Compliance March 25, 2024

Judge Rules for Molina, flexPATH in ERISA Case

The District Court judge cited broad indexes as the appropriate benchmarks for plan TDFs in a ruling expected to be finalized later this month.

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A federal judge in California ruled this week that Molina Healthcare Salary Savings Plan participants are not entitled to recover losses on any of the claims they brought in a 2022 complaint under the Employee Retirement Income Security Act. Molina Healthcare Salary Savings Plan participants are not entitled to recover losses on any of their claims brought under the Employee Retirement Income Security Act, a federal judge in California ruled on March 21.

The allegations from 401(k) plan participants Michelle Mills, Coy Sarell, Chad Westover, Brent Aleshire, Barbara Kershner, Paula Schaub and Jennifer Silva were dismissed with prejudice, wrote U.S. District Judge Stanley Blumenthal Jr., presiding in the Central District of California.   

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“The judge was persuaded by defendants’ argument that broad indices were more appropriate as comparators [of performance] than individual funds,” explains Charles Field, managing partner in the San Diego office of law firm Sanford Heisler Sharp LLP, which was not involved in the lawsuit.

The Case

The plaintiffs’ 2022 complaint in Michelle Mills et al. v. Molina Healthcare et al. challenged the selection and retention of the flexPATH Index target-date funds as the 401(k) plan’s qualified default investment alternative. It alleged Molina Healthcare breached its fiduciary duties and engaged in prohibited transactions in violation of ERISA.

Blumenthal ruled the plaintiffs failed to prove losses and instructed the parties to meet and confer no later than March 27 to file a proposed final judgment that is agreed “as to form,” he wrote.

“Even using the most profitable reasonable benchmark, the selection and retention of the flexPATH TDFs as the plan’s QDIA did not cause a loss to the plan,” wrote Blumenthal.

He also rejected the claim that the plaintiffs’ alleged payment of fees to flexPATH was an additional loss to the plan because the money paid as fees could otherwise have been invested in other opportunities.

In the class period, the flexPATH TDFs “outperformed most other retirement TDFs and all three of the benchmark indices, which are appropriate comparators in this case: the Dow Jones Target Date Total Return Index, the S&P Target Date Total Return Index, and the S&P Target Date To Retirement Index,” wrote Blumenthal. “Using any of these indices as a comparator, the plan earned more through its investment in the flexPATH TDFs than it would have earned if the plan’s funds had been otherwise invested in a prudent alternative selected by a prudent and loyal fiduciary.”

The money paid to flexPATH for its services as a 3(38) investment manager total less than $550,000, and the flexPATH TDFs earned their investors more than $3.2 million more during the class period than the best-performing benchmark index (the S&P Target Date Total Return Index), Blumenthal determined.

Precedent Setting?

As the case approaches a conclusion favorable to Molina Healthcare, it is unclear what precise basis the court is using for its dismissal and therefore whether the ERISA defense can be used by plan sponsors in future lawsuits when sponsors face similar allegations is unclear, according to Drew Oringer, partner in and general counsel at the Wagner Law Group, which was not involved in the litigation.

“Predecessor cases involving this sponsor took a number of different directions,” Oringer says. “There has been something of a trend in the courts to hold plaintiffs to increasingly higher standards in terms of alleging real bases for impudence. While the [Hughes v. Northwestern University] case did give some encouragement to plaintiffs by emphasizing the factual nature of the inquiry, it’s becoming clearer that the court’s caution about appropriate deference to careful fiduciaries is being heard by the lower courts.”

The U.S. Supreme Court issued the Hughes ruling in January 2022.  

Regardless of the national legal trends, Molina Healthcare fiduciaries’ detailed documentation of their fiduciary selection supported their defense, Oringer says.

“Where the employer goes through proper process and is conflict-free, it becomes hard to second-guess on the basis of mere disagreement with ultimate choices, absent a showing that obvious or other basic considerations were ignored,” Oringer says. “In this case, one of the allegations seems to be that the applicable investment strategies were novel. However, I would think that a court would be circumspect about saying that appropriately vetted strategies cannot be used by an ERISA plan merely because they are creative or otherwise new.”

According to Field, the ruling “gives insight into the judge’s thinking on appropriate benchmarks. Here, the judge felt broad indices were more appropriate as comparators than individual funds.

Additionally, Blumenthal’s decision “affects how plaintiffs’ experts select comparators/benchmarks against which to measure damages,” Field adds.

The Molina Healthcare plan comprises about $892.3 million in retirement assets for 19,618 participants, as of the plan’s most recent filing to the Department of Labor. Molina Healthcare is a managed care company headquartered in Long Beach, California.

The complaint against Molina Healthcare’s 401(k) plan was filed in March 2022. In December 2022, Blumenthal allowed the case against Molina to continue but dismissed the case against adviser NFP Retirement.

