties as matter of law. Id. at 13-20. The two parties agreed to a case stated hearing on some (but not all) issues, which this Court conducted on November 20, 2019. [2] Joint Letter from Pls.’ and Def.’s Regarding Nov. 7, 2019 Sum. J. *4 Proc. (“Case Stated Letter”), ECF No. 209; Electronic Clerk’s notes, ECF No. 221.
Having heard the arguments of both sides, the Court now rules that, on count I, Fidelity has breached its duty of prudence by failing to monitor its mutual fund investments and by failing to monitor recordkeeping expenses. Fidelity, however, has not breached its duty of prudence by failing to investigate alternatives to those mutual funds because a prudent fiduciary would not be required to conduct those specific investigations. Fidelity additionally has not breached its duty of loyalty. On count III, Fidelity has not engaged in prohibited transactions because its dealings with proprietary products were no less favorable to the Plan as a whole than to other shareholders of Fidelity funds.
Counts IV and V are both derivative of counts I and III.
Regarding count IV, this Court rules that FMR LLC is liable for
the breach of its duty to monitor the Plan Fiduciaries with
regards to their ongoing handling of the mutual fund investments
and recordkeeping expenses. On count V, the Plaintiffs may
recover from Fidelity Entities for any profits traceable to the
aforementioned breach of the fiduciary duty to monitor. At
trial, the Plaintiffs will bear the burden of proving the extent
of any losses, and Fidelity will bear the burden of proving that
any losses to the Plan were not caused by the lack of
*5
monitoring. See Brotherston v. Putnam Invs., LLC,
A. Procedural History
The Plaintiffs first filed this suit On October 10, 2018,
Class Action Compl. 1, ECF No. 1, amending the complaint three
times. Am. Compl., ECF No. 31; Second Am. Compl., ECF No. 37;
Third Am. Compl., ECF No. 56. On May 2, 2019, the Plaintiffs
filed their fourth and final amended complaint. See generally
Compl. On September 6, 2019, the Plaintiffs filed a motion for
partial summary judgment, and the Defendants then cross-moved
for summary judgment. Pls.’ Mot. Partial Summ. J., ECF No. 135;
Defs.’ Mot. Summ. J., ECF No. 139. Prior to considering the
summary judgment motions, this Court entered a memorandum and
order denying the Plaintiffs’ request for a jury trial but
providing for the selection of an advisory jury. See Moitoso v.
FMR LLC,
B. The Procedural Framework of this Decision: The Case Stated
While the summary judgment motions were sub judice, the
parties proposed that the Court resolve some -- but not all --
of the issues as a case stated. Case Stated Letter. This case
stated hearing was based on stipulations by both parties that
there were no material facts in dispute on any issue except the
Defendants’ statute of limitations defense. Case Stated Letter
1. “Case stated hearings provide an efficacious procedural
alternative to cross motions for summary judgment.” Sawyer v.
United States,
At the case stated hearing this Court announced that it would base its decision on the undisputed statements of facts provided by both parties. Tr. Case Stated Hr’g 4; Pls.’ Local R. 56.1 Statement Undisputed Material Facts (“Pls.’ SOF”), ECF *7 No. 137; Statement Undisputed Material Facts Supp. Defs.’ Mot. Summ J. (“Defs.’ SOF”), ECF No. 141; Pls.’ Resp. Defs.’ SOF Statement Material Facts Pursuant Local R. 56.1 (“Pls.’ Resp. SOF”), ECF No. 153; Defs.’ Resp. Pls.’ SOF, (“Defs.’ Resp. SOF”), ECF No. 167.
It is worth remarking that, in this Court’s experience, case stated hearings usually involve but a modicum of fact finding -- nothing more than the drawing of reasonable inferences. Here, by converting the summary judgment record to their case stated presentation the parties have provided the Court with a plethora of affidavits characterizing the facts. See D. Brock Hornby, The Business of U.S. District Courts, 10 Green Bag 2D 453, 462 (2007) (noting that much of the work of the modern day judge consists of poring over affidavits and other “facts” submitted by lawyers instead of holding trials). This Court has independently drawn its own inferences from the stipulated facts.
C. Factual Background
This case concerns the nature of the fiduciary duties that Fidelity owes to the Plan, along with the current and former employees that are beneficiaries of this Plan.
The Plan is a defined contribution plan within the meaning of 29 U.S.C. § 1002(34) and qualified under 26 U.S.C. § 401 (a “401(k) plan”). Pls.’ SOF ¶ 2; Compl. ¶ 46. FMR LLC is the *8 sponsor of the Plan, pursuant to 29 U.S.C. § 1002(16)(B). Pls.’ SOF ¶ 1. In defined contribution plans, fiduciaries curate diversified investment options in which plan participants can invest. Compl. ¶ 47; see 29 U.S.C § 1104(a)(1)(C). The Plan allowed participants to invest in Fidelity funds, non-Fidelity funds available through a self-directed brokerage account, and two monitored options, the Portfolio Advisory Service at Work account (“PAS-W”) and the Fidelity Freedom K Funds. See Decl. Dave Rosenberg (“Rosenberg Decl.”), Ex. 56, Your Summary Plan Description FID000137, ECF No. 142-56.
Fidelity’s Plan included more than 58,000 participants and assets under management of approximately $17,000,000,000 as of the end of 2016. Pls.’ SOF ¶ 4; Compl. ¶ 51. All members of the class action are former Fidelity employees who were invested in at least one fund available through the Plan. Id. ¶ 119 (describing precise parameters of certified class).
The current litigation is not the first class action concerning this particular Plan. In 2013, a class of the Plan’s beneficiaries alleged that Fidelity breached its fiduciary duty of loyalty by offering only Fidelity mutual funds on the Plan, failing to offer cheaper alternatives, and committing prohibited transactions under ERISA. See id. ¶ 35 (citing Bilewicz v. FMR LLC, et al., Class Action Compl., Civ. A. No. 13-10636, ECF No. 1 (D. Mass. 2013) (Casper, J.) (“Bilewicz”)). Plan participants *9 then filed a second lawsuit on January 7, 2014, alleging that Fidelity had violated its fiduciary duties by paying excessive recordkeeping fees. Defs.’ SOF ¶¶ 8-9 (citing Yeaw v. FMR LLC, et al, Class Action Compl., Civ. A. No. 14-10035, ECF No. 1 (D. Mass. 2014) (Casper, J.) (“Yeaw”)).
In October 2014, Judge Casper approved a settlement agreement between Fidelity and the plaintiffs, consolidated under Bilewicz. Order Approve Settlement Class Action, Bilewicz, ECF No. 72. This settlement agreement required the defendants to pay $12,000,000 into a common fund and rewrite the plan document to provide more benefits and protections for Plan members. See generally Bilewicz, Mem. Supp. Mot. Order, Ex. 1, Class Action Settlement Agreement (“Bilewicz Settlement Agreement” or “Settlement”), ECF No. 53-1.
