Ellis et al v. Fidelity Management Trust Company
Judge William G. Young: ORDER entered. MEMORANDUM AND ORDER"For the foregoing reasons, the Court holds that thePlaintiffs have not made a sufficient showing for the Court tocontinue to entertain the claims against Fidelity. Accordingly,this Court GRANTS Fidelitys motion for summary judgment, ECFNo. 97 .SO ORDERED."(Sonnenberg, Elizabeth)
UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
FIDELITY MANAGEMENT TRUST COMPANY, )
JAMES ELLIS and WILLIAM PERRY,
individually and as representatives
of a class of similarly situated
June 19, 2017
MEMORANDUM & ORDER
In this class action, James Ellis (“Ellis”) and William
Perry (“Perry”), representing a class of similarly situated
individuals (collectively, the “Plaintiffs”), contend that
Fidelity Management Trust Company (“Fidelity”) mismanaged the
Fidelity Group Employee Benefit Plan Managed Income Portfolio
(the “Portfolio”), breaching its fiduciary duties pursuant to
the Employee Retirement Income Security Act of 1974 (“ERISA”)
section 404(a), 29 U.S.C. § 1104(a).
Fidelity here moves for
summary judgment, asserting that the Plaintiffs fail to
establish a breach of either the duty of loyalty or the duty of
Taking all reasonable inferences in the Plaintiffs’
favor, the Plaintiffs do not carry their burden to set forth
evidence to establish a fiduciary breach.
Thus, this Court
grants Fidelity’s motion for summary judgment.
On December 11, 2015, Ellis and Perry filed a complaint
against Fidelity asserting a breach of fiduciary duty under
ERISA section 404(a), 29 U.S.C. § 1104(a).
Compl., ECF No. 1.
Following this Court’s denial of a motion to dismiss, Order, ECF
No. 43; Def.’s Mot. Dismiss Compl., ECF No. 21, Fidelity
answered the complaint, Def.’s Answer Pls.’ Class Action Compl.
(“Answer”), ECF No. 48.
On December 14, 2016, this Court granted Ellis and Perry’s
unopposed motion to certify a class, Pls.’ Mot. Class
Certification, ECF No. 64; Def.’s Mem. Resp. Pls.’ Mot. Class
Certification 6, ECF No. 78, of “[a]ll participants in defined
contribution employee pension benefit plans within the meaning
of ERISA § 3(2)(A), 29 U.S.C. § 1002(2)(A), who invested in the
[Portfolio] from January 1, 2010 until the time of trial.”
Order 1, ECF No. 80.
The Court allowed this class to pursue the
Plaintiffs’ investment management claim, deeming their excessive
fees claims waived.
Id. at 1-2, 1 n.1.
Fidelity now moves for summary judgment.
J., ECF No. 97.
Def.’s Mot. Summ.
The parties have briefed the issues and
submitted statements of facts.
Pls.’ Mem. Opp’n Def.’s Mot.
Summ. J. (“Pls.’ Opp’n”), ECF No. 119; Pls.’ Statement Disputed
Material Facts Opp’n Def. Fidelity Management Trust Company’s
Mot. Summ. J., and Pls.’ Resps. Fidelity’s Statement Undisputed
Material Facts Supp. Mot. Summ. J. (“Pls.’ Statement Facts”),
ECF No. 120; Def.’s Mem. Supp. Mot. Summ. J. (“Def.’s Mem.”),
ECF No. 98; Def.’s Reply Supp. Mot. Summ. J. (“Def.’s Reply”),
ECF No. 130; Statement Undisputed Material Facts Supp. Def.
Fidelity Management Trust Company’s Mot. Summ. J. (“Def.’s
Statement Facts”), ECF No. 99; Def. Fidelity Managements Trust
Company’s Resp. Pls.’ Statement Disputed Material Facts (“Def.’s
Resp. Facts”), ECF No. 131.
The Portfolio is a stable value fund (“SVF”).
