McGinnes v. FirstGroup Am., Inc.
| Decision Date | 18 March 2021 |
| Docket Number | Case No. 1:18-cv-326 |
| Parties | JEFFREY MCGINNES, et al., Plaintiffs, v. FIRSTGROUP AMERICA, INC., et al., Defendants. |
| Court | U.S. District Court — Southern District of Ohio |
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTIONS TO DISMISS (Docs. 37, 38)
This civil action is before the Court on two motions to dismiss: (1) the motion to dismiss filed by Defendants FirstGroup America, Inc. ("FirstGroup") and the FirstGroup America, Inc. Employee Benefits Committee (the "Committee") (collectively, the "FirstGroup Defendants") (Doc. 37); and (2) the motion to dismiss filed by Defendant Aon Hewitt Investment Consulting, Inc. ("Hewitt")1 (collectively with the FirstGroup Defendants, "Defendants") (Doc. 38). Also before the Court are the parties' responsive memoranda. (Docs. 39, 40, 42, 44, 45, 46, 47, 48, 49, 50, 51, 52, 53, 54, 57, 58).
Plaintiffs Jeffrey McGinnes, Wendy Berry, Lorri Hulings, and Kathleen Sammons (collectively, "Plaintiffs") have filed suit against Defendants under the Employee Retirement Security Income Act of 1974, as amended, 29 U.S.C. § 1001, et seq.("ERISA"), on behalf of the FirstGroup America, Inc. Retirement Savings Plan (the "Plan"). (Doc. 35 at ¶ 1). In short, Plaintiffs allege that Defendants have breached the fiduciaries duties imposed on them by ERISA, by replacing 95% of the Plan's well-established investments with a series of new/untested funds developed by Hewitt in 2013, and by stubbornly adhering to this imprudent/disloyal investment decision despite significant losses to the Plan.2 (Id. at ¶¶ 1-2, 52).
Infra, the Court sets forth the material factual allegations in Plaintiffs' Amended Complaint. For the purposes of this Order, the Court must view the Amended Complaint in a light most favorable to Plaintiffs and take all well-pleaded factual allegations in the Amended Complaint as true. Tackett v. M & G Polymers, USA, LLC, 561 F.3d 478, 488 (6th Cir. 2009).3
FirstGroup established the FirstGroup America, Inc. Retirement Savings Plan for its employees in 2009. (Doc. 35 at ¶ 24). The Plan is an employee benefit plan within the meaning of 29 U.S.C. § 1002(2) and a qualified "401(k)" plan under 26 U.S.C. § 401(k). (Id.; Doc. 37-3 at 9). The Plan helps eligible FirstGroup employees save money for retirement. (Doc. 35 at ¶ 25). Plaintiffs are all current/former participants in the Plan. (Id. at ¶¶ 16-19). The FirstGroup Defendants are both fiduciaries of the Plan.4 (Id. at ¶¶ 20-21). And, since 2009, Hewitt has provided investment advisory services to the Plan. (See id. at ¶ 22).
Between 2009 and 2013, Defendants stocked the Plan with a diverse portfolio of well-established funds (the "Original Funds"). (Id. at ¶¶ 7, 25, 54-56). Plan participants had the opportunity to choose between: a "target date" option managed by T. Rowe Price; a stable value fund managed by Wells Fargo; a passive index fund designed to mirror the S&P 500; and eight other funds actively managed by highly experienced companies. (Id. at ¶ 25 ()).
The Original Funds served the Plan participants well. (See id. at ¶ 7; see also Doc. 39 at 10). Each of the Original Funds had a strong, Global Investment Performance Standards ("GIPS")-compliant, record of performance.5 (Doc. 35 at ¶ 55). Each of the Original Funds consistently beat their 10-year performance benchmarks. (Id. at ¶¶ 55-56; see also id. at ¶ 9). And moreover, each of the Original Funds aligned with the terms of an Internal Policy Statement, maintained by FirstGroup between March 2012 and February 2013 (the "2012 IPS"). (Id. at ¶¶ 11-12, 62, 67).
In relevant part, that 2012 IPS provided as follows:
(Doc. 35 at ¶ 62 (emphasis added); see also Doc. 35-1 at 6).6
Notwithstanding the Plan's strong performance, Plaintiffs allege that everything "changed" in 2013. (Doc. 35 at ¶ 7). In 2013, Hewitt introduced its own line of investment products to the 401(k) market (the "Hewitt Funds"). (Id.) And, in connection with the introduction, Hewitt started marketing its new funds to its consulting clients (like the FirstGroup Defendants), in an effort to leverage its existing relationships into new investors. (Id. at ¶¶ 8, 49). As the funds were new/untested, they did not have an established track record. (Id. at ¶ 57). Moreover, as Hewitt was the funds' developer, Hewitt had a substantial interest in getting its clients to invest in them. (Id. at ¶ 49).