All named plaintiffs in the current case were members of the Bilewicz settlement class. Defs.’ SOF ¶ 12. All named Defendants in this case were also defendants in the Bilewicz litigation. Id. ¶ 29. As part of the Settlement, the Bilewicz plaintiffs agreed to release the defendants from “any and all claims, debts, demands, rights or causes of action, suits, matters, and issue or liabilities whatsoever . . . including both known Claims and Unknown Claims” in any way related to the claims at hand in that litigation. Id. ¶ 30 (emphases deleted) (citing Bilewicz Settlement Agreement § 3.3).
*10 Following these settlement negotiations Fidelity announced the First Amendment to the Plan Document, effective July 29, 2014 (“First Amendment”). Pls.’ SOF ¶ 9. Under this First Amendment, Fidelity identified two “designated investment alternatives” (“DIAs”), the Fidelity Freedom target date funds (“Freedom Funds”), and the PAS-W, that would undergo full fiduciary monitoring. Defs.’ SOF ¶¶ 55-57, 93. It also offered beneficiaries of the Plan the option to invest in an array of other Fidelity and non-Fidelity funds by specifically selecting them through the Plan’s “open architecture” or “supermarket” of fund offerings. Id. ¶ 53. Fidelity funds were available on NetBenefits, the online platform previously used by Fidelity, while participants could access the non-Fidelity funds by creating an account on the separate, self-directed BrokerageLink platform. Pls.’ SOF ¶¶ 10-11. The majority of the Plan assets, at the time of filing, were invested in one of the non-DIA Fidelity funds available through NetBenefits. Id. ¶ 16. To address the issue of excessive recordkeeping costs, the Settlement also required an update to the Plan’s existing revenue credit system to create mandatory revenue-sharing with Plan participants (“Revenue Credits”). Defs.’ SOF ¶ 121. This Revenue Credit matches or exceeds the management fees and revenue generated by Fidelity pursuant to its role administering the various funds, which includes the cost of recordkeeping, and *11 is paid to the Plan at the end of each year. Id. ¶¶ 122, 126. The Plan’s fiduciaries have said they did not monitor these administrative costs, on the grounds that all administrative expenses paid to Fidelity would be credited back to the Plan through the Revenue Credits. Id. ¶ 128.
Former employees who had left Fidelity, though still members of the Plan, do not receive any part of the Revenue Credit, unless they were employed for a portion of a Plan year. Pls.’ SOF ¶ 37. Before the implementation of the Revenue Credit, Fidelity had provided a discretionary profit-sharing contribution to the Plan account of each individual equivalent to 10% of their compensation. Id. ¶ 35. After the Revenue
Credit’s implementation, Fidelity adopted a practice of flexing the amount of discretionary profit-sharing based on the amount returned to each account through the Revenue Credit, so the total of the (mandatory) Revenue Credit and (discretionary) profit-sharing remained at 10% of compensation per year. Id. This leads the Plaintiffs to call the implementation of the Revenue Credit an “accounting gimmick.” Id. ¶ 36 (quoting Decl. Mark Thomson (“Thomson Decl.”), Ex. 18, Expert Report Marcia S. Wagner (“Wagner Report”) ¶ 88, ECF No. 138-20).
II. ANALYSIS
As both parties have stipulated to the underlying facts in this case, their conflict concerns the boundaries of the *12 fiduciary duty that Fidelity owes to the members of the Plan. Fidelity believes that this Court need not reach any substantive issues of fiduciary duty. It contends that the Plaintiffs are essentially re-litigating the Bilewicz Settlement Agreement in
arguing that many of the Plan’s features (such as the Revenue Credit) are themselves breaches of fiduciary duty, and that their claims ought thus be denied under the principle of res judicata. Defs.’ Mem. 5-8. Fidelity also points to the release and covenant not to sue in the Settlement as covering all the named Plaintiffs, asking that this Court find the Plaintiffs’ claims are covered by the language of the release. Id. [3] The Plaintiffs primarily point to three places where they allege Fidelity has breached its duties of prudence and loyalty. First, the Plaintiffs contend that the Defendants breached their duty to monitor funds in the plan outside the two DIAs. Compl. ¶¶ 101-103. The Plaintiffs argue this lack of monitoring constitutes a violation of fiduciary duties because, for various *13 reasons, the choice to include these specific funds was imprudent. Id. ¶¶ 65-72, 76-103. Second, the Plaintiffs argue that Fidelity had a duty to investigate alternatives to mutual funds including stable value funds, collective trusts, and separate accounts. Id. ¶¶ 68-71, 95-100. Third, the Plaintiffs argue the Plan Fiduciaries had a duty to monitor and control administrative expenses, and that the Revenue Credit system does not adequately release them from this responsibility. Id. ¶¶ 73-75, 104-116. On the whole, the Plaintiffs argue, the Defendants inappropriately placed the interests of Fidelity over the interests of Plan participants. Id. ¶ 131.
The Plaintiffs additionally assert that payment by the Plan to FMR LLC for administrative expenses constitutes a prohibited transaction with Fiduciary, in violation of 29 U.S.C. § 1106(b)(3). Id. ¶ 143. While Prohibited Transaction Exemption 77-3 (“PTE 77-3”), 42 Fed. Reg. 18734, 18735 (Apr. 8, 1977), would provide the Defendants a safe harbor were the Plan treated no less favorably than any other non-proprietary option, the Plaintiffs dismiss PTE 77-3 as a defense for two reasons: (1) they claim that the Revenue Credit is essentially illusory, so FMR LLC is still receiving net compensation from administrative expenses; and (2) the class members did not receive the Revenue Credits because they are former employees. Pls.' Mem. Supp. Partial Summ. J., (“Pls.’ Mem.”) 18, ECF No. 136.
Derivative of the claimed breach of fiduciary duties, count IV is viable against FMR LLC only were this Court to find the Plan Fiduciaries to have committed a breach. Compl. ¶¶ 148-152. Similarly, count V asks for the disgorgement of profits that Fidelity has accrued pursuant to its breaches of duty and applies only to the extend this Court finds such a breach of duty. Id. ¶¶ 155-158.
The Court addresses the issues in this order.
A. Prior Court-Approved Class Action Settlement and Res Judicata
Fidelity argues that all claims in the complaint are barred by the prior approved class action settlement and res judicata. Defs.’ Mem. 5-6. The Plaintiffs submit that the settlement and res judicata do not bar their claims because their claims arise from breaches of Fidelity’s continual duty of prudence and loyalty after the signing of the settlement. Pls.’ Opp’n 10-15. The Court agrees.
“‘Under the federal law of res judicata, a final judgment
on the merits of an action precludes the parties or their
privies from relitigating claims that were raised or could have
been raised in that action.’” Breneman v. United States ex rel.
