On the third try in a lawsuit against CenturyLink and its investment management company, a judge has recommended all but one claim by participants in the firm’s Dollars & Sense 401(k) Plan be dismissed.

U.S. Magistrate Judge Nina Y. Wang of the U.S. District Court for the District of Colorado discussed the procedural background to this case in her prior recommendation to dismiss, so she only focused on subsequent amendments made in the plaintiffs’ third amended complaint.

Case documents show CenturyLink appointed CenturyLink Investment Management Company (CIM) as an investment fiduciary for its 401(k) plan. One of the investment options offered by CIM was the Active Large Cap U.S. Stock Fund, which was also included in the plan’s 12 target-date funds. As noted in the latest recommendation, the fund underperformed its benchmark nearly every quarter over the life of the fund.

In May 2015, CIM reevaluated the fund’s seven managers using a five-year, rather than a three-year, basis. By the end of 2015, three of the managers had significantly underperformed their benchmarks, but CIM took no action. The following year, CIM again reviewed its investment strategy, concluding that “the Large Cap Fund underperformed by 2.6% while the average manager has detracted 1.8%.” It also concluded that active management had been the largest detractor for the fund. So, CIM shifted 8% of assets managed by Cornerstone to the other managers and terminated Artisan, which managed 4% of the fund. In April 2017, after more underperformance, CIM again evaluated its strategy but declined to make material adjustments.

According to Wang’s recommendation, the third amended complaint contains three counts: (1) breach of fiduciary duty against CIM for the deficient design of the fund, including but not limited to opting for a self-designed fund and the failure to sufficiently monitor and replace or modify the fund despite “dramatic underperformance”; (2) breach of fiduciary duty against CenturyLink for failure to properly monitor CIM as the plan investment fiduciary in its design and implementation of the fund; and (3) co-fiduciary liability against CenturyLink under the Employee Retirement Income Security Act (ERISA).

Wang began her discussion by noting that “the fact that a fiduciary has undergone a robust investigation of an investment does not in and of itself relieve the fiduciary of liability if the circumstances reflect a breach of duty despite the rigorous investigation—and the reverse is true as well.”

Wang found that the third amended complaint is left with allegations, even taken as true, that are insufficient to establish that a reasonably prudent fiduciary would not have made the decision to structure the fund across multiple active managers within the context of the entire portfolio and the overall investment strategy. First, she noted that the defendants have a statutory duty under ERISA to diversify investments. According to the plaintiffs, CIM claimed to have designed the fund to hedge against various market factors. They allege that a back test showed CIM that “the performance of multiple uncorrelated large cap managers over a 10-year period will be very similar to the performance of the index.”

The defendants pointed out that the allegations in the third amended complaint suggest that CIM engaged in a robust investigation in designing the fund. The plaintiffs did not claim that the defendants knew from the outset that structuring the fund with seven managers could not exceed the benchmark. Nor are there factual allegations that demonstrate that CIM’s determination that the level of risk was unacceptable, particularly given the back test that demonstrated that the performance would be “very similar” to the performance of the index. According to Wang, other courts have observed in the context of a motion to dismiss that “a plan is not per se imprudent merely because it incorporates risky investments.”

She concluded that the plaintiffs failed to state a claim under its theory that CIM imprudently structured the fund with seven active managers.

Turning to the plaintiffs’ allegations that CIM’s truncated search for managers constitutes a breach of fiduciary duty, Wang noted that they argued that CIM sought to lessen its oversight burden rather than find the best possible managers for the fund and therefore imprudently limited its search for managers to those with whom it was already familiar. Wang also found those allegations failed to state a claim. She said, as an initial matter, the applicable standard is not “the best available managers for the Large Cap Fund.” Rather, she focused on the process CIM engaged in to select the fund managers, and whether CIM’s decision to select from known fund managers was objectively imprudent.

Wang found the plaintiffs’ argument that CIM limited this search to “ease its own oversight burden” is both conclusory and does not itself indicate any defective process. She said they also have not pled facts that, taken as true, establish or support a plausible inference that CIM’s purported objective to reduce the oversight costs associated with the plan was improper. Wang also noted that the third amended complaint asserts not that this decision was made without analysis, but rather only after “a period of re-underwriting, when the Team refreshed its due diligence through calls, meetings, site visits, and quantitative analysis.” She said there are also no factual allegations that support the contention that CIM’s existing managers were known to be inadequate or managers with such a poor track record that a reasonably prudent fiduciary should have necessarily broadened the search.

According to Wang, to plausibly establish a claim for breach of the duty to monitor based on procedural prudence, a plaintiff must allege facts plausibly establishing that, upon proper review, no reasonable fiduciary would maintain the investment. The plaintiffs must allege facts to support the conclusion that CIM would have acted differently had they engaged in proper monitoring—and that an alternative course of action could have prevented the plan’s losses. It is not sufficient to simply allege that an investment did poorly, and therefore a plaintiff was harmed.

So, given additional factual allegations the plaintiffs provided in their new complaint, Wang found dismissal at this juncture to be inappropriate. While recognizing that the plaintiffs have not addressed the specific alternative course of action that could have prevented the plan’s losses in each instance where review was not adequately conducted, drawing all inferences in favor of the plaintiffs, as she said she must at this juncture, she found that the third amended complaint at least presents a question of the proper interpretation of certain admitted facts, which is not amenable to the motion to dismiss, and may be influenced by expert testimony. She denied the defendants motion to dismiss the claim that CIM failed to monitor the funds.

Regarding the failure to monitor claim against CenturyLink, Wang first turned to the question of whether CenturyLink was a functional fiduciary in this matter. She previously found that the plaintiffs’ allegations were sufficient to establish that CenturyLink was a functional fiduciary, relying on the fact that the plaintiffs pleaded that CenturyLink had the authority to appoint and remove CIM as plan fiduciary. Wang previously declined to recommend dismissal of CenturyLink, given that the especially fact-sensitive inquiry into functional fiduciary status was more appropriate for the summary judgment stage or trial. She found no reason to depart from this recommendation on plaintiffs’ third try.

So, assuming CenturyLink constitutes a functional fiduciary, Wang turned to considering whether the plaintiffs stated a plausible claim that CenturyLink breached its duty to monitor CIM. She found that this claim against CenturyLink suffers from a lack of factual support. Although the plaintiffs offered a more detailed record of when CIM monitored the fund’s performance, and its alleged lack of appropriate action, there are no such facts supporting CenturyLink’s monitoring of CIM. The third amended complaint offers only the conclusory statement that CenturyLink failed to monitor CIM. Wang noted there are no times, dates, locations, or any such specific identification of any review process, nor did the plaintiffs point to any schedule by which CenturyLink was required to monitor CIM but failed to do so.

“Particularly given the fact that Plaintiffs are on their Third Amended Complaint, and they have had discovery available to them, this single allegation is still not sufficient,” said Wang, and she recommended the defendants’ motion to dismiss be granted.