Kistler v. Stanley Black & Decker Inc.

• Court: U.S. District Court — District of Connecticut
• Writing for the Court: STEFAN R. UNDERHILL UNITED STATES DISTRICT JUDGE
• Docket Number: 3:22-cv-966 (SRU)
• Decision Date: 03 July 2024
• Citation: Kistler v. Stanley Black & Decker Inc., 3:22-cv-966 (SRU) (D. Conn. Jul 03, 2024)
• Parties: JAMES KISTLER and LISA LANG, Plaintiffs, v. STANLEY BLACK & DECKER, INC., Defendant.
• topic: Contracts,Corporate / Commercial

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JAMES KISTLER and LISA LANG, Plaintiffs,
v.
STANLEY BLACK & DECKER, INC., Defendant.

No. 3:22-cv-966 (SRU)

United States District Court, D. Connecticut

July 3, 2024

ORDER ON MOTION TO DISMISS THE AMENDED COMPLAINT

STEFAN R. UNDERHILL UNITED STATES DISTRICT JUDGE

Plaintiffs James Kistler and Lisa Lang bring this action on behalf a potential class of participants and beneficiaries of a retirement plan, the Stanley Black & Decker Retirement Account Plan (“Plan”). Doc. No. 85 at ¶ 1. The plaintiffs claim that Stanley Black & Decker, Inc. (“Stanley Black & Decker”) breached its fiduciary duties under the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1001 et seq. Stanley Black & Decker has filed a motion to dismiss the action in its entirety for lack of standing and failure to state a claim. Doc. No. 95. For the reasons set forth below, that motion is denied.

I. Background

The Plan is a defined-contribution retirement plan. Doc. No. 85 at ¶ 17. Defined-contribution plans are common employer-sponsored retirement plans. Although “earnings on investments increase retirement income” in a defined-contribution plan, the “fees and expenses paid by the plan can substantially reduce retirement income.” Probst v. Eli Lilly & Co., 2023 WL 1782611, at *2 (S.D. Ind. Feb. 3, 2023) (citations omitted).

In this case, the plaintiffs bring two claims against Stanley Black & Decker: breach of fiduciary duties under ERISA and failure to monitor fiduciary and co-fiduciary breaches. Doc. No. 85 at 73-76. Specifically, the plaintiffs challenge the Plan's excessive recordkeeping and

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administrative costs (“RK&A” fees), as well as the Plan's investment in the BlackRock LifePath Index Funds. The plaintiffs specifically bring claims challenging conduct that occurred between July 29, 2016 and the present. See Doc. No. 85 at ¶ 10.

A. Investment in the BlackRock TDFs

Regarding the Plan's allegedly imprudent investment in the BlackRock LifePath Index Funds (“BlackRock TDFs”), the plaintiffs allege that the Plan has offered ten BlackRock TDFs since 2011. Id. at ¶ 68. The Plan designated the BlackRock TDFs as the plan's Qualified Default Investment Alternative (“QDIA”), meaning that if participants do not choose where to invest their assets, all contributions are automatically invested in the BlackRock TDFs. Id. at ¶ 72. Thirty-nine percent of the Plan's assets are invested in the BlackRock TDFs. Id. at ¶ 73.

The plaintiffs begin with their premise that “no TDF is a passively managed investment.” Id. at 26 (cleaned up). Individual funds, they argue, can be actively or passively managed. Id. at ¶ 75. A TDF, on the other hand, “is a fund of funds,” with a portfolio of actively and/or passively managed funds, and the managers of the TDF make “active” decisions regarding asset allocation. Id.; see also id. at ¶ 76 (“construction of a glide path involves substantial decision making from TDF managers”). The BlackRock TDFs “are recognized as having ‘passive implementation' because the portfolio is filled with index funds.” Id. at ¶ 76. But the plaintiffs allege that the TDFs themselves are not “passively managed.” Id.

During the class period, Stanley Black & Decker had an Investment Policy Statement (“IPS”) “containing guidelines for the selection, evaluation, and monitoring of Plan investment options.” Id. at ¶ 22. An IPS, once adopted by fiduciaries, is binding. Id. at ¶ 23. The plaintiffs criticize the Plan's IPS guidelines for comparing BlackRock TDFs to their custom benchmark. Id. at ¶ 77. “Using this custom benchmark is akin to looking in a mirror, and provides no basis to

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conclude anything, positive or negative, about the BlackRock TDFs' performance.” Id. The custom benchmark, the plaintiffs contend, did not adequately capture the BlackRock TDFs' underperformance relative to their peers. Id. Separately, the plaintiffs allege that the IPS establishes that the investment performance of actively managed funds should be “evaluated over three- and five-year periods” and compared to “a relevant peer group of similar funds.” Id. at ¶¶ 79, 82. The plaintiffs posit that the defendant did not conduct that analysis because they mistakenly characterized the BlackRock TDF as passively managed. Id. at ¶ 82.