FAA,
Fidelity points to two provisions in the original Bilewicz Settlement Agreement that it argues bar the Plaintiffs’ claims. Defs.’ Mem 3-5. First, section 3.3 of the Settlement defines the scope of claims released by the Settlement. Id.; Bilewicz Settlement Agreement § 3.3. The provision covers “both known Claims and Unknown Claims,” including those “in any way arising out of, relating to, based on, or in connection with: the structure, management, monitoring, servicing, administration, size and/or expenses of the Plan” as well as “any assertions regarding revenue sharing.” Id. (emphases in original). Additionally, the Settlement includes a release barring litigation over any features of the Plan included in section 7.3, the section describing the steps Fidelity would take to meet the demands of the Settlement. Id. §§ 3.3, 7.3. According to Fidelity, the recordkeeping, breach of fiduciary duty, and *17 prohibited transaction claims are barred because they are all related to the system implemented by section 7.3. Defs.’ Mem. 7-8. Fidelity additionally argues that the release should apply because the Plaintiffs’ claims do not arise from a change in events after the Settlement, and because those claims previously could have been litigated. Id. at 9.
The Plaintiffs argue, and the Court agrees, that the
holding from Tibble v. Edison Int’l suggests that there has been
a sufficient “change in circumstances” justifying this new suit,
because fiduciaries have a continual duty to monitor
investments. Pls.’ Opp’n 12 (quoting
This is not to say that the release is ineffective. The Plaintiffs have had to limit their class only to those *18 participants whose claims arose after November 17, 2014, the effective date of the release. See Class Cert. ¶ 1. The
Plaintiffs are also limited to claims concerning Fidelity’s continuing duties, rather than those pre-dating the Settlement or arising from the Settlement.
Fidelity’s arguments based on res judicata are similarly
unavailing. The present case and the Bilewicz case do not arise
from a “common nucleus of operative facts.” See Haag v. United
States,
Fidelity’s duty of continual monitoring, combined with its failure to monitor, means that the claims in the case at hand do not arise out of the “same transaction or series of connected transactions.” Id. (quoting Kale v. Combined Ins. Co., 924 F.2d 1161, 1166 (1st Cir. 1991)).
In conclusion, Fidelity’s claims based on the continual duty to monitor are not barred by the Bilewicz settlement or res judicata.
B. Legal Standard
1. ERISA Fiduciary Duties
Retirement plan trustees are fiduciaries who owe duties of
loyalty and prudence to participants in their plan. 29 U.S.C. §
1104(a)(1)(A); Bunch v. W.R. Grace & Co. (Bunch I), 532 F. Supp.
2d 283, 287-88 (D. Mass. 2008), aff’d,
[A] fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and--
(A) for the exclusive purpose of (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan; (B) 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.
29 U.S.C. § 1104(a)(1). A court considers “the merits of [the]
transaction” and “the thoroughness of the investigation into the
merits of [the] transaction” when determining if a fiduciary has
breached the duties of loyalty or prudence. Bunch I, 532 F.
Supp. 2d at 288 (quoting Howard v. Shay,
a. Duty of Loyalty
The duty of loyalty requires a fiduciary to act solely in
the interest of plan participants and beneficiaries, and with
*20
the exclusive purpose of providing them benefits. 29 U.S.C. §
1104(a); see Vander Luitgaren v. Sun Life Assurance Co. of Can.,
To prevail on a breach of duty of loyalty claim, a
plaintiff must show, by a preponderance of evidence, that
defendants failed to act in the best interest of the
participants and beneficiaries. Bunch I,
b. Duty of Prudence
The duty of prudence requires that a fiduciary act with the
“care, skill, prudence, and diligence under the circumstances
then prevailing” equivalent to those of a prudent man in the
same position. 29 U.S.C. § 1104(a). There is no exact,
“uniform checklist” that a prudent fiduciary must follow. Tatum
v. RJR Pension Inv. Comm.,
ERISA bars a fiduciary from causing a plan to engage in prohibited transactions, which include providing services or transferring assets between the fiduciary and the plan. 29 U.S.C. § 1106(b). There is an exception to these prohibited transactions under PTE 77-3, which renders the prohibition inapplicable to employee benefits plans investing in in-house mutual funds under certain conditions. See Brotherston, 907 F.3d at 27. The relevant condition is as follows:
All other dealings between the plan and the investment company, the investment adviser or principal underwriter for the investment company, or any affiliated person of such investment adviser or principal underwriter, are on a basis no less favorable to the plan than such dealings are with other shareholders of the investment company.
3. Causes of Action
A plaintiff alleging a breach of fiduciary duties may sue
for losses sustained by the plan pursuant to two different
provisions of 29 U.S.C. § 1132, the statute granting a private
right of action for ERISA violations. Under section 1132(a)(2),
a Plaintiff may sue for violations of ERISA § 409, 29 U.S.C. §
1109, which allows for the recovery from a fiduciary of “losses
to the plan” resulting from a fiduciary duty’s breach, along
with “such other equitable or remedial relief as the court may
deem appropriate.” 29 U.S.C. § 1109(a). A plaintiff may also
sue for relief pursuant to 29 U.S.C. § 1132(a)(3), which allows
a court to provide relief when plaintiffs do not have another
section 1132 cause of action. See Varity Corp. v. Howe, 516
U.S. 489, 515 (1996). Section 1132(a)(3)(B) specifically allows
for equitable relief. When a complaint is filed against a
fiduciary, monetary relief available under section 1132(a)(2) is
comparable to the equitable remedy of surcharge, while section
1132(a)(3) authorizes other equitable remedies, including
disgorgement of profits. See Moitoso,
B. Duty to Monitor Funds other than the Designated Alternative Investments
1. Duty to Monitor Self-Directed Brokerage Accounts
The Plaintiffs contend that the Plan Fiduciaries had a duty
to monitor investments other than the two DIAs (the PAS-W and
Freedom K Funds) as an aspect of their duty of prudence. Pls.’
Mem. 9-10. Fiduciaries have a general duty under ERISA
continuously to monitor investments and remove those that are
imprudent, which is a duty separate from their requirement
prudently to select those investments. Tibble, 135 S. Ct. at
1829. Even when a plan document dictates the investment scheme,
fiduciaries may follow that document only insofar as it is
consistent with their duties under ERISA, as “the duty of
prudence trumps the instructions of a plan document.” Fifth
Third Bancorp v. Dudenhoeffer,
*25 Fidelity points out that there is no duty to monitor funds offered in a manner “similar” to a brokerage window. Defs.’ Mem. 13 (citing 29 C.F.R. § 2550.404a-5(h)(4)); see also Wagner Report ¶ 60. Thus, it argues that its proprietary plans are the equivalent of a self-directed brokerage account. Defs.’ Mem. 14 (citing Request for Information Regarding Standards for Brokerage Windows in Participant-Directed Individual Account Plans, 79 Fed. Reg. 49,469, 49,471 (Aug. 24, 2014); Defs.’ SOF ¶ 60). In so arguing, Fidelity notes that the Plaintiffs are not alleging a breach of fiduciary duty with regards to the non- proprietary funds offered through the Plan’s self-directed brokerage accounts. Id. at 13.
The Plaintiffs’ argument is in two parts. First, they argue that Fidelity had a continuing duty to ensure that all Plan investments were prudent, and that this duty is unchanged by 29 C.F.R. § 2550.404a-5(h)(4). Pls.’ Opp’n 3-4. They also say that Fidelity ought not be able to take advantage of the “brokerage window” safe harbor even if it does exist, because the alternative funds were effectively still “available in the plan.” Id. at 4 (citing Pls.’ SOF ¶¶ 10-11).
