Krohnengold v. N.Y. Life Ins. Co.
| Decision Date | 09 August 2022 |
| Docket Number | 21-CV-1778 (JMF) |
| Parties | STUART KROHNENGOLD, et al., Plaintiffs, v. NEW YORK LIFE INSURANCE COMPANY, et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Former and current participants in certain 401(k) plans bring this putative class action alleging violations of the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1001 et seq. More specifically Plaintiffs allege that New York Life Insurance Company (“NYL”), its Fiduciary Investment Committee (the “Committee”), and the members thereof breached their fiduciary duties, engaged in prohibited transactions and violated ERSIA's antiinurement provision in connection with their management of two NYL 401(k) plans (the “Plans”). Their allegations center on Defendants' use of NYL's Fixed Dollar Account as the default investment option for the Plans, as well as their selection and retention of certain proprietary funds (the “MainStay Funds”) that allegedly cost more than similar investment options and underperformed benchmarks chosen by NYL itself. According to Plaintiffs Defendants' imprudent decisions with respect to these investments cost Plan participants hundreds of millions of dollars in retirement assets from 2015 to the present.
Defendants now move, pursuant to Rule 12(b) of the Federal Rules of Civil Procedure, to dismiss Plaintiffs' claims. ECF No 41. For the reasons that follow, Defendants' motion to dismiss is GRANTED in part and DENIED in part. In particular, the Court concludes that four of the seven Plaintiffs lack standing to bring fiduciary-duty claims challenging Defendants' designation of the Fixed Dollar Account as the default investment option; that the corresponding claims of the other three Plaintiffs are time barred; and that Plaintiffs fail to allege a plausible fiduciary-duty claim based on the MainStay MacKay International Equity Fund and a plausible claim for violation of ERISA's anti-inurement provision. Defendants' motion is otherwise denied. Moreover, the Court grants Plaintiffs leave to file another amended complaint.
The following facts, drawn from the Amended Complaint, are presumed to be true for purposes of this motion. See e.g., Karmely v. Wertheimer, 737 F.3d 197, 199 (2d Cir. 2013).
Plaintiffs Stuart Krohnengold, Wayne Antoine, Lee Webber, Anthony Medici, Joseph Bendrihem, Larry Gilbert, and Rafael Musni are seven former and current participants in two 401(k) plans sponsored by NYL: the Employee Progress Sharing Investment Plan (the “Employee Plan”) and the Agents Progress Sharing Investment Plan (the “Agents Plan”). ECF No. 38 (“Am. Compl.”), ¶¶ 15-21, 48. Krohnengold, Antoine, Webber, and Gilbert are participants in the Employee Plan; Musni is a participant in the Agents Plan; and Medici and Bendrihem are participants in both. Id. ¶¶ 15-21. The Plans are defined contribution plans, in which “[t]he value of each participant's individual account in the 401(k) Plans depends on contributions made on behalf of each employee or agent by his or her employer, deferrals of employee compensation and employer matching contributions, plus the performance of investment options and minus all fees and expenses.” Id. ¶¶ 48, 51. As of the end of 2019, the two Plans combined had more than $4.3 billion in assets and more than 29,600 participants. Id. ¶ 57. The Plans provides participants with a menu of investment options, selected by the Committee, from which to choose. Id. ¶ 52. During the proposed Class Period (from March 1, 2015, to the present), the Committee selected and retained various NYL proprietary funds as investment options, including, as relevant here, the Fixed Dollar Account and nine other proprietary mutual funds, known as the MainStay Funds. Id. ¶ 54.
The Fixed Dollar Account, a stable value fund offered through a group annuity contract between the Plans and NYL, is one of NYL's flagship products. Id. ¶ 5, 47, 70. Pursuant to the contract, participants' contributions to the Fixed Dollar Account are transferred to and maintained in NYL's general account. Id. ¶ 70. In exchange, NYL provides a guaranteed rate of return specified in the contract. Id. In total, the Fixed Dollar Account generated less than 5.1% in investment returns each year from 2015 to 2020. Id. ¶ 84. Participants retain the right to make withdrawals from the Fixed Dollar Account, but NYL charges the Plans' assets for such withdrawals in addition to other administrative expenses. Id. ¶ 70. Because NYL's general account assets are subject to claims by its creditors and liabilities arising from any of its businesses, there is a risk that NYL may default on its obligations to the Plans. Id. ¶ 72-73.
