AllianceBernstein this week defeated a lawsuit over the use of its own products in the company’s $1.3 billion 401(k), and the result has lessons for other plan sponsors.
On Monday, the US District Court for the Southern District of New York dismissed the plaintiffs’ claims without prejudice, meaning that they can file an amended complaint to address the legal shortcomings within 30 days.
The lawsuit, which was filed in 2022, failed to show that the asset manager could have breached its duties of prudence and loyalty, and it did not successfully allege any prohibited transactions, the court stated.
“This case is one of the many that have been filed – 40-plus cases – that were for self-dealing against investment managers,” Bonnie Treichel, chief solutions officer at Endeavor Retirement, said in an email. “It is counterintuitive because as an investor/consumer you want to know that investment managers are ‘eating their own cooking,’ but these cases argued that the investment management firm has engaged in self-dealing with its 401(k) plan by including their own investments in the plan that underperform and cost too much.”
The plaintiffs alleged that AllianceBernstein acted in its own interest by including in-house investment products in the plan, such as the Lifetime Income Strategy, which was the default option. However, the company successfully argued that it didn’t enrich itself from those products, as it waived the investment management fees for its own plan participants. And while the plaintiffs contended that the firm nonetheless benefitted from having the plan’s assets in its own products, those investments accounted for only about 0.2 percent of AllianceBernstein's total assets under management – a detail that the court pointed out in Monday’s order.
Having fee waivers “does go a long way,” said Alex Lakatos, partner at Mayer Brown, who recently defended plan sponsor Wood Group against a lawsuit over its use of NFP-affiliate investment products on the menu. “It’s a much harder lift [for the plaintiffs],” he said, adding that even in the absence of waivers, “You can still show that you weren’t disloyal, that your purpose was to help the plan participants out.”
Courts have found that employers can’t be shown to be disloyal to their plan participants merely on the basis of including their own products in plans, Lakatos said.
“It was very useful that the court came out and put the kibosh on this theory” that investment managers inherently benefit from the scale of the products used in their own plans, he added.
The plaintiffs had also alleged that AllianceBernstein acted imprudently as the plan sponsor by retaining investments that underperformed benchmarks during various periods of time. However, “the alleged underperformance is not of sufficient duration or magnitude to create an inference of misconduct,” the court stated. “Virtually any investment vehicle can be said to underperform its benchmark depending on the time frame that is chosen. ERISA protects participants against imprudence; it does not, however, accord participants an insurance policy against market losses."
That, Treichel said, reinforces something her firm tells clients.
“The court reminds us that ‘no authority requires a fiduciary to pick the best performing fund.’ ERISA and the duty of prudence is about the process, not the outcome,” she said. “This is a reminder for plan sponsors that you can always be sued but strong fiduciary process creates a strong defense to such cases that may involve conclusory allegations without specific facts.”
It has become very common for similar lawsuits to cite underperformance relative to other funds on the market, but often those allegations don’t mention anything about the level of risk assumed by the funds they're being compared to, Lakatos said.
If the plaintiffs are planning to file an amended complaint, they will likely face an uphill battle, given that they will have to address the holes the court found in the claims, said Alex Smith, of counsel at Holland & Hart. The court’s dismissal is an interesting development and appears to reflect favorable facts presented by AllianceBernstein, such as the fee waivers and the small percentage of total assets the plan assets accounted for in its book, he said.
“At a minimum, this could provide a road map for other asset managers looking to better protect themselves if they are using proprietary funds in their 401(k)s,” Smith said.
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