Some courts have extended the duty to monitor to funds
available through brokerage windows while others have not,
though this Court has not found a judicial opinion actually
analyzing the issue. Compare Troudt v. Oracle Corp., Civ. A.
*26
No. 16-00175-REB-SKC,
designated investment alternatives offered under the plan”). [4] Just because these regulations apply to DIAs, however, does not *27 preclude them from applying also to other forms of investments, such as self-directed brokerage accounts.
Regulators have declined to weigh in on this question. In 2012 the Department of Labor (the “Department”) issued a Field Assistance Bulletin indicating that an affirmative obligation to monitor could arise when a large number of plan participants partake in investments other than DIAs, see John J. Canary, Department of Labor, Field Assistance Bulletin No. 2012-02 Q&A 30 (May 7, 2012), https://www.dol.gov/agencies/ebsa/employers- and-advisers/guidance/field-assistance-bulletins/2012-02, but then withdrew this guidance and replaced it with new guidance that did not include this duty to monitor. See John J. Canary, Department of Labor, Field Assistance Bulletin No. 2012-02R(1) Q&A 39 (July 30, 2012),
https://www.dol.gov/agencies/ebsa/employers-and-
advisers/guidance/field-assistance-bulletins/2012-02r. This
Court sees the withdrawal of guidance as the Department
essentially declining to take a position on the issue, though
other communications indicate that it may not consider such a
duty to exist. See
This Court need not defer to these statements, [5] but in the absence of other regulations explicitly imposing such a duty, it is hesitant to state unequivocally that there either is, or is not, a fiduciary responsibility to monitor self-directed brokerage accounts.
The goals of ERISA include protecting plan participants by
controlling the administration of plan benefits, including
through the imposition of stringent fiduciary standards. New
York State Conf. of Blue Cross & Blue Shield Plans v. Travelers
Ins. Co.,
(KBF),
Brokerage windows can provide plan participants significant freedom by allowing them to select from a menu of hundreds or *29 thousands of investments, making it perhaps unrealistic for a fiduciary to monitor them all. See Wagner Report ¶ 60. On the
other hand, the same regulation that defines “Designated Alternative Investments,” 29 C.F.R. 2550.404a-5(h)(4), also includes the following language: “Nothing herein is intended to relieve a fiduciary from its duty to prudently select and monitor providers of services to the plan . . . .” 29 C.F.R. 2550.404a-5(f). Using section 2550.404a-5 as a vehicle entirely to remove a fiduciary monitoring duty would seem to contradict this language. See Field Assistance Bulletin No. 2012-02 Q&A 39, supra (“[A] plan fiduciary’s failure to designate investment alternatives, for example, to avoid investment disclosures under the regulation, raises questions under ERISA section 404(a)'s general statutory fiduciary duties of prudence and loyalty.”).
Furthermore, a plan sponsor can incur liability when it
fails to carefully select or monitor the service provider, and
that service provider then breaches a delegated duty. See 29
U.S.C. §§ 1104, 1105(c)(2). If the service provider has no duty
to monitor the contents of a brokerage window, that implies the
plan sponsor has no duty to oversee the service provider of the
brokerage window, because it cannot breach its fiduciary duties
by failing to monitor a party that itself has no fiduciary
duties. Cf. Brotherston,
In sum, there is significant lack of clarity regarding the duties a fiduciary owes with regard to the funds within a brokerage window. This Court need not decide this thorny issue, however, because Fidelity was not offering its proprietary funds through a brokerage window or its equivalent.
a. “Brokerage Window” or “Equivalent” The Plaintiffs contend that the proprietary funds offered on Fidelity’s platform were not offered through a program “similar” to a brokerage window. Pls.’ Reply Mem. L. Supp. Mot. Summ. J. (“Pls.’ Reply”) 9-12, ECF No. 176. The Plaintiffs are correct. The manner in which Fidelity offered funds to Plan participants was not “similar” to the manner in which it offered funds through a brokerage window, but instead was far more similar to the manner in which it had offered the funds when they were considered “on the Plan” prior to the Settlement.
At first glance, the definition of “brokerage window” would appear sufficiently vague to encompass Fidelity’s program. The original regulation defining “brokerage window” and “similar” vehicles defines them as “plan arrangements that enable participants and beneficiaries to select investments beyond those designated by the plan,” see 29 C.F.R. § 2550.404a-
5(h)(4), without defining what “similar” means. See also Scott Mayland, Ratcheting up the Duty: The Department of Labor's
Misguided Attempt to Impose a Paternalistic Model upon Defined Contribution Plans Through ERISA, 75 Ohio St. L.J. 645, 661-62 (2014) (echoing the definition from § 2550.404a-5(h)(4)). The common definition is similar, referring to “a facility allowing plan participants to buy and sell securities through a brokerage platform.” James Chen, Brokerage Window, Investopedia.com (Nov. 20, 2019),
https://www.investopedia.com/terms/b/brokerage_window.asp. The
Department has treated the term very broadly,
[6]
but only in the
*32
preamble to a request for information that lacks the force of
law. See
The way other courts have treated self-direct brokerage accounts provides a better indicia of how they are defined in practice. In Tracey v. Massachusetts Inst. of Tech., another
session of this Court described Fidelity’s BrokerageLink
platform as “designed for investors with a higher appetite for
risk and independent management.”
With these indicia in hand it is manifest that there are significant similarities between how Fidelity offered its designated and non-designated proprietary funds, and that the treatment of these options differed significantly from that of non-Fidelity funds. Fidelity itself has noted that self- directed brokerage accounts allow investors to “access a larger investment universe”; that was not what was happening with Fidelity’s proprietary funds offered on the Plan. Def.’s SOF ¶ 61. All proprietary funds were offered on Fidelity’s internal NetBenefits platform rather than the BrokerageLink platform used to access outside funds. Defs.’ Resp. SOF ¶ 10. Accessing the BrokerageLink platform required visiting a separate webpage, creating a separate login, and waiting up to two business days, while participants could automatically access the Fidelity funds. Pls.’ SOF ¶ 11. Additionally, there is “no difference” between how Fidelity funds were offered before and after the Settlement, even though Fidelity argues that after the Settlement its proprietary funds should have been considered to be in the equivalent of a separate window. Id. ¶ 10. Following the re-enrollment period that resulted from the 2014 plan *34 amendment, only 1.41% of Plan participants moved to the non- proprietary funds on BrokerageLink, and the majority of plan assets remained in the non-monitored proprietary Fidelity funds. Id. ¶¶ 15-16. Fidelity’s own description of brokerage windows in a 2014 letter to the Department appears to describe the type of offering available through BrokerageLink, not the proprietary funds available through NetBenefits. See Decl. Kai Richter, Ex. 2, Letter from Douglas O. Kant & Krista M. D’Aloia to the Department (Nov. 19, 2014) 4, ECF No. 177-2 (noting that Fidelity typically offers BrokerageLink as the brokerage window option for employers, and that only 2.6% of individuals across all employers with access to BrokerageLink utilize it). On the whole, the offering of the proprietary Fidelity funds on NetBenefits appears highly dissimilar to expert-level self- directed brokerage accounts (of the sort offered through BrokerageLink), and highly similar to the type of fund normally offered “on a plan.”
