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Compliance April 16, 2021
Judge Finds Most Allegations Sufficient in Lawsuit Over CITs
Among other claims, the lawsuit says Aon and a 401(k) plan sponsor caused the plan to invest in Aon’s proprietary collective investment trusts (CITs) for Aon’s benefit.
Reported by Rebecca Moore
A federal judge has moved forward claims in an Employee Retirement Income Security Act (ERISA) lawsuit against pharmaceutical product manufacturing company Astellas US LLC, its board of directors and its retirement plan administrative committee, as well as the plan’s discretionary investment manager, Aon Hewitt Investment Consulting.
The plaintiffs allege that instead of acting in the exclusive best interest of participants, Aon Hewitt, now known as Aon Investments USA, acted in its own interest by causing the plan to invest in Aon’s proprietary collective investment trusts (CITs) for Aon’s benefit. The Astellas defendants are also accused of failing to use the plan’s bargaining power to negotiate reasonable fees for investment management services.
The plaintiffs said Astellas and its retirement plan committee agreed to allow Aon to select investments for the plan exclusively from Aon’s proprietary CITs and that Aon had no obligation to consider non-proprietary investment vehicles for the plan. They also noted that Astellas retained the authority to request that Aon keep any plan investment not recommended by Aon for inclusion in the plan.
Aon argued that the plaintiffs failed to state a claim that the company breached its fiduciary duties. However, according to the opinion, the plaintiffs contended that the following combination of allegations allows for a plausible inference of imprudence and disloyalty: The Aon CITs are affiliated with Aon, and thus Aon had a “significant conflict of interest” because it would benefit from having plan assets as “seed money” for its investment-management business; Aon was an inexperienced investment manager and the Aon CITs had less than five years of performance history; and prior to their inclusion in the plan, the Aon CITs underperformed the comparable mutual funds that they replaced.
Judge Ronald A. Guzmán found that these allegations, taken together, are sufficient to plausibly allege Aon’s violation of the duties of prudence and loyalty.
Aon argued that the plaintiffs’ comparisons of the Aon CITs to other funds for purposes of alleging underperformance are flawed because the funds that plaintiffs chose as comparators have different investment strategies and asset allocations. Guzmán said the problem with Aon’s argument is it relied heavily on exhibits that are outside the pleadings and have been excluded from consideration. He also said Aon’s “myriad factual disputes” regarding the aptness of the comparisons are inappropriate to resolve at this stage of the case.
Guzmán also rejected Aon’s contention that the Aon CITs were “managed by experienced, best-of-breed asset managers” and that there is “no legal basis for complaining about the adoption of new investment vehicles for established managers or strategies.” He said he cannot determine on a motion to dismiss that the managers Aon chose were “best of breed,” and that Aon cites no authority for its proposition that as a matter of law, the “relatively recent vintage” of the Aon CITs is “inconsequential under ERISA.”
According to Aon, a provision in its investment management agreement shows that its decision to offer its own CITs “could not have resulted in a penny of additional compensation” beyond its contractual fiduciary fee. Guzmán agreed with the plaintiffs’ response that even if it is true that Aon did not derive “a direct increase in its compensation” from placing its CITs in the plan, their allegations that Aon received other benefits are sufficient to render this claim plausible. The plaintiffs allege that the inclusion of the Aon CITs in the plan benefited Aon’s affiliate, Aon Trust, by virtue of its trustee fees, and benefited Aon by “dramatically increasing its assets under management [AUM]” for the CITs, through the receipt of hundreds of millions of dollars in plan assets as “seed money” for Aon’s investment management business.
Aon contended that, in order to state a claim for breach of the duty of loyalty, the plaintiffs must show that a fiduciary’s primary motive was to further its own interests. But Guzmán disagreed. “Aon cites only two out-of-circuit decisions for this proposition, which does not follow from the relevant statutory language,” he wrote in his opinion. “Moreover, plaintiffs need not show anything for purposes of a motion to dismiss; they need only plausibly allege that Aon put its own interests ahead of those of plan beneficiaries, which plaintiffs have done.”
The Astellas defendants contended that they cannot be liable for the selection and retention of the Aon CITs because the committee delegated these responsibilities to Aon alone, and ERISA provides that a delegating fiduciary shall not be liable for an act or omission by the appointee. In response, the plaintiffs argued that the defendants “cannot escape liability by passing the buck to another person and then turning a blind eye.” The plaintiffs also argued that the Astellas defendants “may also be liable for Aon’s breach as a co-fiduciary,” on the theory that the Astellas defendants “knowingly participated in Aon’s breach.”
But Guzmán found that nothing in the plaintiffs’ complaint alleged any such knowledge. “The allegation that the Astellas defendants ‘partnered’ with Aon to overhaul the plan’s investment options is far too vague to permit an inference of such conduct,” the judge said, dismissing Count I of the complaint without prejudice with respect to the Astellas defendants.
According to the opinion, Count II is a claim against only the Astellas defendants for breach of the fiduciary duties of prudence and loyalty, based on the selection and retention of “plan investment options with higher-cost shares of mutual funds and collective investment trusts that charged unreasonable investment management fees relative to other investment options that were available to the plan.” Guzmán rejected the Astellas defendants’ arguments against the claim based on prior court cases and denied its motion to dismiss Count II.
The complaint also included claims that Aon and Astellas engaged in prohibited transactions under ERISA. “Because it is clear from plaintiffs’ allegations that Aon did not act as a fiduciary when negotiating its own fees with the plan, plaintiffs fail to state a prohibited-transactions claim against Aon to the extent the claim is premised on the payment of plan assets,” Guzmán wrote. However, he found it questionable that Aon Trust’s compensation was reasonable as a matter of law, so he denied Aon’s motion to dismiss Count III of the complaint to the extent it is premised on the selection of Aon CITs for the plan.
Guzmán agreed with the Astellas defendants that the plaintiffs failed to a state a prohibited-transaction claim against them based on the selection of the Aon CITs because the plaintiffs did not allege that the Astellas defendants “caused” the selection of those funds. However, he found that the plaintiffs plausibly alleged that Aon was a party in interest at the relevant time for the purposes of the prohibited transaction claim. “The Astellas defendants’ motion to dismiss is denied as to Count III, to the extent this claim is premised on the payment of plan assets to Aon,” Guzmán wrote.
