Reetz v. Lowe’s Companies, Inc., No. 5:18-CV-00075-KDB-DCK, 2021 WL 4771535 (W.D.N.C. Oct. 12, 2021) (Judge Kenneth D. Bell).
This week’s notable decision is a surprising loss for participants in Lowe’s 401(k) pension plan against the plan’s investment manager, Aon Hewitt Investment Consulting, following class certification, success on summary judgment, and a multi-million-dollar, court-approved settlement with Lowe’s inside fiduciaries.
Plaintiff Benjamin Reetz, a former Lowe’s employee and 401(k) plan participant, brought suit against Lowe’s, the administrative committee of the plan, and Aon, claiming numerous breaches of fiduciary duty with respect to Aon’s design and implementation of a new investment strategy and line-up for the plan. Following class certification, plaintiff’s claims against Lowe’s and the administrative committee were resolved through a class action settlement totaling $12.5 million. But the claims against Aon proceeded to a bench trial.
Lowe’s 401(k) plan is massive; with assets totaling $6.6 billion, and over 260,000 participants, it is among the largest plans in the country. Aon Hewitt, which succeeded its corporate predecessor, Hewitt Associates, had dual positions as both the plan’s investment consulting fiduciary and its investment manager. From 2009 to October 1, 2015, the plan’s investment menu consisted of twelve investment options, which included Lowe’s company stock, a series of target date funds, a stable value fund, a fixed income fund, and eight equity options. In October 2015, this all changed when Aon, with Lowe’s approval, restructured the investment menu, eliminated the eight equity options, and replaced them with its own brand-new Aon Growth Fund. All eight of the equity options were performing well when they were eliminated. Plaintiff argued that Aon breached its fiduciary duties by reducing the options available to participants, recommending and implementing a self-serving “cross-selling” effort, including and then failing to remove the Aon Growth Fund, which performed extremely poorly since its inception in 2015, and failing to ever consider selecting funds with a proven track record that were not affiliated with Aon.
It was undisputed that Aon cross-sold its delegated investment management services to Aon’s existing consulting clients, including Lowe’s, by leveraging the Aon Hewitt brand. An internal presentation from December 2013 listed Aon’s direct contribution client base as one of the sales channels for Aon’s new funds and described defined contribution plans as a “new asset pool.” It was also established that Aon never considered any option other than the use of its own collective trust funds prior to making its investment decision. Aon’s entire strategy for growing its Growth Fund was to go after the larger clients first for the “many pluses” offered by these well-funded plans. Documents revealed that Lowe’s was listed as one of Aon’s “top opportunities.” Alongside the implementation of the Aon Growth Fund in October 2015, Aon also replaced the trustee for the plan’s collective trust with Aon Trust Company, an Aon affiliate.
Both parties agreed that the Aon Growth Fund performed very poorly and that it was ranked at the bottom of its peer group based on returns since inception. Plaintiff’s damages expert, Dr. Becker, calculated four different loss models and calculated the losses to be between $58.9 to $277.1 million. Neither Aon nor the court challenged the accuracy of these findings. However, how the mostly undisputed facts were interpreted by all involved, including the court, was central to the resolution of the case.
As an initial matter, the court concluded that Aon acted as a fiduciary in all its dealings with the plan. Thus, the court agreed with the plaintiff that Aon was subject to ERISA’s fiduciary duties of prudence and loyalty, not only in its role as an investment manager for the plan but also in its attempts to cross-sell its additional services to Lowe’s. The court nevertheless concluded that none of Aon’s conduct was either imprudent or disloyal. The court reasoned that ERISA doesn’t require plans to offer a large number of investment options or demand that plans offer any particular type of investment. The court also found that Aon’s advice to the administrative committee to change and limit the number of investment options was based on substantial research about participant confusion when presented with a large number of choices and therefore satisfied ERISA’s duty of prudence. Additionally, the court took no issue with Aon’s cross-selling conduct. To the judge, what mattered most was why Aon acted as it did. Given what the court referred to as the “totality of the circumstances,” the judge found that Aon did not have a disloyal operative motive in cross-selling its services.
Aon’s selection and retention of its own Growth Fund gave the court more pause. With respect to plaintiff’s claims that Aon acted disloyally in using “the Lowe’s plan to ‘seed’ and legitimize its relatively new Growth Fund,” the court found that “[t]here can be little doubt that Aon was pleased to see a billion dollars of Lowe’s assets going into the Aon Growth Fund, which in turn allowed Aon sales employees and others to promote the fund more effectively to potential clients.”
However, the court concluded that these were simply the “inherent effects” of the selection of the fund, not the reason that Aon selected it. Instead, crediting testimony presented by Aon, the court concluded that Aon used the fund for the plan because it “believed it was the best long-term investment option for the plan.” The court likewise concluded that Aon did not act imprudently by selecting the fund, reasoning that it had principled reasons for believing the fund to be an appropriate investment for the retirement plan even as it did very poorly year after year, a troubling fact which the court dismissed as “hindsight.”
With respect to the prudence of retaining the fund in light of its poor performance, the court found it most significant that Lowe’s itself concluded that the fund would eventually prove itself. This finding is curious in light of the penultimate section of the decision in which the court assessed Aon’s comparative fault and “found that Lowe’s bears substantial responsibility for any damages” and “fell short of its responsibility to protect the Plan (which, of course, may well be reflected in the settlement of Plaintiff’s claims against Lowe’s and the Committee).”
In the end, the court entered judgment in favor of Aon on all of plaintiff’s claims, but finding that there was support for plaintiff’s positions, the court ordered the parties to bear bear their own attorney’s fees and costs. A long and winding path to a puzzling conclusion.
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