The class of plaintiffs is represented by attorneys with the law firm Schlichter Bogard & Denton LLP; defendant Molina Healthcare is represented by the law firm King and Spalding; NFP Retirement is represented by law firm O’Melveny and Myers LLP; and the business advocacy organization the U.S. Chamber of Commerce, a filer of amicus briefs, is represented by law firm Goodwin Procter LLP.

Representatives of Molina Healthcare did not respond to a request for comment; nor did attorneys for either party.

Compliance March 22, 2024

4 Bipartisan Bills Would Restrict Investment in China

They would ban Chinese securities in index funds and tax gains from them as income.

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Representatives Brad Sherman, D-California, and Victoria Spartz, R-Indiana, introduced four bills that would restrict or disincentivize U.S. investors from investing in China. The bills were referred to the U.S. House Committee on Financial Services on March 20.

The No China in Index Funds Act would forbid funds that track an index from holding any Chinese securities starting 180 days after the bill is passed. Sherman’s office explained that passively managed index funds do not exercise the same due diligence in asset selection or monitoring as do active funds and therefore do not carefully examine the unique risks of Chinese companies.

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As such, the bill does not affect actively managed funds. The bill also makes no distinction between an index fund that tracks an index that specializes in Chinese securities and an index fund that merely contains Chinese securities. This is an important distinction because index funds are only required to match 80% of an index in order to be considered an index fund, per the Securities and Exchange Commission’s requirements.

As an example of how broadly such a ban would apply, the MSCI All Country World Index is a global equity index that measures the equity performance in 23 developed markets and 24 emerging markets. According to information from MSCI, the index included nearly 3,000 companies and covers approximately 85% of the global investable equity opportunity set, as of February. In the MSCI ACWI Index, excluding U.S. investments, (a version of the index), Chinese companies accounted for 7.12% of the index weighting as of last month. There were nearly 90 funds in the U.S. that used that fund as their benchmark, according to February data from Simfund, which, like CIO, is owned by ISS STOXX.

Another bill in the package, the No Capital Gains Allowance for American Adversaries Act, would subject income derived from securities in “countries of concern” to income tax, rather than to capital gains. “Countries of concern” are defined in the legislation as Belarus, China, Iran, North Korea and Russia.

A spokesperson for Sherman’s office clarified that in the case of pooled investment vehicles, such as mutual funds, the manager must track what proportion of the fund is from a “country of concern,” and only growth attributable to those holdings would be taxed as income. For example, a mutual fund with 40% exposure to China and 60% exposure to countries that are not “countries of concern” would have 40% of its gains taxed as income and 60% taxed as capital gains when a distribution is made.

The spokesperson also clarified that the bill would not affect the tax status of retirement plans or other tax-advantaged accounts.

The China Risk Reporting Act, another in the package, would require public companies in the U.S. to disclose the material risks that come from their supply chain’s reliance on China, and this would have to include a narrative disclosure of the company’s actions to minimize the risk. Sources of potential China risk identified in the bill include: rule of law issues in China, biased judicial proceedings, intellectual property theft and conflict between the U.S. and China.

Lastly, the PRC Military and Human Rights Capital Markets Sanctions Act would require the president to make a list of covered entities within 90 days of the bill’s passage. U.S. investors would be forbidden from trading in securities offered by those entities and would have to divest any of those securities. The list would include entities on the Specifically Designated National and Blocked Persons List, the non-SDN Chinese Military-Industrial Complex Companies List and other Chinese military companies.

The sanctions bill carries a 20-year maximum sentence for any U.S. investor “who willfully violates, willfully attempts to violate, willfully conspires to violate, or aids or abets in the commission of a violation of this Act.” It is the only one of the four to carry a criminal penalty.

H.K. Park, a managing director at Crumpton Global, a risk advisory firm based in Washington, D.C., says the volume of bills related to Chinese investment makes it difficult for investors to prepare for compliance because they often carry “different approaches and definitions. As a result, some GPs have asked us to conduct ‘national security assessments’ of all future target companies with Chinese or Russian links, inside and outside those two countries.”

Park adds that even the potential of successful legislation concerns investors, and “some LPs have asked us to conduct national security assessments of their current portfolio so that they can apply a hedging strategy for companies that might decline in value due to future geopolitical actions—for example, ByteDance—due to the proposed forced sale of Tik-Tok.”

The American Securities Association strongly endorsed the package of bills. Chris Iacovella, the ASA’s president and CEO, said in a statement that “prohibiting Chinese stocks from being included in index funds will protect American investors and prevent the Chinese Communist Party from using American capital to fund its military technologies, indiscriminate climate destruction, and gross human rights violations.”

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