ERISA Lawsuit Settlement Hits Stumbling Block

Cincinnati, OHThe partial settlement of Berry v. FirstGroup America, which seemed like a sure thing less than a month ago, has hit a snag that may require substantial changes. The class action ERISA lawsuit alleged that FirstGroup America removed well-performing investment funds from the FirstGroup America, Inc. Retirement Savings Plan (the “Plan”) and replaced them with newly-launched Hewitt funds. The plan fiduciaries made this change at the urging of Hewitt, its investment adviser (later known as “Aon Hewitt” and now “Aon”). The results were disastrous. Plan participants allegedly lost tens of millions of dollars.

The proposed $4.5 million settlement was to have ended the litigation between the Plan participants and Aon, but not Aon. The settlement would also have blocked FirstGroup from asserting counterclaims against Aon. FirstGroup objected. So, the Plan participants will continue to wait for payments that might have covered at least some of their losses.

Background to the Lawsuit  

       
Hewitt had acted as the investment consultant to the Plan since at least 2009. At the inception of the relationship, it appears that Hewitt attempted to provide independent advice to the Plan, and helped FirstGroup construct and maintain an investment lineup consisting of a diverse set of investment products from a number of different fund managers.

In 2013, however Hewitt started a new business venture and began offering its own line of investment products, which it introduced to the 401k plan marketplace in September of that year. Hewitt marketed these funds to its existing client base in order to attract investors for itself.

The overwhelming majority of 401k plan sponsors that it advised rejected the new Hewitt Funds for their plans. FirstGroup became the first employer in the country to include them in its Plan, and even went so far as to make the Hewitt target-date fund series the Plan’s default investment option. The Plan fiduciaries transferred over a quarter billion dollars (more than 90 percent of the Plan’s total assets) into these new and untested funds, and left participants with no other meaningful investment options.

The experiment failed. Since the new funds were added to the Plan in 2013, they consistently underperformed their benchmarks, and have underperformed the funds they replaced by tens of millions of dollars.

The 13,000 public transportation workers who participated in the Plan filed their ERISA lawsuit in 2018. They alleged various breaches in fiduciary duty of care and prudence on the part of both the investment advisor and the those at FirstGroup in charge of managing the Plan. Specifically, they charged that both defendants breached their fiduciary duties under ERISA by:

• engaging in a radical redesign of the Plan’s investment menu that was designed to benefit Hewitt (the Plan’s fiduciary investment consultant) rather than the participants and beneficiaries; and
• stubbornly adhering to this imprudent menu design in spite of evidence that it has caused significant and ongoing damage to the Plan.

ERISA Fiduciary Duties  

To protect plan participants, Section 404 of ERISA incorporates the twin fiduciary duties of loyalty and prudence. The duty of loyalty requires fiduciaries to act “solely in the interest of the participants and beneficiaries.” Specifically, a decision to make an investment may not be influenced by other factors unless the investment, when judged solely on the basis of its economic value to the plan, would be equal or superior to alternative investments available to the plan.

The duty of prudence applies to the initial selection of a plan’s investment options, and also entails a continuing duty to monitor plan investments and remove imprudent ones. Although a retirement plan sponsor and fiduciary committee may seek input from an investment consultant (such as Hewitt) about the plan’s investment options, this does not absolve the corporate sponsor of its fiduciary duties. In such a case, the sponsor, committee, and the consultant share legal duties with respect to the Plan.

Proposed Settlement on Hold    

The former employees said the proposed $4.5 million partial settlement represented about 10.6 to 17.8 percent of the total estimated damages, estimated to be between $25.2 million and $42.4 million.

FirstGroup has objected to a provision in the proposed settlement agreement that would extinguish the company’s rights to bring any claims for indemnity, contribution or third-party claims against Aon. FirstGroup alleges that these provisions are contained in the previously executed investment management agreement between Aon and FirstGroup.

These last-minute objections are not unusual in partial settlement negotiations. But in the meantime, the Plan participants, who appear to have been harmed by incautious and perhaps self-serving decisions on the part of those charged with managing their retirement funds wisely, sit and wait.