Tullgren v. Booz Allen Hamilton Inc., No. 1:22-cv-00856 (E.D. Va. Aug. 1, 2022)
Hall et al. v. Capital One Financial Corporation et al., No. 1:22-cv-00857 (E.D. Va. Aug. 3, 2022) 

In the same week, a Virginia federal judge ruled in favor of two investment managers following two separate complaints regarding employee 401(k) plans. In each complaint, it was alleged that the investment group mismanaged various employee retirement savings by placing them or leaving them in poorly performing investment funds, which resulted in workers losing millions in retirement savings. In both cases, the court permitted 14 days to amend the complaint.

In the first case, an individual filed a complaint against its employer and alleged that the employer violated the Employment Retirement Income Security Act ("ERISA") by mismanaging its employees’ 401(k) plan. The complaint asserted that the employer selected a default fund that notably performed worse than other available funds. The complaint went further and alleged the employer had both an opportunity and a fiduciary duty to select a better-performing fund but failed to do so. In response, the employer argued the individual had failed to show that the company had breached its fiduciary duties because the complaint did not point to comparable markets with better-performing funds. Lastly, the employer argued that the complaint lacked convincing facts that would have led a reasonable investment manager to move funds to a different default fund. 

In the second case, the same Virginia judge dismissed another lawsuit that alleged mismanagement of poorly performing investments. Unlike the previous case, this claimant provided comparisons and established there were four funds that had better three- and five-year returns. The claimant argued that the availability of better-performing funds created a breach of fiduciary duties as it is the fiduciary’s obligation to monitor investments and make the proper changes. In response, the investment manager argued that the mere fact that there are other funds performing better does not rise to the level of investments mismanagement. 

The Takeaway

Likely, courts will dismiss cases involving investment funds if there is a lack of meaningful comparisons. The cases above suggest that alleging mere underperformance of a fund in comparison to other funds is insufficient to prove that the investment management has breached its fiduciary duty.