Additionally, allowing a recordkeeper easily to disclaim
fiduciary liability for its proprietary funds contradicts the
goals of ERISA. There is no law preventing a recordkeeper from
offering its own proprietary funds in a brokerage window. See
Larson,
In conclusion, as Fidelity was not offering its funds in the equivalent of a brokerage window, it can face fiduciary liability for its lack of monitoring subsequent to the Settlement.
The question whether this alleged lack of prudence actually led to any losses is one of causation: a question upon which the defendant bears the burden of proof. Brotherston, 907 F.3d at 39. The plaintiff still bears the burden of showing the existence and extent of the alleged loss. Id. In their complaint, the Plaintiffs put forward numerous theories *36 regarding how Fidelity’s lack of monitoring could have caused losses to the plan. Specifically, the Plaintiffs argue that Fidelity retained proprietary funds in the Plan despite excessive fees, Compl. ¶ 65, failed to investigate less-costly non-proprietary funds, id. ¶¶ 66-67, failed to utilize the cheapest available share class of certain proprietary funds, id. ¶ 72, retained inappropriately speculative funds, id. ¶¶ 76-84, should have investigated better-performing non-proprietary funds, id. ¶¶ 85-88, and failed to remove underperforming proprietary funds from its lineup over time, id. ¶¶ 89-94. Yet the parties in their letter requesting a case-stated resolution indicated that the scope of this judgment ought be limited to liability issues. It is therefore premature upon this record to determine whether any loss has occurred and, if so, whether the lack of monitoring caused it.
2. Investigation of Separate Accounts, Collective Trusts, and Stable Value Funds
The Plaintiffs argue that Fidelity breached its fiduciary duties by failing to investigate non-mutual fund investment vehicles, such as collective trusts and separate accounts. Id. ¶¶ 68-71. [7] They also argue that Fidelity had a duty to *37 investigate stable value funds as an alternative to its money market accounts. Id. ¶¶ 95-100. [8] This Court concludes, however, that Fidelity did not incur liability because it had no inherent duty to investigate these particular types of funds.
While Fidelity offered several money market funds as capital preservation options, it did not offer stable value funds as an option. See Defs.’ SOF ¶ 64. Fidelity also did not offer collective trusts or separate accounts as investment funds. See Pension & Welfare Benefits Administration, U.S. Dep’t of Labor, Study of 401(k) Plan Fees and Expenses, at 16 (April 13, 1998),
https://www.dol.gov/sites/default/files/ebsa/researchers/analysi s/retirement/study-of-401k-plan-fees-and-expenses.pdf. Many funds have adopted collective trusts or separate accounts as options in addition to mutual funds, and they are more common for larger funds. BrightScope & Investment Co. Inst., The BrightScope/ICI Defined Contribution Profile: A Close Look at 401(k) Plans, at 21 (Dec. 2014),
https://www.ici.org/pdf/ppr_14_dcplan_profile_401k.pdf. The
regulatory and transparency requirements of separate accounts
and collective trusts, however, differ significantly from those
of mutual funds, making direct comparison between them “apples-
to-oranges.” White v. Chevron Corp., No. 16-cv-0793-PJH, 2016
U.S. Dist. LEXIS 115875, at *37 (N.D. Cal. Aug. 29, 2016)
(citing Tibble v. Edison Int’l,
*38 options. Id. ¶¶ 60, 93. In fact, the June 2014 amendment to the Plan required that Fidelity make only mutual funds available through its “open architecture” window. Id. ¶ 53; Thomson Decl., Ex. 3, First Amendment to 2014 Plan Restatement, § 12.2(c), ECF No. 138-4. Fidelity declined to investigate the possibility of including alternatives to mutual funds on the Plan –- including collective trusts and stable value funds –- because of these restrictions in the 2014 First Amendment. Thomson Decl., Ex. 9, Deposition Ralph Derbyshire 85:16-88:7, ECF No. 138-11.
Fidelity makes two arguments in rebuttal. It first asserts
that the original design of the Plan in the 2014 amendment was a
settlor act for which Fidelity did not owe a fiduciary duty.
Defs.’ Mem. 14 (quoting Lockheed Corp. v. Spink,
Fidelity also argues that it had no specific duty to
investigate alternatives to mutual funds. Defs.’ Mem. 15. Here
it is on firmer ground. Numerous courts have ruled that plans
are under no duty to offer alternatives to mutual funds, even
*39
when the plaintiffs argue they are markedly superior. See id.
at 15 n.17 (citing Larson,
Still, the Plaintiffs are correct in pointing out that most
of these cases imply there may be some duty to investigate the
possibility of offering alternatives to mutual funds. In
Wildman, the court found that defendants had not breached their
fiduciary duty in declining to offer index funds or stable value
funds because it analyzed their decision-making and found it
prudent.
There are several cases at the district court level holding that a plan is under no such duty to investigate these alternatives. In Main v. American Airlines, Inc., the Northern
District of Texas found that a fiduciary defendant had not
breached its duty by failing either to offer or investigate
alternatives to mutual funds.
This Court agrees that there is no fiduciary duty to
investigate alternatives to mutual funds. Separate accounts,
*41
collective trusts, and stable value funds are all common
investment instruments with the potential to outperform mutual
funds. See Terraza v. Safeway Inc.,
As Fidelity pointed out at oral argument, the managers of
the fund “didn’t consider . . . gold bars or they didn’t
consider hedge funds.” Tr. Case Stated Hr’g 20. There is no
inherent fiduciary duty to offer any particular type of
investment vehicle, whether gold bars, hedge funds, collective
accounts, or stable value funds. See Hecker,
3. Duty to Monitor Recordkeeping Expenses The Plaintiffs next argue that Fidelity has breached its fiduciary duty to monitor the Plan’s recordkeeping expenses. Pls.’ Mem. 1. Fidelity does not dispute that the Plan Fiduciaries declined to monitor recordkeeping expenses but argues that it has not violated its fiduciary duties because all expenses were returned to the Plan through the mandatory Revenue Credit, and thus netted to zero. Defs.’ Mem. 15-16. Its argument rests on the proposition that “there is no breach of a duty to be cost-conscious where there are no costs.” Defs.’ Opp’n Mot. Partial Summ. J. (“Defs.’ Opp’n”) 10, ECF No. 165 (emphasis in original).