The plaintiffs state that Wilshire's investment reports (“Wilshire Reports”), reports produced for Stanley Black & Decker by an investment consultant, did, however, compare the performance of the BlackRock TDFs to peers. Id. at ¶ 81. The plaintiffs, however, allege that “[t]here is no evidence that the [Stanley Black & Decker, Inc. Pension Operating] Committee ever considered, discussed, or analyzed this comparative data.” Id. Using the minutes of the Stanley Black & Decker, Inc. Pension Operating Committee (the “Committee”) as a reference, the plaintiffs allege that each time the Committee met quarterly beginning from the third quarter of 2016 through the fourth quarter of 2018, the Committee did not discuss or mention the performance of the BlackRock TDFs. Id. at ¶¶ 82-99. The omission was notable because, during each those respective quarters, the Wilshire Report showed that the BlackRock TDFs underperformed relative to the median of their peers over three- and five-year periods. Id. at ¶¶ 82, 83-99.

The plaintiffs argue that prudent fiduciaries would have compared the performance of the BlackRock TDFs to the S&P Target Date Indices and to similar, alternative TDFs. Id. at ¶ 101. Regarding the S&P Target Date Indices, the plaintiffs allege that those indices are “the most common benchmark used to approximate the overall performance of the TDF industry,”

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according to Morningstar, an investment analyst firm. Id. at ¶ 101. Regarding the similar, alternative TDFs, the plaintiffs posit that the proper comparator TDFs are the other five largest TDF series (BlackRock TDF being one of the six largest TDFs). Id. at ¶¶ 105-07. The six largest TDFs “managed approximately three-quarters of all TDF assets.” Id. at ¶ 106. The plaintiffs argue that any other TDFs would be inapt comparators because those funds would have much smaller assets under management and would accordingly never be a viable investment alternative for the Plan. Id. at ¶ 105. The other five largest TDFs are Vanguard Target Retirement, T. Rowe Price Retirement, American Funds Target Retirement, Fidelity Freedom, and Fidelity Freedom Index. Id. at ¶ 106. The plaintiffs contend that four out of those five TDFs are proper comparators-they exclude Fidelity Freedom because the funds “under[went] a strategy overhaul in 2014” and “lost considerable assets and market share” as a result, making them an unsuitable comparator. Id. at ¶ 107; id. at ¶ 107 n.22.

All of the plaintiffs' suggested comparators are “through” glidepaths, while BlackRock TDF is a “to” glidepath. Id. at ¶ 109. “To” glidepaths reduce risk “at a quicker pace than most of the Comparator TDFs.” Id. To account for that variable, the plaintiffs provide a chart comparing the percentage of each comparator's portfolio in equities (i.e., how risky or conservative a portfolio is) for several vintages. Id. at 42 ¶ 109. The chart shows that the only vintages in which the BlackRock TDFs were substantially lower-risk than the comparators were the vintages approaching retirement. Id. For the vintages 2045 through 2030 (for investors retiring in those years), the BlackRock TDFs did not significantly differ from the comparators in riskiness. Id. at ¶ 110. And in the later vintages (for investors retiring later), the BlackRock TDFs were riskier (i.e., more aggressive) than the comparators. Id. at ¶¶ 109-110.

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In further support of the adequacy of their comparators, the plaintiffs write that “[t]he Sharpe ratio metric, a common component of a fiduciary investment monitoring, accounts for differing levels of risk by measuring the performance of an investment, such as a TDF, compared to the performance of similar investments, after adjusting for risk.” Id. at ¶ 112. The plaintiffs thus contend that using the Sharpe ratio allows for comparing the performance of TDFs across management styles, such as comparing “to” and “through” TDFs. Id.

The plaintiffs allege that Stanley Black & Decker's representatives should have observed and discussed the BlackRock TDFs' repeated underperformance relative to those alternative TDFs, yet the Committee's minutes do not show such discussions. Id. at ¶ 113. The Sharpe Ratio three- and five-year rankings, as well as the three- and five-year annualized returns of the BlackRock TDFs, were available during each quarter between 2016 and 2022. Id. at 47-56 ¶¶ 115-17; see also id. at 58, 60-67. Compared to the plaintiffs' comparators, the plaintiffs allege that the BlackRock TDFs consistently performed below average, and almost always last, among all competitors in the quarters between 2016 and 2019. See id. at 47-56 ¶¶ 115-17. The plaintiffs further allege that “[t]hese returns . . . are annualized, meaning the difference in the returns between the BlackRock TDFs and Comparator TDFs are equivalent to the specified difference in each of the three or five years in the period compounded. This is not the same as saying the funds underperformed by the specified amount over the entire time period.” Id. at ¶ 120. The plaintiffs additionally allege that the BlackRock TDFs consistently underperformed all comparators at the suite-level.^[1] See id. at 59-67, ¶¶ 122-23.

Despite what the plaintiffs contend is obvious underperformance, the plaintiffs allege that the “minutes of meetings of the Committee from March 27, 2017 through September 27, 2022 do

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not reflect a single instance where the Committee so much as independently discussed the performance woes of the BlackRock TDFs.” Id. at ¶ 125.

B. Recordkeeping and Administrative Expenses

The plaintiffs claim that the Plan paid excessive RK&A fees. During the Class Period, Plan...