Wildman v. Am. Century Servs., LLC

• Decision Date: 23 January 2019
• Docket Number: No. 4:16-CV-00737-DGK,4:16-CV-00737-DGK
• Citation: 362 F.Supp.3d 685
• Parties: Steve WILDMAN, et al., Plaintiffs, v. AMERICAN CENTURY SERVICES, LLC, et al., Defendants.
• Court: U.S. District Court — Western District of Missouri

362 F.Supp.3d 685

Steve WILDMAN, et al., Plaintiffs,

v.AMERICAN CENTURY SERVICES, LLC, et al., Defendants.

No. 4:16-CV-00737-DGK

United States District Court, W.D. Missouri, Western Division.

Signed January 23, 2019

Brock J. Specht, James H. Kaster, Paul J. Lukas, Carl F. Engstrom, Jacob T. Schutz, Kai H Richter, Nichols Kaster & Anderson, PLLP, Minneapolis, MN, Michael F. Brady, Mark A. Kistler, Brady and Associates, Overland Park, KS, for Plaintiffs.

John J. Falvey, Jr., Paul Nemser, Alison V. Douglass, Dave Rosenberg, James O. Fleckner, Samuel J. Goodwin, Goodwin Procter LLP, Boston, MA, W. Perry Brandt, Bryan Cave Leighton Paisner, LLP, Kansas City, MO, for Defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

GREG KAYS, CHIEF JUDGE

This case involves claims for breach of fiduciary duty and prohibited transactions pursuant to the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq. Plaintiffs Steve Wildman ("Wildman") and Jon Borcherding ("Borcherding"), participants in the American Century Retirement Plan (the "Plan"), brought this suit on their own behalf and on behalf of a class of participants in the Plan, against Defendants American Century Services, LLC ("ACS"), American Century Investment Management ("ACIM"), American Century Companies, Inc. ("ACC") (ACS, ACIM, and ACC collectively "American Century"), the American Century Retirement Plan Retirement Committee (the "Committee"), and past and present members of the Committee,¹ seeking damages and declaratory and injunctive relief related to allegations that Defendants breached their fiduciary duties to the Plan.

Plaintiffs tried three claims² to the Court over eleven days, from September 4 to 20, 2018.³ All of Plaintiffs' claims rest on Defendants committing a breach of fiduciary duty. After carefully considering all of the evidence presented at trial, the Court finds Plaintiffs failed to prove Defendants breached any fiduciary duty to the Plan participants. Accordingly, the Court finds in Defendants' favor on all counts and claims.

Findings of Fact

A. The Parties

Wildman is a former employee of American Century. He began participating in the Plan in 2005 and continues to participate, though he is in the process of removing his funds from the Plan. Borcherding is also a former employee of American Century and participated in the Plan from 1996 to 2012.

Defendant ACIM is a financial services company offering mutual funds and other investments to retirement plans and other investors. ACIM manages the American Century-branded mutual funds within the Plan. During the relevant time, ACIM offered 106 mutual fund products to its customers, and as of year-end 2016, ACIM had approximately $ 11.7 billion in assets under its management.

Defendant ACS is the Plan sponsor,⁴ and is primarily responsible for administering the Plan. Administration of the Plan includes controlling and managing the Plan's operations by selecting and monitoring investment options and third-party service providers. ACS outsources this administration to the Committee, which is responsible for supervising, monitoring, and evaluating the performance of the Plan. The Committee is composed of American Century employees appointed by the American Century senior management team.

Mark Gilstrap, a senior management committee member, testified that members of the senior management committee did not involve themselves with the inner workings of the Committee and provided no oversight or review of the Committee's decisions because the Committee members had significant expertise in investment products, retirement plans, and financial markets. In fact, three of the Committee members hold Chartered Financial Analyst (CFA) designations, a designation which measures the competence and ethics of a financial analyst. The other Committee members were familiar with the inner workings of American Century and knew the product and services well. The Court finds the Committee members' testimony credible.

B. The Plan

The Plan is a defined-contribution "401(k)" plan, as defined by ERISA, 29 U.S.C. § 1002(2)(A), (34), that allows participants to contribute a percentage of their pre-tax earnings and invest their contributions in one or more investment options. The Plan is open to all employees of the American Century companies, and also former employees and their beneficiaries. The record shows most chose to participate in the Plan. From 2011 to 2015, the participation rate in the Plan ranged from 93.5 to 96.0 percent. During that same time period, the plans (approximately 1,900) recordkept⁵ by Vanguard had average participation rates of between 74 and 78 percent. The Plan's participation rate was also higher than the average participation rate of other defined contribution plans with automatic enrollment recordkept by Vanguard, which was between 88 and 92 percent.