Most of Hewitt's clients rejected the Hewitt Funds, presumably due to their new/untested nature. (Id. at ¶ 8). However, the FirstGroup Defendants were "not as discerning." (Id.) Hewitt pitched a massive Plan overhaul to the Committee at a May 22, 2013 meeting. (Id. at ¶ 69). And, following that single pitch, the FirstGroup Defendants agreed to both: (1) appoint Hewitt as the investment manager for the Plan; and (2) overhaul the Plan lineup to include the Hewitt Funds (instead of the Original Funds). (Id. at ¶¶ 68-72; see also Doc. 37-8 at 3-4; Doc. 39 at 14).
Notably, the Committee's May 22, 2013 minutes do not indicate that the FirstGroup Defendants retained an independent consultant before agreeing to the Plan overhaul; nor do the Committee's May 22, 2013 minutes explain why the Plan overhaul would be in the best interests of the Plan participants. (Doc. 37-8 at 3-4). Instead, they merely provide that the Committee "discussed and considered" the information presentedby Hewitt, then determined that Hewitt "should be retained to be the investment manager for the [] Plan[,] with the authority to select, monitor[,] and manage the [] Plan's investments . . . ." (Id. at 4).7
On August 29, 2013, Defendants executed an investment management agreement (the "IM Agreement"), giving Hewitt the "exclusive authority" to select/monitor the Plan's investment menu, sub-advisors, and investment options. (Doc. 37-6 at 2, 10). Then, on September 24, 2013, Defendants executed a supplemental letter amendment (the "Letter Amendment"), confirming that Hewitt could carry out its duties by "selecting exclusively from among the [Hewitt] Funds." (Doc. 35-2 at 3). In other words, the FirstGroup Defendants explicitly authorized Hewitt to replace all the Plan's Original Funds with the Hewitt Funds. (Id.; see also Doc. 35 at ¶ 71).
Hewitt assumed its role as investment manager on October 1, 2013 (Doc. 37-6 at 2), and, that same day, Hewitt replaced the Original Funds with the Hewitt Funds (Doc. 35 at ¶ 26). In accordance with the Letter Amendment, Hewitt did not just replace some of the Plan's Funds; instead, Hewitt swapped over 95% of the Plan's existing assets for its own new/untested products. (Id. at ¶ 52). Indeed, based on the allegations in the Amended Complaint, Hewitt replaced an Original Fund with a Hewitt Fund wherever itwas possible to do so. (Id. at ¶ 61 n. 28). This resulted in a transfer of over $250 million in Plan assets to the Hewitt Funds. (Id. at ¶ 61).
To illustrate, Plaintiffs have presented the following table of the Plan's lineup both before and after the 2013 overhaul:
Before After Target Date Funds - T. Rowe Price Retirement Series Actively-Managed Funds - Wells Fargo Advantage Small Cap Value Fund - American Funds EuroPacific Growth Fund - Artisan Mid Cap Value Fund - Baron Growth Fund - Dodge & Cox Stock Fund - Mainstay Large Cap Growth Fund - Morgan Stanley Mid Cap Growth Portfolio - PIMCO Total Return Fund Passively-Managed Funds - Wells Fargo S&P 500 Index Fund Capital Preservation Option - Wells Fargo Stable Return Fund Target Date Funds - Aon Hewitt Retirement Series Actively-Managed Funds - Aon Hewitt Core Plus Bond Fund - Aon Hewitt Inflation Strategy Fund - Aon Hewitt Large Cap Equity Fund - Aon Hewitt Non-U.S. Equity Fund - Aon Hewitt Small & Mid Cap Equity Fund Passively-Managed Funds - None Capital Preservation Option - Wells Fargo Stable Return Fund
As depicted in the table, the 2013 overhaul represented a massive change to the Plan's lineup. (Id.) Following the 2013 overhaul, Plan participants had no non-Hewitt options in the Plan lineup other than a low-yielding capital preservation fund. (Id. at ¶ 52). Moreover, Plan participants were left without any passively managed index fund option, as each Hewitt Fund is primarily actively managed. (Id.) Notably, this full-sale adoption of the Hewitt Funds occurred despite the fact that, at the time of the 2013 overhaul, no other 401(k) plan in the country had agreed to use them. (Id. at ¶ 8).
According to Plaintiffs, the results of the 2013 overhaul have been "disastrous." (Id. at ¶ 2). Hewitt's Target Date Funds portfolio has underperformed its weighted 10-year benchmark by an average of 1.49% per year, and the Plan funds it replaced by2.76%. (Id. at ¶ 74). Moreover, Hewitt's remaining portfolio has underperformed its weighted 10-year benchmark by an average of 1.12% per year, and the Plan funds it replaced by 0.76%. (Id. at ¶ 75). Amplified across the $250 million invested in the Hewitt Funds, this underperformance has allegedly resulted in tens of millions of dollars in losses. (Id. at ¶ 13).
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