Autopsy of a Certified ERISA Class Action: Beach -v- JPMorgan Chase Bank

By Neal Shikes

Managing Partner, The Trusted Fiduciary

Neal J. Shikes is Managing Partner of The Trusted Fiduciary and has 30 years of experience in the Financial Services Industry and an expansive network.

In a recent ERISA Class Action filing, the United States District Court for the Southern District of New York certified Terre Beach, et al., Plaintiffs -v- JPMorgan Chase Bank, National Association et al., Defendants.  Simply stated, the plaintiffs alleged that the Plan Sponsor breached their fiduciary duties of prudence and loyalty because investments (“funds”) in the retirement plan had relatively excessive fees.

The Retirement Plan had actively and passively managed funds. Since actively managed funds try to outperform their respective benchmarks/indexes, their expenses are higher than their passively managed counterparts. In recent history, generally, active funds have not outperformed passive funds in most capitalization categories and time periods. In this Class Action, the “subject funds” were limited to the funds named in the Second Amended Complaint and did not include the entire menu of investment options.

In the certification, the Court immediately established the legal standards of the standing of relief. There were three elements required to establish standing but it seems like the second one is most often misunderstood and that is, connecting injury to conduct. Conduct as in the behaviors and methodologies that preempt choices. This should come as no surprise given that ERISA does not provide specifics with regards to investment and return guidelines; both are outcomes of the Plan Sponsor’s/Investment Committee’s/Fiduciary’s methodology. Nevertheless, the Court made it clear as to who is responsible for proving standing:

A plaintiff must prove standing “in the same way as any other matter on which the plaintiff bears the burden of proof, i.e., with the manner and degree of evidence required at the successive stages of the litigation.”

In addition, the Court pointed out that constitutionally “a plan participant may have Article III standing to obtain injunctive relief related to ERISA’s…fiduciary duty requirements without a showing of individual harm to the participant.”  Perhaps plaintiff’s ought to take a “page” out of this Court’s “playbook” by strategically educating the Court as it could provide a basis for their allegations and evidence subject matter expertise in their ERISA Class Action filings.

Thematic to the Court’s logic is something that pertains to all ERISA Class Actions and that is to uncover and understand the conduct relating to the processes used to manage the plan and how those processes apply to everyone in the plan. Furthermore, the alleged damages must be predicated on the processes that the defendants chose to base their decisions on.  In certifying the case, it is almost if the Court is providing some instruction as to how the plaintiff should move forward. The processes or methodologies is what determines prudence and loyalty.

Who is best at determining prudence and loyalty? The experts that have functional experience in developing methodologies that choose and oversee investments.

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