From 2003 to 2008, and from 2009 on, the Committee set the Fixed Dollar Account as the default investment option for the Plans. Id. ¶ 68. As a result, the contributions for all Plan participants during those years were automatically invested in the Fixed Dollar Account unless the participant affirmatively selected a different investment option. Id. By the end of 2019, nearly 60% of the Employee Plan and nearly 43% of the Agents Plan - more than $2.3 billion in total assets - were invested in the Fixed Dollar Account. Id. ¶ 59. These high rates of investment in a stable value product like the Fixed Dollar Account made the Plans an outlier among 401(k) plans. Id. ¶ 82. According to a study conducted by NYL, participants in other 401(k) plans allocated only 12% on average to stable value products; the weighted-average stable value holdings in the “four largest private 401(k) plans” is under 17%. Id.
Notably, the Department of Labor (“DOL”) has determined that low-risk, low-return stable value funds, such as the Fixed Dollar Account, do not satisfy the asset accumulation requirements necessary to be deemed a Qualified Default Investment Alternative (“QDIA”), id. ¶ 47 - i.e., a default investment option that is eligible for an ERISA safe harbor provision, see 29 U.S.C. § 1104(c), because, among other things, it is typically “designed to provide long-term appreciation and capital preservation through a mix of equity and fixed income exposures consistent with a target level of risk appropriate for participants,” 29 C.F.R. § 2550.404c-5(e)(4)(ii); see also id. §§ 2550.404c-5(e)(4)(i), (iii). In making this determination, DOL explained that “investments made on behalf of defaulted participants ought to and often will be long-term investments.” Default Investment Alternatives Under Participant Directed Individual Account Plans, 72 Fed.Reg. 60,452, 60,463 (Oct. 24, 2007). “[O]ver the long-term,” the DOL continued, making such investments “in money market and stable value funds will not . . . produce rates of return as favorable as those generated by products, portfolios and services included as qualified default investment alternatives, thereby decreasing the likelihood that participants invested in capital preservation products will have adequate retirement savings.” Id.
During the Class Period, the Committee also selected and retained NYL proprietary mutual funds, known as the MainStay Funds, as investment options for the Plans. See Am. Compl. ¶¶ 54-55. Nine such funds are relevant here: the Income Builder Fund, the Epoch U.S. All Cap Fund, the Epoch U.S. Small Cap Fund, the MacKay International Equity Fund, the Retirement 2010 Option Fund, the Retirement 2020 Option Fund, the Retirement 2030 Option Fund, the Retirement 2040 Option Fund, and the Retirement 2050 Option Fund. Id. ¶¶ 53-54. These funds are managed for a fee by NYL. Id. ¶ 55.
According to Plaintiffs, eight of the nine MainStay Funds - all but the MacKay International Equity Fund - consistently underperformed performance benchmarks selected by NYL itself or other comparable funds. Id. ¶ 101. For instance, the Epoch U.S. All Cap Fund and the Epoch U.S. Small Cap Fund underperformed benchmarks selected by NYL, as well as Morningstar index benchmarks, over one-, three-, five- and ten-year trailing returns as of the end of 2020. Id. ¶¶ 102-06. And the Income Builder Fund underperformed those same benchmarks over one-, three-, and five-year trailing returns. Id. Meanwhile, the five MainStay Retirement Funds underperformed the Vanguard Target Retirement Funds, the funds which were later used to replace the MainStay Retirement Funds, on a trailing one-, three-, five-, and ten-year basis as of the end of 2018. Id. ¶¶ 127, 129, 131. According to Plaintiffs, “[t]he Vanguard Target Retirement Funds are appropriate comparators to evaluate the Mainstay Retirement Funds because they have similar asset allocation among the underlying asset classes.” Id. ¶ 133. For instance, “at year end 2015, the Mainstay Retirement 2050 Fund's asset allocation was 89% equity, and 11% fixed income, while the Vanguard Target Retirement 2050 Fund had an asset allocation of 90% equity and 10% fixed income.” Id.
Plaintiffs allege that the same eight MainStay Funds also had higher costs and fees than funds that were similar, if not identical, in terms of their investment strategy. Id. ¶¶ 110-14, 118, 120-21, 128. For instance, although the MainStay Epoch U.S. All Cap Fund has an expense ratio of eighty-nine basis points for the share class offered by the Plans, Epoch Investment Partners, Inc. manages a separate account that uses an identical strategy but has an expense ratio of only sixty basis points - approximately “33% cheaper than what [the Plans] pay for the same strategy.” Id. ¶ 112. Additionally, three of the MainStay Funds - the Epoch U.S. All Cap Fund, the Income Builder Fund, and the MacKay International Equity Fund - each had expense ratios that were notably...
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