Massachusetts District Court Grants Motion To Dismiss 401(k) Fiduciary Breach And Prohibited Transaction Claims – Employee Benefits & Compensation

A federal district court in Massachusetts dismissed ERISA
fiduciary breach and prohibited transaction claims against 401(k)
plan fiduciaries, ruling that the prohibited transaction claims
were time-barred and the fiduciary breach claims—once limited
by a settlement agreement in an earlier class action against
MassMutual involving similar allegations
(“Gordan“)—failed to plausibly state a
claim. The case is Lalonde v. Massachusetts Mutual Insurance
Co., No. 22-cv-30147, 2024 WL 1346027 (D. Mass. Mar. 29,
2024).

Plaintiff, a former employee of Massachusetts Mutual Insurance
Co. (“MassMutual”), sued the company and fiduciaries of
its 401(k) plan on behalf of a putative class, alleging that
defendants breached their fiduciary duties of prudence and loyalty
by retaining costly and poorly performing proprietary investment
funds in the plan and causing the plan to pay excessive
recordkeeping fees. Plaintiff also claimed that defendants engaged
in prohibited transactions by including proprietary funds in the
plan’s investment menu and causing the plan to contract with
MassMutual-affiliated service providers. The suit was brought
notwithstanding a November 2016 class action settlement of
fiduciary breach and prohibited transaction claims in
Gordan, pursuant to which the “class agreed not to
bring any further actions related to or arising out of the
plan.” The court dismissed the complaint in its entirety.

As a threshold matter, the court held that ERISA’s statute
of limitations barred some of plaintiff’s claims. The court
found that plaintiff’s fiduciary breach claims were not barred
by ERISA’s three-year limitations period—which starts to
run when plaintiff had “actual knowledge” of the alleged
breach—because these claims were “necessarily confined
to a period commencing approximately two years before this suit was
filed” pursuant to the Gordan settlement agreement.
Nonetheless, the court held that plaintiff’s prohibited
transaction claims were barred by the three-year rule, which was
triggered by “[p]laintiff’s knowledge [that] the
proprietary funds were in the plan portfolio.” The court found
plaintiff had actual knowledge of the funds’ inclusion in the
plan as far back as 2016 because the complaint expressly alleged
the proprietary funds were part of the plan by that time (labeled
as MassMutual funds), and plaintiff “knew this to be
true” because she invested in them. The court also noted that
plaintiff’s membership in the Gordan settlement class
made it “it even more implausible that she was unaware the
plan contained proprietary funds” by late 2016 when that case
was settled.

The court ruled that the remaining allegations were limited to
those arising after December 3, 2020, pursuant to a provision in
the Gordan settlement. But even as so limited, the court held that
these allegations failed to state a claim under ERISA. At bottom,
the court concluded that the allegations either failed to compare
the funds’ performance and fees to “meaningful
benchmarks,” failed to otherwise support an inference of
fiduciary breach, or were conclusory. For example, although
plaintiff alleged the plan’s proprietary mutual funds and
stable value fund underperformed, the court found plaintiff failed
“to demonstrate the existence of an imprudent process”
with respect to the mutual funds because she relied merely on
hindsight comparisons that showed only a “modest differential
in performance.” With respect to the stable value fund, the
court concluded that “to survive a motion to dismiss the
underperformance must be substantial for a court to plausibly infer
the challenged fund’s retention was imprudent.” The court
also held that plaintiff’s investment fee claims failed because
for certain investments, plaintiff did not compare the fees to
“apples-to-apples” comparators, and her comparisons of
other investments to “industry average ratios” were
insufficient to state a claim because “the mere fact that a
fund charges an expense ratio higher than the mean or median . . .
does not imply that the cost was excessive . . . [o]therwise, by
definition, half of all funds would charge excessive fees.”
Lastly, the court rejected plaintiff’s imprudence claims based
on the plan’s recordkeeping fees as lacking allegations that
the fees were excessive relative to the services provided to the
plan.

Proskauer’s Perspective

As discussed in our previous blog posts (such as here), district
courts have reached varied decisions on motions to dismiss
fiduciary breach and prohibited transaction claims against 401(k)
plan fiduciaries, even where they purport to apply the same
pleading standards. This decision is an encouraging example of a
court finding the factual allegations insufficient to meet these
pleading standards. It also serves as a reminder to ERISA
defendants to be on the lookout for statute of limitations
defenses, particularly when facing prohibited transactions similar
to those asserted here.

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Massachusetts District Court Grants Motion to Dismiss 401(k)
Fiduciary Breach and Prohibited Transaction Claims

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