Fourth Circuit Upholds Trial Court Win for Aon Hewitt

Does a plan investment consultant breach fiduciary duties when it sells other investment services to the plan? And does a delegated fiduciary act disloyally or imprudently when it selects a proprietary investment fund for the plan? On Monday, the U.S. Court of Appeals for the Fourth Circuit addressed both questions and issued a decision upholding the district court's judgment in favor of Aon Hewitt Investment Consulting, Inc. (Aon) that it did not breach its ERISA duties of prudence or loyalty when serving as an investment consultant and as the delegated fiduciary to the Lowe's Home Improvement 401(k) Plan (the Plan). Reetz v. Aon Hewitt Investment Consulting Inc., No. 21-2267 (4th Cir., July 17, 2023). Aon's co-defendant, Lowe's, had previously settled with the plaintiff class for $12.5 million. The court's reasoning on Aon's discharge of its fiduciary duties of loyalty and prudence to the Plan, especially with respect to the cross-selling of services and selection and retention of investment options, is novel.

Following a five-day bench trial, the district court found that Aon, in its role as investment consultant, was not disloyal in cross-selling and pitching its services as a delegated fiduciary to the Plan fiduciary committee. As the Plan's delegated fiduciary, Aon would have responsibility and discretion to select the Plan's investment options and the plaintiffs claimed Aon's pitch was to advance Aon's own interests. Rejecting this claim, the Fourth Circuit first analyzed whether Aon was acting as a fiduciary when making the cross-selling pitch and concluded that it was not. If Aon, as the investment consultant, functioned as the Plan's fiduciary investment advisor, the appellate court began with the principal that selling services is not fiduciary investment advice and then found no "good reason not to extend the same analysis to cross-selling." The court reasoned that "[j]ust like on an initial sale or negotiation, when a cross-seller pitches his other services, he is performing an 'arms-length negotiation' that doesn't constitute a fiduciary function." Since "Aon's sales efforts were not investment advice . . . it was not acting as a fiduciary so owed no fiduciary duties," and the claim was appropriately found in Aon's favor.  

Moving on to the question of Aon's advice about the Plan's investment menu, the Fourth Circuit agreed with the plaintiffs that the company was acting as a fiduciary but disagreed that Aon was disloyal or imprudent in its recommendations to streamline the investment options. Affirming the district court, the circuit court concluded that a self-interest does not necessarily rise to the level of disloyalty under ERISA: "the duty [of loyalty] does not mean a fiduciary is disqualified whenever it has a conflict of interest…. [A] fiduciary can have self-interest, it just can't act on it." The Fourth Circuit deferred to the district court's finding that Aon was not motivated by self-interest when making its streamlining recommendations, reasoning that "Aon's recommendation to streamline the investment menu may have incidentally benefitted its own interest. But, because that interest did not motivate Aon's recommendation, it did not violate the duty of loyalty."

The Fourth Circuit agreed with the district court's judgment on the plaintiffs' prudence claim that, after becoming the plan's designated fiduciary, it selected and retained its own Growth Fund for the Plan's investment structure. Using novel reasoning, the Fourth Circuit determined that the evidentiary record showed that Aon "cleared the prudence bar" given its creation of the Growth Fund and determination that it was in the Plan's best interest, all before Aon became the delegated fiduciary. The Court reasoned that because Aon, in its capacity as an investment consulting firm, created the fund "after an extensive review of the available options on the market left them dissatisfied," it went "beyond prudence." Aon "didn't merely investigate, it created" a new fund which it selected for the Plan through a "reasoned and calculated [process] to maximize the benefits of the plan." The Fourth Circuit also agreed with the district court that Aon's own monitoring of its funds, including the Growth Fund, as well as the work of the fund's managers and its periodic changes to asset allocation and underlying managers demonstrated it discharged its duty to the plan to monitor investments and remove imprudent ones. 

Fourth Circuit Judge Robert Bruce King dissented, in part, to the majority's decision on the plaintiffs' loyalty claims, citing to references in the trial court record indicating that the generation of fees and delegated fiduciary sales colored Aon's investment advice recommendations. The dissent did not address at all the majority's novel reliance on Aon's corporate activities in creating and amending the Growth Fund as evidence of its prudence in carrying out its fiduciary duties to the Plan. Plan sponsors and fiduciaries should keep abreast of whether additional courts outside the Fourth Circuit adopt this same type of prudence analysis, and those in the Fourth Circuit should discuss with their fiduciary investment consultants and managers any impact the decision will have on the latter's advice, services, and marketing efforts directed to their plans.

DOL and Private Plaintiffs Reach $124M Settlement with Ruane and Others

In a settlement announced on July 14, 2023, fiduciaries of a retirement plan sponsored by DST Systems, Inc. — including New York City-based investment management firm Ruane, Cunniff & Goldfarb L.P. — will pay more than $124.6 million to resolve alleged violations of federal law brought in multiple legal proceedings by the Department of Labor (DOL) and private parties related to the management of the profit-sharing portion of the plan. Ferguson v. Ruane, Cunniff & Goldfarb, No. 1:17-cv-06685-ALC-BCM (S.D.N.Y. July 14, 2032). In October 2019, DOL filed suit in the U.S. District Court for the Southern District of New York (SDNY) alleging that Ruane violated ERISA by failing to diversify the plan's assets to minimize the risk of large losses and failing to act prudently and loyally in managing the assets when the investment manager invested the plan's assets on a highly concentrated basis in a select number of securities held long-term. By way of example, the complaint alleged that 45 percent of the plan's assets were imprudently invested in the stock of a single pharmaceutical company, Valeant Pharmaceuticals International, Inc., resulting in significant losses to participants when Valeant stock fell in late 2015 and 2016. The DOL lawsuit also faulted the plan's advisory and compensation committees for imprudence and failure to diversify the plan investments and for their alleged failure to monitor Ruane or establish a written investment policy. 

The settlement, which will resolve several class actions and arbitrations filed by former DST employees in addition to the DOL suit, calls for the appointment of an independent fiduciary to oversee the administration of the settlement. The parties are awaiting the court's preliminary approval of the settlement.

Upcoming Speaking Engagements and Events

Joanne Roskey and Anthony Shelley will present, "Discussion with EBSA: Enforcement & Regulatory Priorities Impacting Health Plans," at the BCBS 2023 Law, Audit, Compliance & Ethics Conference on August 9, 2023.

In the News

Joanne Roskey comments in Bloomberg Law on a proposal being reviewed by the White House updating mental health parity requirements that employers that sponsor health plans have been calling for: "We're expecting more explication of how to pick comparable mental health and med-surg services for purposes of doing the analysis."

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