Goodwin Insights December 16, 2021

Investment Manager Prevails at Trial Challenging Its Investments

Key Takeaway: A plan’s delegated investment manager recently prevailed at trial against claims alleging that it breached its fiduciary duties by selecting its own investments for a client’s retirement plan, in a ruling that could be helpful for other defendants facing suits regarding use of proprietary investment products in retirement plans.

On October 12, 2021, the U.S. District Court for the Western District of North Carolina ruled after a five-day bench trial that defendant Aon Hewitt Investment Consulting had not breached its fiduciary duties as a delegated investment manager under ERISA 3(38) in connection with the Lowe’s 401(k) Retirement Plan. The plaintiff had originally brought suit against both Aon and Lowe’s, alleging that each had breached their duties of loyalty and prudence by replacing some of the Lowe’s plan’s then-existing investment options with those managed by Aon. In particular, the plaintiff alleged that the investments at-issue should not have been selected where they lacked a track record at the time of their selection for the plan, and further that the investments later underperformed the funds they replaced in the plan. Lowe’s settled the claims against it in 2021 and the trial proceeded against Aon.

The district court ruled based on the trial record that Aon had acted prudently and loyally. Although the plaintiff put forth evidence that Aon had not specifically analyzed whether other managers’ investment products were a better fit for the Lowe’s plan than Aon’s investments, the court found this was unnecessary where the evidence reflected that Lowe’s hired Aon in contemplation that Aon investment products would be utilized for the Lowe’s plan and that Aon was generally knowledgeable about other managers’ products. The court also determined that Aon had not breached its duties in selecting for the Lowe’s plan an equity fund that contained fixed income exposure and therefore underperformed during the recent bull market. The court reasoned that the fund’s strategy was not unreasonable at the time it was selected for the plan, and that Aon had not breached its duties in maintaining the fund in the plan where its later underperformance was expected based on the fund’s strategy and the market conditions at the time. Finally, the court ruled it was not a breach to include in the Lowe’s plan an investment option that lacked a long track record where the investment option’s investment decisions were generally made by subadvisors that had lengthy track records. Plaintiff have appealed the decision.

The case is Reetz v. Lowe’s Companies, Inc., No. 18-00075, in the U.S. District Court for the Western District of North Carolina, and the decision is available here.