Statement Facts 33 ¶ 26; Def.’s Statement Facts ¶ 26.
one of the most conservative options in which 401(k) plan
participants can invest, Pls.’ Statement Facts 28 ¶ 5; Def.’s
Statement Facts ¶ 5, usually holding a portfolio of highquality, diversified fixed income securities, Pls.’ Statement
Facts 28 ¶ 7; Def.’s Statement Facts ¶ 7.
SVFs also make use of
wrap contracts, Pls.’ Statement Facts 28 ¶ 7; Def.’s Statement
Facts ¶ 7, a form of insurance coverage that guarantees
withdrawing investors the book value of their investment if the
SVF has been exhausted, subject to certain exceptions.
Statement Facts 29 ¶ 13; Def.’s Statement Facts ¶ 13.
contracts include investment guidelines that impose limitations
on the composition of the SVF’s underlying portfolio of
investments, Pls.’ Statement Facts 31 ¶ 20; Def.’s Statement
Facts ¶ 20, and do not guarantee that investors will earn a
return on the principal that they invest, Pls.’ Statement Facts
32 ¶ 25; Def.’s Statement Facts ¶ 25.
Breaches of wrap contract
guidelines can result in termination of coverage.
Statement Facts 44 ¶ 70; Def.’s Statement Facts ¶ 70.
Fidelity is the trustee of the Portfolio, Pls.’ Statement
Facts 2 ¶ 6; Def.’s Resp. Facts ¶ 6, and has primary
responsibility for the Portfolio’s administration and the
prudent investment of Portfolio assets, Pls.’ Statement Facts 2
¶ 7; Def.’s Resp. Facts ¶ 7.
Fidelity’s management fee for the
Portfolio is derived from the amount of assets under management
Pls.’ Statement Facts 3 ¶ 13; Def.’s Resp. Facts ¶ 13.
The Portfolio is governed by the Declaration of Separate
Facts ¶ 30.
Pls.’ Statement Facts 33 ¶ 30; Def.’s Statement
The DSF states that the Portfolio’s primary
investment objective is “‘seek[ing] the preservation of capital
as well as . . . provid[ing] a competitive level of income over
time consistent with the preservation of capital,’” Pls.’
Statement Facts 2 ¶ 8, 34 ¶ 31; Def.’s Statement Facts ¶ 31;
Def.’s Resp. Facts ¶ 8, and that Fidelity must “use its best
efforts to maintain a stable net asset value of $1.00 per unit,”
Pls.’ Statement Facts 34 ¶ 32; Def.’s Statement Facts ¶ 32.
Ellis and Perry each invested in the Portfolio through the
Barnes & Noble 401(k) Plan.
Def.’s Statement Facts ¶ 41.
Pls.’ Statement Facts 36 ¶ 41;
Ellis invested in the Portfolio
from 2009 to 2015, while Perry invested in the Portfolio between
2009 and 2013.
Compl. ¶ 12; Answer ¶ 12.
The Portfolio’s Benchmark
A portfolio performance benchmark loosely shapes SVF
investors’ expectations about the risks and returns that the
portfolio manager will take when investing fund assets, Pls.’
Statement Facts 37 ¶ 49; Def.’s Statement Facts ¶ 49, but does
not limit the types of investments a fund can make -- in fact,
fund managers at times invest in securities that are not
included in the fund’s benchmark, Pls.’ Statement Facts 38 ¶ 50;
Def.’s Statement Facts ¶ 50.
Fidelity used the Barclay’s Government/Credit Bond Index 15 A (“1-5 G/C Index”) or better as a benchmark to manage the
Portfolio throughout the class period.
¶ 52; Def.’s Resp. Facts ¶ 52.
Pls.’ Statement Facts 12
The DSF also states that the
Portfolio’s assets “will be managed to approximate the interest
rate sensitivity of the [1-5 G/C Index].”
34 ¶ 33; Def.’s Statement Facts ¶ 33.
Pls.’ Statement Facts
sensitivity” is the weighted average duration of the securities
in a portfolio.
Facts ¶ 34.
Pls.’ Statement Facts 35 ¶ 34; Def.’s Statement
The longer the duration of a fixed income security,
the more that its market value would generally be expected to
change in response to changes in interest rates.
Statement Facts 35 ¶ 34; Def.’s Statement Facts ¶ 34.
