Alert March 28, 2013

Fourth Circuit Affirms Dismissal of Claims and Summary Judgment in Case Challenging Financial Services Company’s Use of Proprietary Products in Its Retirement Plans

In David v. Alphin, 704 F.3d 327 (4th Cir. 2013), participants in a defined contribution plan and a defined benefit plan sponsored by a bank brought putative class claims under ERISA alleging breaches of fiduciary duty and prohibited transactions in connection with the selection of bank-affiliated mutual funds for the plans.  Specifically, the plaintiffs alleged that the defendants breached their fiduciary duties of prudence and loyalty by selecting and failing to remove bank-affiliated funds from the plans despite poor performance and higher fees than other viable options.  They further alleged that the defendants caused the plans to enter into transactions with the funds that were subject to conflicts of interest.

The U.S. District Court for the Western District of North Carolina dismissed all claims related to the defined benefit plan for lack of standing under Article III of the U.S. Constitution.  After the completion of discovery, the district court granted summary judgment to the defendants as to all remaining counts on statute of limitations grounds.

The Fourth Circuit affirmed both rulings.  With respect to claims concerning the defined benefit plan, the Fourth Circuit found that, under the plan, the plaintiffs were entitled to receive only a fixed level of retirement benefits.  As a result, any risk to the plan’s investments resulting from the defendants’ investment selection had no effect on the participants’ benefit rights, particularly where the plan was over-funded.  Accordingly, the court held that the plaintiffs could not demonstrate actual harm sufficient to show an injury-in-fact as required for constitutional standing under Article III.  The court rejected arguments advanced by the Department of Labor in an amicus brief in support of the plaintiffs, including the argument that the plaintiffs had representational standing to sue with respect to injuries to the plan even if they themselves had suffered no harm.

With respect to claims concerning the defined contribution plan, the Fourth Circuit held that the district court correctly concluded that the plaintiffs’ claims were time-barred under ERISA’s statute of limitations—which, in relevant part, bars actions commenced more than six years after the date of “the last action which constituted a part of the breach.”  Specifically, the court concluded that the alleged prohibited transactions and breaches of duty could be based only on the initial selection of the challenged funds for the plan.  Where there was no dispute of fact that such initial selection occurred more than six years prior to the filing of the complaint, ERISA’s six-year limitation period barred the claims.  In this regard, the court rejected the plaintiffs’ argument that the challenged conduct was not the initial selection of the funds, but the ongoing failure to remove the funds. The court held that the initial inclusion of bank-affiliated funds on the plan’s investment lineup “triggered the limitations clock."

The Fourth Circuit also affirmed the district court’s decision to dismiss the complaint with prejudice on the ground that the plaintiffs had not moved to amend the complaint and had already filed four complaints in the matter.  The plaintiffs’ petition for rehearing and/or rehearing en banc was subsequently denied.