Another suit filed against flexPATH by the law firm of Schlichter Bogard, LLP has been dismissed—with prejudice—though it seems to have turned more on good outcomes than prudent processes.
This suit (Mills v. Molina Healthcare, Inc., C.D. Cal., No. 2:22-cv-01813, complaint 3/18/22) was filed by plaintiffs Michelle Mills, Coy Sarell, Chad Westover, Brent Aleshire, Barbara Kershner, Paula Schaub, and Jennifer Silva “individually and as representatives of a class of participants and beneficiaries of the Molina Salary Savings Plan.”
The $741 million, 15,686 participant plan was accused primarily of causing the plan to invest in flexPATH’s “untested target date funds, which replaced established and well-performing target date funds used by participants to meet their retirement needs.” The plan fiduciaries are also alleged to have “failed to use the Plan’s bargaining power to obtain reasonable investment management fees, which caused unreasonable expenses to be charged to the Plan.”
If that sounds familiar, it’s because nearly identical allegations were made by a different set of plaintiffs (albeit represented by the same law firm) in a case that was recently (also) decided in favor of the fiduciary defendants just last month. In that case, in a “findings of fact & conclusions of law” filing, United States District Judge James V. Selna walked the parties (and us) through a remarkably comprehensive (70 page) analysis of target-date fund history and policy, examined the genesis and structure of fiduciary reviews, and concluded that the flexPATH defendants provided a solid case for the selection of their funds by the plan in question. More specifically, he wrote that "The objective facts support the decision to use flexPATH's own funds.”
The Process
In a similar fashion, U.S. District Judge Stanley Blumenfeld Jr. ruling in the Central District of California (Michelle Mills et al., v. Molina Healthcare Inc. et al., case number 2:22-cv-01813, in the U.S. District Court for the Central District of California), noted that there were policies and procedures in the Plan’s Investment Policy Statement (the IPS), including that the committee was “to hold regular meetings, and report at least annually to the Board,” and that “at all relevant times, the Committee held meetings on at least a quarterly basis.”
He also acknowledged that “the Committee’s members for the most part had no special expertise in finance or investment and were primarily focused on other job responsibilities, and that “at least one member typically did not even read the materials that were distributed in advance of the quarterly meetings.” Moreover, he stated that during the six-day trial, “most former Committee members who testified could not remember basic information about what they were told or the decisions they made”—and that while he concluded “that their lack of recollection is attributable in part to the passage of time but also that most members lacked a deep understanding of the Plan’s investments.”
Judge Blumenfeld also commented that, “based on the testimony at trial, the Committee members’ level of engagement and lack of expertise appears to be within the normal range for similar committees overseeing ERISA plans in other companies that worked with investment advisors,” and that the committee members “acted in good faith but largely deferred to the advice and guidance of their investment advisors.” He noted, however, that they did understand that the IPS provided criteria for selecting and monitoring plan investment options, that that they were required to monitor investments on an ongoing basis, although the IPS stated that “[f]requent change of investments is neither expected nor desired.” Among other things, that IPS provided for scorecards, and that “a fund that remained on the watch list for four consecutive quarters or five out of eight consecutive quarters should be considered for possible removal.”
The Move to flexPATH
With that background, Judge Blumenfeld outlined Molina’s decision—and process involved in—adopting the flexPATH target-date funds as the plan’s qualified default investment alternative (QDIA) at the recommendation of the plan’s advisor, NFP. He noted that the meeting minutes prepared by NFP “emphasize the benefits of the flexPATH TDFs, although NFP avoided characterizing its presentation as a recommendation: NFP Retirement introduced the Committee to a custom target date fund solution called FlexPATH Strategies,” which offered three different risk levels that participants can choose from rather than a single glidepath option (as in most target date funds). He noted that the Committee agreed to maintain the existing target date funds for now but continued to evaluate the options available to the plan—as they did (not transferring those funds until May 2016)[i].
While he explained that “NFP did not make the Committee aware, for example, that flexPATH and NFP were owned and managed by the same people and worked out of the same office,” and that “flexPATH benefited from obtaining new clients and having a larger sum of assets under management, as well as from having more funds invested in its TDFs,” that NFP recognized the inherent conflict of interest in promoting the flexPATH TDFs to its clients. “To mitigate conflicts, flexPATH created a separate share class for NFP clients to remove fees that would otherwise be paid to flexPATH, and RPAG instructed that investment advisors could not “[r]ecommend flexPATH Strategies or the flexPATH CITs to existing clients.”
That said, and while acknowledging that certain individuals stood to gain financially from that decision, and that “NFP’s self-interested promotion of the flexPATH TDFs raises concerns,” Judge Blumenfeld wrote “because NFP is no longer a defendant in this case, the Court need not determine whether its conduct breached the duty of loyalty that it owed to Molina.”
He did note that, as a practical matter, “the testimony at trial established that in every instance in which an NFP client adopted the flexPATH TDFs, it hired flexPATH as a 3(38) manager, and every time flexPATH has been hired as a 3(38) manager, it has determined that its own funds are the best fit for the plan.”
Comparator Critiques
All that notwithstanding, Judge Blumenfeld disagreed with the comparators the plaintiffs’ expert put forth as comparator funds that were alleged to establish underperformance. Not only did he find flaws in methodology, but he went on to comment that he “appears to have been influenced in his selection of comparators by his knowledge of how the funds actually performed during the Class Period, leading to his choice of the best performers as comparators,” and found “speculative at best” the notion that prudent, loyal fiduciaries would have chosen those funds.
Instead, he found more plausible the benchmarks put forth by the flexPATH expert (the median among all other to-retirement TDFs and also to three indices—the Dow Jones Target Date Total Return Index, the S&P Target Date Total Return Index, and the S&P Target Date to Retirement Index), and based on the best performing of those benchmarks, Judge Blumenfeld concluded that “The flexPATH TDFs earned $3,276,260 more during the Class Period than the best-performing benchmark index,” and that therefore even if he were to accept the plaintiffs’ argument that the investment fees paid to flexPATH should be considered recoverable losses to the plan (and he didn’t), the investment returns were far in excess of that. “The Plan therefore suffered no losses even if the investment manager fees are considered,” he wrote.
Concluding as “undisputed” that the flexPATH TDFs outperformed all three benchmark indices, there was no need to discern who had to bear the burden of establishing causation, nor was it necessary to determine a resolution of whether the defendants engaged in a prohibited transaction or breached their fiduciary duties of prudence or loyalty.
And dismissed all claims against the defendants on the merits with prejudice.
What This Means
While not quite the ringing endorsement of a prudent process that the previous decision in favor of flexPATH was, it was clear that there was a process in place, an IPS to guide the decisions of the committee, and the engagement of a professional advisor to assist them in that process.
Ultimately, however, Judge Blumenfeld seems to have leaned on a determination of “no harm, no foul” in dismissing the suit against flexPATH—and there’s reason for that, considering that the primary allegation here was that those funds had underperformed and, in the process, endangered the retirement savings of participants.
Footnote
[1] According to the court decision, in April 2020, the Committee decided to replace NFP with SageView Advisory Group as the Plan’s 3(21) investment advisor. In August 2020, SageView recommended that the flexPATH TDFs be replaced with the Fidelity Freedom Index Premier Suite. The Committee approved the fund changes on August 25, 2020. On Sept. 1, 2020, Molina appointed SageView as the 3(38) investment manager for the Plan’s TDFs, effective Aug. 18, 2020, the Fidelity Freedom Index TDFs were added to the Plan on Oct. 26, 2020, and all assets in the flexPATH TDFs were transitioned to the new Fidelity Freedom Index TDFs.
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