Chris Lazarini Analyzes ERISA Claims Against Advisor Firm in Putative Class Action

October 23, 2018
Securities Online Litigation Alert

Bass, Berry & Sims attorney Chris Lazarini analyzed the putative class active brought against T. Rowe Price Group by current and former employees alleging the firm breached its fiduciary duty by favoring its own financial interests over that of the plaintiffs. The court agreed with the plaintiffs, finding the fiduciaries did not properly uphold the following fiduciary standards imposed by ERISA:

  • Fiduciaries must act solely in the best interest of the plan participants
  • Fiduciaries must diversify the plan investments to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so
  • Fiduciaries must act under the Plan documents where those documents follow ERISA
  • Fiduciaries must exercise the care, skill, prudence, and diligence that a prudent man acting in like capacity would use under the existing circumstances

Chris provided the analysis for Securities Online Litigation Alert (SOLA). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SOLA, please visit the SOLA website to sign up for the newsletter.

Feinberg vs. T. Rowe Price Group, Inc., No. 17-0427 (D. Md., 8/20/18)

*ERISA imposes fiduciary standards on those responsible for administration of employee benefit plans.

**Fiduciaries must act solely in the best interest of the plan participants; must diversify the plan investments to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; must act under the Plan documents where those documents follow ERISA; and must exercise the care, skill, prudence, and diligence that a prudent man acting in like capacity would use under the existing circumstances.

Plaintiffs, current and former T. Rowe Price employees who participated in the company‚Äôs defined contribution 401(k) plan (“Plan”), allege in this putative class action that the company, related entities, and other Plan fiduciaries and parties-in-interest breached their fiduciary duties to the Plan and engaged in ERISA-prohibited transactions. Plaintiffs claim Defendants favored their own economic interests over Plaintiffs’ by limiting the Plan to proprietary funds that charged fees higher than comparable funds, by using higher cost retail versions of the in-house funds over lower cost institutional versions, and by retaining underperforming funds.

Denying Defendants’ motion to dismiss, the Court finds Plaintiffs’ breach of fiduciary duty allegations sufficient to cross the line from possibility to plausibility of entitlement to relief. A plaintiff cannot avoid a motion to dismiss by simply alleging that better or cheaper investment options were available. The breach of fiduciary duty allegations must allow the court to reasonably infer that the process was flawed and that the alleged breach caused a loss to the plan and its participants.

Here, the Court has no trouble finding that Plaintiffs adequately alleged a flawed process. Its Opinion highlights multiple allegations about the process, including allegations that the proprietary funds’ expense ratios ranged from 16% to 2,500% higher than comparable non-proprietary funds, retail-class versions of funds were used instead of less expensive institutional versions, Plan assets were used to seed new funds and then moved to less expensive, nearly identical alternatives once the new funds achieved marketability to outside investors, and chronically underperforming funds were retained in the Plan. Accepting these allegations as true, as it must at this stage, the Court concludes that Plaintiffs alleged that the Plan and its participants suffered losses because of Defendants’ decisions.

The Court similarly allows Plaintiffs to proceed on their prohibited transactions claim, finding that they stated a plausible claim for relief where they alleged that Defendants engaged in self-dealing that allowed T. Rowe Price affiliates, who were Plan fiduciaries, to receive more than reasonable compensation for advising the Plan. The Court acknowledges that Defendants may have viable affirmative defenses, including statutory exemptions and the running of the statute of repose, but finds it cannot consider their merits on a motion to dismiss, because the facts necessary to establish them are not clearly apparent on the face of the complaint.

Defendant T. Rowe Price Associates, Inc. is an investment adviser that provided investment advisory services to the proprietary mutual funds involved in this case.