A recent lawsuit involving an alleged breach of fiduciary duty by an advisor to a 401(k) provider has been partially resolved. A court ruled the advisor was not in breach of his fiduciary duties on certain claims; however, a jury will decide the remaining issue of whether the advisor breached his fiduciary duty as to plan participants regarding plan offerings.
The Employee Retirement Income Security Act (ERISA)-based lawsuit includes claims against the advisor, hired by Banner Health, a 401(k) provider. Banner offered three tiers of funds to plan participants including target date funds provided by Fidelity Freedom Funds.
The advisor was hired to, among other things, review the investment performance of the plan's current investment options and provide recommendations to Banner regarding fund providers.
In August 2014, the advisor recommended that Banner compare the current target date offerings provided by Fidelity Freedom Funds with others to be sure they were the most appropriate option for Banner's plan participants. Later, he advised Banner to hear presentations from other target date fund providers. In February 2015, the advisor recommended Banner replace the Freedom Funds with J.P. Morgan target date funds, which was done.
However, this was too little, too late, according to the plaintiffs. They allege that as far back as 2011, the performance gap between Fidelity Freedom Funds and other alternatives was so glaring by the end of the second quarter of 2011 that a prudent fiduciary could no longer ignore the need to replace the Freedom Funds. According to the plaintiffs, this alleged fiduciary failure to timely remove the Freedom Funds from the plan resulted in $40.7 million in plan losses. Plaintiffs allege the advisor was a fiduciary and breached his duty of loyalty by providing imprudent investment advice.
The court held the plaintiffs provided sufficient evidence for a jury to determine if the advisor breached his fiduciary duty by not recommending fund changes more promptly. "Ruling in ERISA Case Lets Advisor Partly off the Hook" www.plansponsor.com (Apr. 28, 2019).
The advisor's 2014 contract with Banner provided that the "sole standard of care imposed on [the advisor] by this agreement is to act with the care, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims." This is the standard by which a jury will determine the advisor's liability to plan participants.
However, as to other alleged violations, the advisor's liability was held to be limited by his employment contract. He was deemed a fiduciary, but only with respect to those matters specifically assigned to him by contract.
Some courts, Delaware in particular, have long held that limited liability companies ("LLCs") have the option to specify in their operating agreements that their managers owe no fiduciary duties to other members or to the company. However, even so, there remains an expectation that there are still some duties that managers will owe to members in running the company, regardless of the contract. However, a recent Delaware decision (Miller v. HCP & Co., 2018 WL 656378 (Del. Ct. Ch. Feb. 1, 2018)), has held that it will enforce an LLC's exclusion of fiduciary duties even in the face of allegations that the managers acted to enrich themselves directly at the expense of other members.
The court's rationale is that the members plainly intended to restrict the application of fiduciary duties and that any other result would be inconsistent with the members' contractual intent.
Such a holding is unlikely to apply in federal ERISA cases such as that above, but it may gain traction in resolving state-based claims arising from contract-based breach of fiduciary duties.