Typically, long-term bonds have greater interest rate risk than
short-term bonds, and an interest rate change will have a
greater effect on the price of long-term bonds than short-term
Pls.’ Statement Facts 38 ¶ 52; Def.’s Statement Facts
Fidelity’s stable value portfolio managers believe that
interest rate changes are generally unforeseeable; thus they
typically strive to keep the duration of each SVF within a band
around the fund’s benchmark.
Pls.’ Statement Facts 39 ¶ 56;
Def.’s Statement Facts ¶ 56.
Before and during the class period, Fidelity periodically
explored changing the Portfolio’s benchmark and regularly
conducted quantitative analyses of potential alternative
benchmarks, including their risks and the impacts changing the
benchmark could have on the Portfolio’s returns, duration,
market-to-book ratio, and tracking error volatility.
Statement Facts 40 ¶ 57; Def.’s Statement Facts ¶ 57.
stable value portfolio managers evaluated both more and less
aggressive benchmarks, but consistently decided to retain the 1-
5 G/C Index as the Portfolio’s benchmark.
Pls.’ Statement Facts
41 ¶¶ 59-60; Def.’s Statement Facts ¶¶ 59-60.
The Portfolio’s Management Process
A portfolio manager (“PM”) evaluates potential investments
and investment strategies, and makes investment decisions for
Pls.’ Statement Facts 47 ¶ 79; Def.’s
Statement Facts ¶ 79.
A portfolio’s designated PM has final
decision-making authority with respect to that portfolio’s
holdings, but works with other PMs to make investment decisions.
Pls.’ Statement Facts 47 ¶ 81; Def.’s Statement Facts ¶ 81.
Fidelity’s PMs sit next to each other on Fidelity’s fixed income
trading floor, where they have informal conversations about
investment strategies and ideas amongst themselves, as well as
with other investment professionals.
Pls.’ Statement Facts 49
¶¶ 86-87; Def.’s Statement Facts ¶¶ 86-87.
The Portfolio’s investment decisions use Fidelity’s
analytics and take into account the information provided by
numerous teams, Pls.’ Statement Facts 62 ¶ 116; Def.’s Statement
Facts ¶ 116, including the fundamental research team, Def.’s
Statement Facts ¶ 94, and the fixed income trading team, id.
The fundamental research team provides a ground-up approach
to credit research -- constructing Fidelity’s own rating for
nearly every counterparty with which Fidelity transacts, id.
¶ 91 -- and adds a top-down aspect to the process by integrating
sector and macroeconomic research, id. ¶ 92.
The team is
comprised of around forty fixed income fundamental research
analysts with various specialties.
Id. ¶¶ 89-90.
provide quantitative and qualitative research on various topics,
such as an in-house assessment of the creditworthiness of
issuers, details regarding particular debt offerings, events and
conditions that could affect the performance of different asset
classes, statistical analyses, and information about general
macroeconomic events or conditions.
Id. ¶ 89.
team routinely summarizes this research into research notes, id.
¶ 93, which the PMs review on a regular basis to learn about the
market and assess investment ideas, id. ¶ 94.
Fidelity’s team of fixed income traders identifies
opportunities for the PMs to purchase or sell fixed income
securities, evaluates whether those opportunities are priced
appropriately, and executes trades.
Id. ¶¶ 95-97.
The team is
made up of about twenty traders with various specialties.
Fidelity’s PMs and other fixed income professionals
host a daily morning meeting on the trading floor to discuss
overnight events and market movements and present potential
Id. ¶ 98.
Fidelity’s senior management monitors and oversees the
processes and judgments of the PMs with respect to potential
investments and investment strategies.
Id. ¶ 103.
The PMs meet
with Christine Thompson, Chief Investment Officer for Fidelity’s
bond group, every six weeks or so to review the PMs’ decisionmaking, id. ¶ 131, and discuss the funds’ performance and flows,
risk positioning, sector allocation, duration positioning, and
other issues, id. ¶¶ 133-34.
Fidelity also oversees its SVFs
through the Trust/Investment Oversight Committee (“TIC”), which
exercises the powers of the Board of Directors with respect to
supervision of the trust activities of Fidelity, including the
management of Fidelity’s SVFs.