Fiduciaries have a general duty to monitor recordkeeping
expenses. This duty stems from a fiduciary’s prudential duty to
be cost-conscious in administering its duties. Restatement
(Third) of Trusts § 88 cmt. a (2007); Tibble v. Edison Int’l,
The Plan’s current recordkeeping expense regime first appeared in the Eighth Amendment to the 2005 Restatement of the Plan. Defs.’ SOF ¶ 16. This Amendment included the addition of a Revenue Credit, which approximated the revenue paid to Fidelity by the Plan. Id.; Rosenberg Decl., Ex. 34, FMR Corp. Profit Sharing Plan, Eighth Amendment to 2005 Restatement MOITOSO0014016, ECF 142-34. When Fidelity amended the Plan again in July 2014 pursuant to the Bilewicz Settlement Agreement, this Revenue Credit was altered to require the inclusion of any revenue-sharing Fidelity received for investments in non-Fidelity funds. Thomson Decl., Ex. 1, FMR LLC Profit Sharing Plan: 2014 Restatement (“2014 Profit Sharing Plan”) art. 5.1, ECF No. 138-1. The full amount of this Revenue Credit is calculated and distributed each year back to the Plan. Defs.’ SOF ¶¶ 122-123. These clauses, in effect, reimburse the Plan an amount at least equivalent to all fees paid into it, which is an amount higher than the total recordkeeping expense. Id. ¶ 126. The entire system of returning Revenue Credits to the Plan is codified in the 2014 amendment and is mandatory *45 under those rules. 2014 Profit Sharing Plan art. 5.1-2. The establishment of this Revenue Credit was a settlor act, as the design of a plan is a settlor function. See Lockheed Corp., 517 U.S. at 890.
Because Fidelity credited all revenue generated by the Plan back to the Plan through this Revenue Credit, the Plan Fiduciaries, including the Retirement Committee, did not monitor these expenses or conduct third-party benchmarking of its fees. Def.’s SOF ¶ 128. The Retirement Committee also never reviewed the fee disclosures required by ERISA section 408(b)(2), 29 U.S.C. § 1108, and the relevant regulation, 29 C.F.R. § 2550.408b-2(c). Pls.’ SOF ¶ 29. These fee disclosures indicated that, in 2017 for example, Fidelity charged $288 per participant for recordkeeping services, as well as an additional $212 per person for “Additional Value for Fidelity Products” (making an even $500 per head), or a total of 0.19% of assets. Thomson Decl., Ex. 59, Statement Services & Compensation Fidelity Retirement Savings Plan FID0001247, ECF 138-61. The parties have stipulated that if Fidelity were a third party negotiating this fee structure at arms-length, the value of services would range from $14-$21 per person per year over the class period, and that the recordkeeping services provided by Fidelity to this Plan are not more valuable than those received by other plans of over $1,000,000,000 in assets where Fidelity *46 is the recordkeeper. Thomson Decl., Ex. 65, Stipulations of Facts (“Stipulations of Facts”) 3-4, ECF 138-67.
The 2014 Amendment also dictated how the Revenue Credit would be distributed to Plan participants. 2014 Profit Sharing Plan arts. 3.3, 5.1, 5.2, 6.2. Article 6.2(f) of the 2014 Profit Sharing Plan states that each participant shall receive an amount equal to the sum of the Revenue Credit and the discretionary Employer Profit Sharing Contribution, in an amount proportionate to their compensation. This clause applies only to those employees who meet the requirements of section 3.3. Id. Article 3.3 states that the Employer Profit Sharing Contribution and the Revenue Credit shall be distributed only to current employees. All members of the class action in this case are former employees of Fidelity who did not receive the Revenue Credit for at least a portion of the class period because they were excluded by the Plan. Compl. ¶ 119.
For qualified employees, the total of the Revenue Credit and the discretionary company contribution was 10% for all years immediately preceding the 2014 Settlement and for all years since then. Pls.’ SOF ¶ 35. Prior to 2014, this 10% contribution consisted entirely of discretionary profit sharing, while after 2014 the amount consisted of the Revenue Credit plus a discretionary amount. Id. Thus, the discretionary contribution from Fidelity increased or decreased based on the *47 value of the mandatory Revenue Credit. See Thomson Decl., Ex. 70, FMR LLC Retirement Committee Meeting Minutes (Dec. 9, 2014) 2, ECF No. 138-73; Thomson Decl., Ex. 69, Retirement Benefits Overview FID0000128, ECF No. 138-72.
Fidelity argues that the Bilewicz release shields it from
liability because the Revenue Credit structure derives from the 2014 Amendment, which was part of the Settlement. Defs.’ Mem. 7. As explained in section II.A, supra, the release cannot disclaim Fidelity’s continued duty to monitor, so the Plaintiffs are correct that Fidelity can potentially incur liability for any losses that stem from a lack of monitoring. See Pls.’ Opp’n 13-14.
The main dispute between the parties concerns whether the Revenue Credit system shields Fidelity from fiduciary liability notwithstanding the lack of monitoring, because the Plan itself could not have sustained any losses when all revenue was automatically returned to it. The Plaintiffs present two theories to explain how the Plan may have incurred a loss: that the Revenue Credits were “illusory,” and that all members of the class action, as former employees, did not receive the benefit of these Revenue Credits.
a. The Revenue Credits theory The Plaintiffs’ first theory of liability is that the Revenue Credit system is essentially “illusory” because the *48 total compensation returned to eligible employees remained at 10% both before and after the 2014 amendment, and thus the Revenue Credits are nothing more than an “accounting gimmick.” Pls.’ Mem. 7. This matters, the Plaintiffs argue, because it shows that the Revenue Credit was really being used to shore up Fidelity’s compensation structure. Tr. Case Stated Hr’g 38-39. The Plaintiffs assert in summary that Fidelity is attempting to use these Revenue Credits as a “double credit” -- against both the Plan expenses and against Fidelity’s profit-sharing year-end bonus. Id. at 40. [9]
The Plaintiffs point to the First Circuit’s holding in
Brotherston for the proposition that employers may not “claw
back with their fiduciary hands compensation granted with their
employer hands.” Id. at 36 (quoting
To the Plaintiffs’ charge that Fidelity was not providing
any real consideration by offering the Revenue Credits, see
Pls.’ Opp’n 7, Pls.’ Reply 14-15, Fidelity responds that “a
legally enforceable right is not a gimmick,” and that following
the 2014 Amendment, Plan participants gained a right to enforce
the Revenue Credits that did not exist before. Defs.’ Opp’n 11
(citing In re Halpin,
Regarding the alleged “accounting gimmick,” ERISA does not
protect members of a Plan from employers who reduce
discretionary compensation to offset fiduciary benefits.
