Target Funds ‘Focus’ of Excessive Fee Settlement

As It Appeared On

 publication logo

A $10 billion 401(k) plan sued for breach of fiduciary duty for selecting—and keeping—an underperforming target-date fund family on its fund menu—has struck a settlement.

A little more than two years ago, plaintiffs (Chandra V. Brown-Davis, Yolanda Brown, Ronald Dinkel, Siobhan E. Fannin, Daphne G. Jacob, Kristie Kolacny, Dianna J. Martin, Sherri Nelson, Becky S. Ray, Timothy M. Renaud, Lisa Smith and Susan Weeks), individually and as representatives of a class of some 200,000 participants and beneficiaries of the $10 billion Walgreen Profit-Sharing Retirement Plan, had sued the Walgreen Co., the Retirement Plan Committee For Walgreen Profit-Sharing Retirement Plan and their members, and the Trustees for the Walgreen Profit-Sharing Retirement Trust and their members for breach of fiduciary duties under ERISA.

Specifically, the suit claimed that, “in 2013, they loaded the plan with a suite of poorly performing funds called the Northern Trust Focus Target Retirement Trusts,” and that they “kept these Funds throughout the Class Period despite their continued underperformance”—allegedly these investment options “…performed worse than 70 to 90 percent of peer funds.” Worse, according to the plaintiffs—who are represented by Sanford Heisler Sharp LLP and Maddox Hargett & Caruso PC—Walgreen “selected the Northern Trust Funds as the Plan’s default investment options.”

Case History

Walgreens didn’t submit without a fight—terming the suit a case of “Monday-morning quarterbacking” and seeking to dismiss the suit, arguing both that the funds were prudently selected and that the plaintiffs hadn’t proven any flaws in process.

However, U.S. District Judge Charles R. Norgle (who will decide on the merits of the settlement) didn’t buy those arguments—at least not at that stage of the proceedings—and directing the parties to proceed to discovery. He did, however, foreclose the part of the suit targeting two of the funds in question in which the plaintiffs hadn’t actually invested.

The Terms

Under the terms of the settlement, the fiduciary defendants will pay $13,750,000 into a Settlement Fund, which will be allocated among Class Members (after deduction of attorneys’ fees, expenses, and a proposed class representative award) in proportion to their ownership in the Challenged Funds.

In addition, the plan fiduciaries have not only removed the Northern Trust Focus Target Retirement Trusts from the plan, but agreed to keep them off the menu for a 3-year period—and to “use an investment advisor to provide ongoing investment monitoring services for the Plan.”

As for the fairness of the settlement terms, the agreement states that the plaintiffs’ damage expert calculated damages to be approximately $34,000,000 if one compares the performance of Challenged Funds against the average performance of the Challenged Funds’ Morningstar peer universes beginning on January 1, 2018, and argues that the settlement amount is well within the range of other similar cases.

The settlement also notes that “Plaintiff’s Counsel will apply for reasonable attorneys’ fees and reimbursement of their out-of-pocket costs in a combined amount totaling $4,583,333.33, or one-third of the $13,750,000 million value of the Gross Settlement Amount.” Additionally, it asks for “class representative compensation awards not to exceed $15,000 each in recognition of their service as Class Representatives.” The agreement notes that “such awards compensate plaintiffs for the efforts and risks they have undertaken, without which no settlement would be possible”—and, with no sense of irony, it also acknowledges that “…they provide an incentive for other employees to bring cases that vindicate the public’s interest in having retirement funds prudently managed.”

Risks and Uncertainty

In encouraging the court’s approval of the settlement, it outlines the “significant risk and uncertainty exist regarding proof of liability or damages.” Specifically, it acknowledges that the “plaintiffs’ claims rest on a breach of ERISA’s duty of prudence. Evaluating prudent conduct requires consideration of both the substantive reasonableness of the fiduciary’s actions and the procedures by which the fiduciary made its decision.” More specifically, it notes that this means that “plaintiffs must prove that Defendants’ process failed to “(1) employ proper methods to investigate, evaluate and structure the investment; (2) act in a manner as would others who have a capacity and familiarity with such matters; [or] (3) exercise independent judgment when making investment decisions.” Moreover, that plaintiffs must prove that Defendants breached their duty to monitor the Challenged Funds and failed to timely remove them, and, as a result, the Plan suffered investment losses.

Beyond that, it notes that “also at issue is whether the peer universes Plaintiffs have identified were in fact comparable to the Challenged Funds and whether any underperformance identified is solely the product of hindsight,” concluding that “if Plaintiffs fail on any of these points, their recovery could be lost all together [sic]. Defendants vigorously contest liability and damages, and Plaintiffs would still need to prevail at summary judgment, trial, and on appeal.” And, if that weren’t enough, “…damages are uncertain and a likely subject of expert testimony.”

In sum, the plaintiffs “respectfully ask the Court to: (1) grant preliminary approval of the Settlement; (2) enjoin Class Members from pursuing any claims that arise out of or relate to the claims at issue in this action pending final approval; (3) direct notice to Class Members and approve the plan and form of notice, including the procedure for objecting to the Settlement; (4) appoint Analytics LLC as Settlement Administrator and Escrow Agent; (5) schedule a final Fairness Hearing; (6) schedule a hearing on Class Counsel’s forthcoming application for fees and costs and the payment of Class Representative Compensation awards; and (7) approve the CAFA notice form.”

Will Judge Norgle agree? Stay tuned.