Since 2010, the Plan's investment options were a selection of American Century mutual funds, American Century collective investment trusts ("CIT"),⁶ American Century Companies Inc. Class C common stock, and a self-directed brokerage account ("SDBA").⁷ The SDBA includes American Century and non-American Century investment options including index mutual funds, exchange traded funds, and individual stocks and bonds.

The class period runs from June 30, 2010, to the present. At the beginning of the class period, American Century offered Plan participants mostly institutional share class funds, but in July 2013, American Century made the retirement share class ("R6") available for twenty-three funds in the Plan.⁸ Although there was some delay, the Committee converted all twenty-three funds to the R6 share class in August 2014.

During the class period, the Plan offered between thirty-three and forty-six investment options. Committee members testified they purposefully offered a large number of investment options because the majority of American Century's employees are sophisticated investors (holding various financial advisor certifications and financial industry regulatory licenses), who preferred the ability to invest their retirement savings more precisely. In fact, by the end of 2016, 404 out of the approximately 1,300 Plan participants were active employees of American Century who had passed exams allowing them to buy and sell securities.

Even though the Plan consisted of only American Century funds, it contained a diverse array of asset classes and investment styles covering the entire risk/reward spectrum. For example, the Plan offered funds from money market accounts on the low end of the spectrum to several specialty funds and common stock funds at the higher end. The Plan also offered a significant number of large cap equity funds, and many small and mid-cap equity funds as well. The Plan did not offer a stable value fund, which consists of a bundle of high-quality, relatively conservative securities that are wrapped by an insurance contract.

Up until 2013, the Plan included a sub-advised index fund (a passive fund), offered by Barclays but branded American Century. When American Century decided to discontinue its relationship with Barclays, the fund was removed from the Plan. The Committee discussed adding index funds to the Plan on and off after 2010. On September 12, 2016, the Committee added five Vanguard passively managed index funds to the Plan's investment lineup.

The Committee members testified they preferred actively managed funds—the only type of fund American Century offered—because they believed actively managed funds were more responsive to market fluctuations. Active funds tend to have higher fees than passive funds, and the fees for the funds within the Plan ranged from 4 to 158 basis points. While the Committee members were aware of the fee differential between passively and actively managed funds, they believed the benefits outweighed those costs. They also believed Plan participants preferred actively managed funds, given the employees' enthusiasm in American Century, their investment in American Century products outside of the Plan, and the fact the Committee only once—after this lawsuit—received a question about the lack of passive options in the Plan.

No other 401(k) plan offers exclusively American Century funds, but a report ("the Hewitt Report") presented to the Committee by Hewitt/Hewitt EnnisKnupp ("Hewitt Company") indicated that 41 percent of plans used an all-proprietary lineup. The Committee also preferred American Century funds because the fund managers were readily accessible to the Committee. On several occasions, the Committee heard reports from American Century fund managers about new funds, strategies to combat changes in the market, or about management changes in funds suffering from poor performance. The Committee felt the closeness with the fund managers was advantageous because the Committee (and participants) had an "insiders' view" into the inner-workings of the fund's investment management team.

C. Recordkeeping & Revenue Sharing

At the beginning of the class period, JPMorgan Retirement Plan Services, LLC, ("JPMorgan RPS") was the Plan's recordkeeper, but in December 2013, JPMorgan RPS was replaced by Schwab Retirement Plan Services ("Schwab RPS"). This switch was made after an independent consultant conducted a request for proposal ("RFP") to determine the recordkeeping needs of the Plan and its participants. After the RFP, American Century considered three recordkeepers but ultimately chose Schwab RPS. Throughout the class period, American Century, not the Plan or Plan participants, paid the Plan's recordkeeping costs regardless of the fee arrangement or the recordkeeper.

In 2018, Schwab RPS told American Century that it was possible to rebate revenue sharing back to the participants, and the Committee elected to do so. The Committee members testified they were excited about this opportunity since it is uncommon for retirement plans to rebate revenue sharing paid by fund managers to recordkeepers...