“ERISA’s principal function [is] to ‘protect contractually
defined benefits.’” US Airways, Inc. v. McCutchen,
Decisions made at an employer’s discretion are said to be
made in its “business” capacity. See Noorily v. Thomas & Betts
Corp.,
Here, Fidelity’s decision to change its yearly discretionary payments based on the amount of mandatory Revenue Credit was a business judgment. These discretionary payments were outside the Plan; calculated in response to the Plan, but not dictated by the Plan. Businesses must be able to make business decisions based on weighing the costs of their fiduciary outflows, simply as a function of balancing their books. See, e.g., Douglas J. Elliott, What Happens to GM
Pensions in Bankruptcy?, Brookings (May 29, 2009), https://www.brookings.edu/research/what-happens-to-the-gm- pensions-in-bankruptcy/ (describing how General Motors’ 2009 bankruptcy would affect its pension plan, and how overfunding *52 the pension plan contributed to its bankruptcy). What Fidelity is doing here with its year-end bonuses is no different from a legal standpoint. In conclusion, Fidelity’s business decision to set the total end-of-year bonus at 10% does not violate its fiduciary duties because a proper fiduciary analysis includes only the actions taking place within the Plan, all of which were mandatory.
b. The Former Employees Theory The Plaintiff’s second theory of liability is that members of its class have incurred losses because all of them, at some point during the class period, paid for recordkeeping expenses, but did not receive back Revenue Credits because they were no longer employed by Fidelity. Pls.’ Opp’n 8. The Plaintiffs developed this theory first as part of their now-withdrawn second claim that Fidelity had violated its duty of impartiality, but at oral argument repurposed it as evidence that the Revenue Credits were being used as a form of compensation rather than reimbursement. Tr. Case Stated Hr’g 39-41. They argue that this means, in effect, that the members of the class action have suffered a loss. Id. at 41. Fidelity argues that losses to the plan must be analyzed at the Plan level, not the individual level, and as the Plan has not suffered a net loss, the individualized members of the class have no claim. Defs.’ Mem. 17.
The Plaintiffs’ theory has merit because 29 U.S.C. § 1132(a)(2) allows for the equitable relief of surcharge for losses sustained by individuals, even when a Plan has not suffered losses. Here, members of the class paid higher recordkeeping fees as a result of Fidelity’s failure to monitor. This is a violation of the duty of prudence for which the Plaintiffs may seek equitable relief, even though the Court does not credit Plaintiffs’ theory that the high recordkeeping expenses evidence a breach of the duty of loyalty.
There are two potential pathways for analyzing loss under
the duty of prudence: through section 1132(a)(2) and through
section 1132(a)(3). For purposes of a section 1132(a)(2) cause
of action, the controlling case is LaRue v. DeWollf, Boberg &
Assocs., Inc.,
This Court may, however, grant equitable relief under
section 1132(a)(3). Courts may grant equitable relief for
“those categories of relief that were typically available in
equity (such as injunction, mandamus, and restitution, but not
compensatory damages).” Mertens,
The decision by the Plan Fiduciaries not to monitor recordkeeping expenses was clearly negligent. The Plan Fiduciaries conducted multiple meetings over the course of years in which they could have accessed the section 408(b)(2) disclosure reports that contained recordkeeping fees, but they chose not to request or review them. Pls.’ SOF ¶ 29.
Fidelity’s own training material acknowledged that the Plan
Fiduciaries had an ongoing duty to monitor recordkeeping fees
and perform due diligence, and to ensure that the fees paid were
reasonable. Id. ¶ 27. Particularly, in light of the 2015
ruling in Dudenhoeffer,
Given the stipulated facts that the recordkeeping services would have been available to the Plan for a significantly lower cost per head, Stipulations of Facts 3-4, it is fair to say that but for the lack of monitoring on the part of the Plan Fiduciaries, the members of the class action would have paid less in recordkeeping costs. Surcharge is an “appropriate” remedy in these circumstances. Here, the Plan Fiduciaries were negligent in failing to monitor recordkeeping expenses, an important component of the administration of their fiduciary duties. There are no “special circumstances” excusing this breach of their duties, see Restatement (Third) of Trusts § 95 cmt d., and Fidelity’s primary defense is based on an analysis of losses at the Plan level that is not necessarily applicable for equitable remedies.
Conversely, restitution and disgorgement of ill-gotten
gains are not appropriate remedies for this breach. These
*57
remedies are appropriate only if Fidelity had received gains or
profits as a result of the breach, but 100% of the money
collected for recordkeeping expenses was returned to the Plan.
See Mertens,
The Plaintiffs contend exactly this, arguing that the Revenue Credits were actually a form of compensation, providing larger reimbursements to more highly compensated individuals. Pls.’ Mem. 15 n.14, 17-18; Tr. Case Stated Hr’g 38-39. This is really a question of how the Plan allocates expenses, rather than benefits, because after the distribution of the Revenue Credit each member of the Plan will have paid a different amount of net expenses, with the members of this class action paying a higher amount relative to current employees. Fidelity’s Plan did provide a larger Revenue Credit (and thus lower expenses) to highly compensated individuals and to current employees than to former employees, supporting the Plaintiffs’ theory that the *58 Revenue Credits were acting as a form of compensation, and thus, gains for Fidelity. Defs.’ SOF ¶ 141; 2014 Profit Sharing Plan art. 6.2(f). It is common, however, for retirement plans to differentiate expenses between current and former employees, and between employees based on factors such as their compensation. Defs.’ SOF ¶ 141.
Fidelity points out that the design and distribution of the
Revenue Credits is a settlor act, and that ERISA “does not
‘proscribe discrimination in the provision of employee
benefits.’” Defs.’ Mem. 18 (quoting Shaw v. Delta Air Lines,
Inc.,
Ultimately, these are arguments over the design of the Plan
rather than over Fidelity’s lack of monitoring, and the design
*59
of the Plan is covered by the Bilewicz release. Bilewicz
Settlement Agreement § 3.3. Thus, the release in the Settlement
Agreement and the principle of res judicata foreclose analysis
of this issue. Additionally, though “a trustee has a duty to
deal impartially with beneficiaries,” see Morse v. Stanley, 732
F.2d 1139, 1145 (2d Cir. 1984), Fidelity designed the Revenue
Credit system in its capacity as a settlor, and there are no
allegations that it has done anything except accurately carry
out the dictates of the plan document.
[10]
As a settlor, Fidelity
was not under a fiduciary duty of loyalty, so this settlor act
cannot form the basis of an alleged fiduciary violation. See
Lockheed Corp.,
In conclusion, Fidelity has breached its duty of prudence
with regard to its failure to monitor the recordkeeping
expenses, and the class members may recover under the equitable
doctrine of surcharge. As with the failure to monitor the
proprietary mutual funds, the Plaintiffs at trial will bear the
burden of proving the exact extent of loss (an exercise that may
or may not be trivial given the parties’ stipulations), while
Fidelity will bear the burden of showing this lack of monitoring
has not caused this loss. See Brotherston,
Fidelity has stipulated that, absent the Revenue Credit system, “Fidelity’s dealings with the Plan during the Class Period . . . would have been on terms less favorable than Fidelity’s dealings with some other shareholders of certain Fidelity-advised mutual funds.” Stipulations of Facts 4. With the inclusion of the Revenue Credit system, there was no net transfer of consideration from the Plan to Fidelity. Defs.’ SOF ¶ 126.
The Plaintiffs cite Brotherston for the proposition that
the Revenue Credits are “irrelevant” to the PTE 77-3 analysis
because they are made in Fidelity’s capacity as an employer,
Pls.’ Mem. 18 (quoting
The Plaintiffs also argue that Fidelity’s actions do not
fall within the PTE 77-3 safe harbor because the Revenue Credits
were not provided to the class members. Pls.’ Mem. 18. As with
the duty to monitor, this is another question of whether a
fiduciary incurs liability at the level of the Plan or of the
individual. The language of the exemption asks if “dealings
between the plan [and the company] . . . are on a basis no less
favorable to the plan” than are comparable dealings with other
shareholders. This language mirrors the language of section
1109, which creates a liability for a breach of fiduciary duty
“with respect to a plan.” The Supreme Court has held that
section 1109 provides for recovery only when the plan itself has
suffered an injury. See LaRue,
In conclusion, because there was no net transfer of consideration from the Plan to Fidelity for administrative expenses, and because the proper level of analysis is at the level of the Plan, Fidelity has not engaged in prohibited transactions in violation of section 1106.