Def.’s Statement Facts ¶ 135.
Pls.’ Statement Facts 70 ¶ 135;
The TIC reviews Fidelity’s SVFs
at least twice per year, at meetings where at least one PM is on
hand to present.
Pls.’ Statement Facts 71 ¶ 138; Def.’s
Statement Facts ¶ 138.
The discussions cover, inter alia,
performance, risk, investment strategy, benchmarks, investment
guidelines, asset allocation, wrap capacity, and compliance with
investment limitations of the SVFs, Pls.’ Statement Facts 71
¶ 138; Def.’s Statement Facts ¶ 138, as well as duration and
sector allocation, Def.’s Statement Facts ¶ 139.
Board of Directors also receives regular updates on the SVFs,
including the Portfolio.
Id. ¶ 140.
Events During the Class Period
The interest rate level during the class period was the
lowest of any six-year period in history, Pls.’ Statement Facts
82 ¶ 179; Def.’s Statement Facts ¶ 179, and it was not
foreseeable in 2009 that interest rates would remain at historic
lows for a six-year period, Pls.’ Statement Facts 82 ¶ 180;
Def.’s Statement Facts ¶ 180.
Throughout the class period, the
Portfolio maintained a stable net asset value of $1.00 per unit
and provided positive returns to investors; no Portfolio
investors experienced any out-of-pocket losses.
Facts 85 ¶ 192; Def.’s Statement Facts ¶ 192.
also outperformed its stated benchmark, Pls.’ Statement Facts 85
¶ 193; Def.’s Statement Facts ¶ 193, and its crediting rate1
improved relative to the median SVF’s crediting rate from 20102014, Pls.’ Statement Facts 85 ¶ 195; Def.’s Statement Facts
During the class period, Fidelity took immense care to
comply with its wrap contract guidelines, so as not to trigger
termination of coverage due to a breach, Pls.’ Statement Facts
44 ¶ 70; Def.’s Statement Facts ¶ 70; in fact, none of
Fidelity’s wrap providers ever claimed that Fidelity had
A crediting rate is “the interest rate earned on the
contract value (principal plus accrued income) expressed as an
effective annual yield.” Leela Scattum & Nick Gage, Stable
Value Crediting Rates, Galliard, 2 (March 2015),
http://www.galliard.com/Publication-PDFs/Stable-Value-CreditingRates-March-2015.pdf. Financial institutions use the crediting
rate mechanism to smooth returns over the duration of an SVF so
that the SVF is able to deliver bond-like returns at low
volatility. Id. The crediting rate is calculated as “a
function of the contract value of an investment contract, the
market value of the underlying bond portfolio, and the yield and
duration of the underlying bond portfolio.” Id.
liability to them for breach of wrap guidelines or any other
reason, Pls.’ Statement Facts 46 ¶ 77; Def.’s Statement Facts
¶ 77, nor did the Portfolio exceed its wrap guidelines’ threeyear duration ceiling at any point, Pls.’ Statement Facts 44
¶ 72; Def.’s Statement Facts ¶ 72.
In or around 2009, Rabobank and AIG -- two of Fidelity’s
wrap providers -- decided to exit the wrap business.
Statement Facts 8 ¶ 32; Def.’s Resp. Facts ¶ 32.
presentations, Fidelity portrayed the Portfolio as desirable to
wrap providers, due in part to low probability of withdrawals,
Pls.’ Statement Facts 9 ¶ 35; Def.’s Resp. Facts ¶ 35, its
conservative approach, and a “portfolio structure [that]
minimizes risk to issuers,” Pls.’ Statement Facts 15 ¶ 67;
Def.’s Resp. Facts ¶ 67.
Fidelity ultimately replaced Rabobank
and AIG’s wrap capacity with insurance from American General
Life, Bank of Tokyo, and Prudential.
¶ 32; Def.’s Resp. Facts ¶ 32.
Pls.’ Statement Facts 8
Bank of Tokyo and Fidelity
executed their first wrap contract in July 2012.
Statement Facts 77 ¶ 159; Def.’s Statement Facts ¶ 159.
