A New York district court recently summarily dismissed, with prejudice, a 401(k) plan participant’s putative class action complaint alleging breaches of fiduciary duty.  Falberg v. Goldman Sachs Grp., Inc., No. 19-cv-9910, 2022 U.S. Dist. LEXIS 167064 (S.D.N.Y. Sep. 14, 2022).  The Plaintiff alleged that the Plan fiduciary-Defendants breached their duties of prudence and loyalty under the Employee Retirement Income Security Act of 1974 (“ERISA”) by (1) failing to adopt an Investment Policy Statement (“IPS”), and (2) making decisions regarding the choice to remove or retain certain underperforming investment options based on their own self-interest. The Plaintiff further alleged that Plan fiduciary-Defendants engaged in a prohibited transaction by failing to claim “fee rebates” in the form of revenue sharing on behalf of the Plan. 

First, the Court rejected Plaintiff’s claim that the Plan’s lack of an IPS was a breach of the fiduciaries’ duty of prudence.  To the contrary, the Court found that the Defendants had robust policies and procedures in place for monitoring and evaluating the Plan’s investment options.  In doing so, the Court reiterated that not adopting an IPS is not a per se ERISA violation.  

Second, the Plaintiff argued that the Defendants breached their duty of loyalty when they allegedly (1) failed to acknowledge an alleged conflict of interest; (2) retained certain underperforming investment funds; (3) gave preferential treatment to certain investment funds; and (4) removed investment options to avoid litigation.  The Court summarily dismissed this claim, holding that there was no conflict of interest with the Plan offering investment options managed by the Defendants’ asset management group. Specifically, the Plaintiff had the burden of establishing that the Defendants acted for the purpose of providing benefits to themselves or someone else.  The Court held that no Defendant committee member had a personal financial incentive to prefer the investment funds held by Defendants’ asset management group and there was no evidence that the Defendants applied a different standard to the investment funds held by Defendants’ asset management group.  Likewise, the Court found unpersuasive the Plaintiff’s argument that the inclusion of the allegedly underperforming investment funds amounted to a breach of the duty of loyalty.  This is because the court found that the company had well-vetted and unbiased processes to evaluate investment options, including an established investment option rating system, monthly and quarterly performance reports, quarterly and ad hoc meetings to discuss the Plan’s investment options, and that the Defendants reasonably relied on their retained investment advisors.  In addition, the Court found no merit in the allegation that the removal of investment options to avoid litigation amounted to an ERISA violation.   

Third, the Court analyzed Plaintiff’s argument that the Plan’s failure to collect fee rebates in the form of revenue-sharing payments on every investment option constituted a prohibited transaction.  Having noted that the Plan’s recordkeeper was ineligible to receive revenue sharing payments from the subject investment funds, the Court found that the Plan was treated no less favorably than similarly situated plans with respect to fee rebates, and dismissed Plaintiff’s prohibited transaction claim. 

Finally, the Court held that the claim for breach of the duty to monitor was not viable because duty of loyalty claims are derivative in nature, and that Plaintiff could not maintain any of the underlying fiduciary breach claims.

This decision is important because the Court points to specific practices and aspects of the Plan’s management that allowed Goldman to prevail in the lawsuit.  Employers can adopt such practices to avoid or combat the wave of more than 220 similar class action lawsuits that have been filed around the country since 2020.