D. Count IV: the Failure to Monitor Fiduciaries Claim The Plaintiffs’ fourth count, against FMR LLC only, alleges that it is a fiduciary and that it failed in its fiduciary duty of monitoring the FBIC and Retirement Committees to ensure they were properly administering the plan. Compl. ¶¶ 148-154.
An employer is considered a plan fiduciary when it controls
the administration of the plan. Negron-Fuentes v. UPS Supply
Chain Solutions,
A plan sponsor is a fiduciary only when acting in certain
roles. For example, when amending or terminating a plan, a plan
sponsor acts in a settlor role, Lockheed Corp.,
*65 Here, the FBIC, which derived its fiduciary power from appointment by FMR LLC, has specifically disclaimed any obligation to monitor investments other than the two DIAs. Pls.’ SOF ¶¶ 20-21. By the same token, FMR LLC conducted no fiduciary monitoring of the FBIC or Retirement Committee to ensure they were themselves prudently monitoring the menu of Fidelity investments, because it delegated all investment- related plan fiduciary duties to the FBIC. Defs.’ Resp. SOF ¶ 17. It appears that it did not monitor or investigate the Plan Fiduciaries either to ensure they were monitoring recordkeeping expenses. Defs.’ SOF ¶ 128 (“The Plan’s fiduciaries, and in particular the Retirement Committee that was responsible for the operation and administration of the Plan, did not conduct benchmarking or otherwise monitor the administrative revenue that the Plan generated to Fidelity . . . .”). As this Court has ruled that the Retirement Committee and FBIC breached their fiduciary duties in failing to monitor the non-DIA investments as well as recordkeeping expenses, FMR LLC is also liable for its breach in failing to monitor.
E. Count V: The Failure to Monitor Fiduciaries Claim The fifth count of the complaint charges all the Defendants with profiting from the breach of their fiduciary duties, and requests equitable relief under section 1132(a)(3) for these breaches. Compl. ¶¶ 155-162. Like the fourth count, this count *66 is derivative of the underlying fiduciary breaches alleged in counts I and III.
Equitable relief may be available to the Plaintiffs based
on Fidelity’s violation of its duty of prudence under count I.
See Moitoso,
III. CONCLUSION
There remains a live issue as to whether Fidelity’s statute of limitations defense is viable. Additionally, this decision addresses only the question of liability, not causation or loss. On the case-stated record, the Court has made the following findings and rulings:
Fidelity has incurred liability under count I for its breach of the duty of prudence in failing to monitor proprietary funds other than the two DIAs, and for failing to monitor recordkeeping expenses. FMR LLC is liable under count IV for breaches related to this failure to monitor. All Fidelity Entities may be liable under count V for breaches related to the *67 failure to monitor. At the close of this case, judgment will enter for Fidelity on the other theories under count I, as well as count III.
SO ORDERED.
_/s/ William G. Young__ WILLIAM G. YOUNG U.S. DISTRICT JUDGE
Notes
[1] The Defendants collectively will be referred to as “Fidelity,” but will be referred to by their specific names when this Court is analyzing the actions of a specific member of the group.
[2]
[2] Through the case stated procedure, the parties waive trial
on a specified set of issues and the Court may render judgment
based on the undisputed facts in the record. See TLT Constr.
Corp. v. RI, Inc.,
[3]
[3] Fidelity further argues that both counts I and III are
time-barred because the Plaintiffs would have been required to
sue within three years of discovering the breach of fiduciary
duty. Defs.’ Mem. 9-12 (citing 29 U.S.C. § 1113(2)). The
statute of limitations under ERISA is based on an actual
knowledge standard, see generally Intel Corp. Inv. Policy Comm.
v. Sulyma,
[12]
[15]
[4] The definition of “Designated Investment Alternative,” though it originated in a regulation governing disclosure, see 29 C.F.R. § 2550.404a-5(h)(4), is a term of art now used elsewhere throughout the ERISA landscape. Cf. 29 C.F.R. § 2550.408g–1(c)(1) (“The term ‘designated investment option’ has the same meaning as the term ‘designated investment alternative’ as defined in 29 CFR 2550.404a–5(h).”).
[26]
[5] Courts are required to defer to agency interpretations of
their own regulations under Auer v. Robbins,
[28]
[6] “The Department understands that a variety of different
plan and investment arrangements may be encompassed by the terms
‘brokerage window,’ ‘self-directed brokerage account,’ and
similar arrangements. For example, open mutual fund windows may
permit participants to invest in hundreds or thousands of mutual
funds. More limited mutual fund windows or ‘supermarkets’ may
permit participants to invest in any mutual fund on one or more
of a particular vendor’s platforms, but not necessarily every
mutual fund on the market. Other brokerage accounts also offer
participants access to a virtually unlimited number of
individual stocks, exchange-traded funds, and other securities.”
[31]
[7] Separate accounts and collective trusts are types of investment vehicle available to institutional investors. For plans with significant assets, offering separate accounts can lead to substantial savings compared with utilizing mutual
[36]
[8] Stable value funds are a type of investment vehicle that provide a low-volatility rate of return guaranteed by an underlying contract. David F. Babbel & Miguel A. Herce, Stable Value Funds Performance, 6 Risks 2018, no. 1(12), Feb. 2018, at 3, http://www.mdpi.com/2227-9091/6/1/12/pdf. Many large plans use stable value funds rather than money market funds as their default capital preservation option. Chris Tobe, Do Money- Market Funds Belong in 401(k)s?, MarketWatch (Aug. 30, 2013), http://www.marketwatch.com/story/do-money-market-funds-belong- in-401ks-2013-08-30.
[37]
[9] At the case-stated hearing, the Plaintiffs also argued that Fidelity was seeking a “triple credit” because if an employee departs the company in less than five years, her account balance will not be fully vested, and the Revenue Credit portion can be used to offset other company contributions. Tr. Case Stated Hr’g 44 (citing 2014 Profit Sharing Plan arts. 6.4, 9.2, 9.4). While the Revenue Credit portion is not itself subject to forfeiture, the forfeiture account as a whole can be used to pay for “appropriate Plan expenses.” 2014 Profit Sharing Plan art. 6.4(c). If the forfeiture account is being used to pay Plan expenses, though, there would still be no loss to the owner of the account because it could only be used to pay for expenses she would otherwise owe regardless. Thus, this Court finds that there is no “triple credit” problem.
[48]
[10] That Fidelity violated its duty of impartiality is the argument the Plaintiffs originally made in their now-withdrawn Count II. See Compl. ¶ 135-141.
[59]