A federal appeals court revived a lawsuit challenging Royal Caribbean Cruises Ltd.’s selection of target-date funds for its employee retirement plan, ruling that plaintiffs do not always have to identify a closely matched investment benchmark to establish that a fiduciary made an objectively imprudent investment decision.
The U.S. 11th Circuit Court of Appeals on August 17 reversed a lower court’s grant of summary judgment in favor of Royal Caribbean and sent the case back to the district court for further proceedings. According to the three-judge circuit court panel, the district court applied too rigid a standard when it required plaintiff Ann Johnson to produce an “apples-to-apples” comparison between the Russell Target-Date Funds at issue and another target-date fund with the same strategy and risk profile.
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The ruling could have implications for Employee Retirement Income Security Act litigation involving investment performance and so-called meaningful benchmarks. While courts frequently look to comparable investments when determining whether a plan fiduciary acted prudently, the 11th Circuit ruled that such evidence is not mandatory in every case.
The Supreme Court is expected to decide in Anderon v. Intel, to be heard in its next term that begins in October, whether plaintiffs need to identify a “meaningful benchmark” in the motion-to-dismiss stage in ERISA imprudence complaints. In the Royal Caribbean case, the 11th Circuit—which hears appeals from federal district courts in Alabama, Florida and Georgia—ruled that an exact comparator was unnecessary.
“The important point is that the law imposes no mandate that a plaintiff prove objective imprudence through apples-to-apples comparator evidence,” the court decision stated. It later stated that, depending on the circumstances, either qualitative or quantitative evidence may be sufficient.
Dispute Over Target-Date Funds
Johnson, a participant in Royal Caribbean’s retirement plan, brought the case on behalf of a proposed class of similarly situated participants. She alleges that Royal Caribbean breached its fiduciary duties under ERISA by replacing Vanguard target-date funds with Russell target-date funds in the plan’s investment lineup.
Royal Caribbean’s investment committee selected Russell as an investment manager after a 2014 request-for-proposal process. The committee recognized Russell for its investment consulting expertise but also identified potential drawbacks, including relatively high pricing; a requirement that at least 75% of the plan’s fund offerings be Russell funds; and the need to use a third-party recordkeeper.
Johnson alleged that warning signs surrounded the Russell funds. According to evidence summarized by the 11th Circuit, the Russell TDFs had no more than 12 clients and had lost their two largest clients to Vanguard in 2014. The court also concluded that the funds had inferior risk, return and risk-adjusted-return characteristics. A similar Russell retail target-date series received a negative Morningstar rating in December 2014.
The Russell funds subsequently lagged both the Vanguard funds they replaced and the American Funds TDFs that later replaced Russell. From October 2015 through May 2019, Russell underperformed those two fund families on an annualized basis by an average of 1.51% and 2.12%, respectively, according to the court. The Russell funds also posted an asset-weighted average annual underperformance of 0.71% against their composite benchmark.
Royal Caribbean terminated its investment management agreement with Russell in April 2019, and the investment committee replaced the Russell target-date series with American Funds the following month.
Lower Court Required Comparable Funds
The U.S. District Court for the Southern District of Florida granted summary judgment to Royal Caribbean, finding that Johnson needed to establish objective imprudence by comparing Russell’s funds with funds that shared the same investment strategy and risk profile. It ruled Vanguard and American Funds were improper comparators because of differences in investment strategies, glide paths and asset allocations.
The 11th Circuit disagreed with making such a comparison an absolute requirement.
Under ERISA, fiduciaries must prudently investigate, select and monitor plan investments. The appeals court explained that establishing fiduciary liability requires evidence of an imprudent process, as well as loss causation—meaning that the process resulted in an objectively imprudent investment.
Comparisons with alternative investments can help establish that an investment was objectively imprudent, the panel wrote, but are not the only available evidence. The central question, per the panel, is whether an investment fell outside the range of reasonable judgments that a prudent fiduciary with similar objectives could make.
The court wrote that qualitative evidence may include whether an investment was widely used by comparable retirement plans and how industry analysts rated it. Quantitative evidence can include fees and performance relative to appropriate peers and benchmarks. When plaintiffs do rely on quantitative comparisons, however, those comparisons must account for differences in risk profiles, strategies and asset allocations.
As such, the case will be remanded back to the district court.
The plaintiffs were represented by Wenzel Fenton Cabassa P.A., Morgan & Morgan P.A. and Nichols Kaster PLLP, according to the district court docket. Milbank LLP and Akerman LLP represented the defendants.