In March 2010, Fidelity stated that a best practice was
consistent emphasis on capital preservation and that integrity
of the underlying assets took priority over crediting rate.
Pls.’ Statement Facts 15 ¶ 68; Def.’s Resp. Facts ¶ 68.
Fidelity also internally noted that clients and consultants had
concerns about low crediting rates.
Pls.’ Statement Facts 16-17
¶¶ 72, 74-76; Def.’s Resp. Facts ¶¶ 72, 74-76.
In fact, one
Fidelity employee went as far as to note, in reference to a
Portfolio competitor, that:
They probably are more diversified than us. They’re
more willing to use every tool available to them –traditional GICs, separate account GICs, Mutual of
Omaha. They’re certainly more flexible than we are.
You’d think that given our size and our resources that
we could do anything, but with us everything has to be
done our way. [The competitor] can also afford to put
deposits into cash because their crediting rates don’t
suck. The biggest difference between us and [them]
though is that they care about this business in a way
that we don’t. Stable value matters to them. We can
talk all we want about how we’re the best (and in some
ways we are), but the fact is that while we were
selling everything in the meltdown our competitors
stuck to their guns. As a result, in many cases they
are better off than we are.
Pls.’ Statement Facts 17 ¶ 77; Def.’s Resp. Facts ¶ 77.
Concerns about the Portfolio’s conservative approach and
underperformance were echoed over the years.
In June 2010, a
Fidelity document stated that clients were asking about
alternatives given the Portfolio’s conservative positioning and
resultant underperformance versus peers.
18 ¶ 79; Def.’s Resp. Facts ¶ 79.
Pls.’ Statement Facts
In September 2010, a
Portfolio manager noted that the Portfolio’s “[c]onservative
positioning [was] increasingly difficult to defend as others
were conservative as well and have higher yields.”
Statement Facts 18 ¶ 80; Def.’s Resp. Facts ¶ 80.
2011, Fidelity continued to note that clients were concerned
with the Portfolio’s relative performance, and that “crediting
rate pressure continues to persist.”
19 ¶ 83; Def.’s Resp. Facts ¶ 83.
Pls.’ Statement Facts 18-
In May 2011, Fidelity’s Sean
Walker wrote an email to the PMs, noting that when Fidelity had
obtained wrap capacity from JP Morgan prior to 2011, Fidelity
had agreed to “overly stringent guideline terms.”
Statement Facts 10 ¶ 44; Def.’s Resp. Facts ¶ 44.
done this with the understanding that JP Morgan would make those
wrap guidelines its industry standard, Pls.’ Statement Facts 11
¶ 45; Def.’s Resp. Facts ¶ 45; however, by November 2010,
Fidelity felt that JP Morgan had not honored this commitment,
and that Fidelity had gotten lower crediting rates than peers,
Pls.’ Statement Facts 11 ¶ 46; Def.’s Resp. Facts ¶ 46.
In November 2011, in response to a request for information
from a wrap provider, Micheletti Decl., Ex. G, Dep. Ex. 14, at
FIDELITY_0074207, ECF No. 121-7, Fidelity stated:
Fidelity has always maintained a conservative posture
in [its] stable value management, [and has] generally
not had to change the way in which [it] manage[s]
stable value assets. More specifically, based on
[its] conservative approach, [Fidelity] ha[s] not been
as significantly impacted by some of the policies that
wrap providers are requesting of other managers.
[Fidelity is] committed to maintain [its] conservative
approach in managing stable value assets.
Pls.’ Statement Facts 15 ¶ 69; Def.’s Resp. Facts ¶ 69.
In December 2011, Fidelity’s communications with wrap
providers stated: “integrity of the underlying assets takes
priority over crediting rate (yield).”
¶ 42; Def.’s Resp. Facts ¶ 42.
Pls.’ Statement Facts 10
As of March 2012, Fidelity
sought to leverage its conservative underlying portfolio in
order to obtain more wrap capacity.
Pls.’ Statement Facts 10
¶ 43; Def.’s Resp. Facts ¶ 43.
In January 2012, an internal Fidelity email noted that the
“much more stringent guidelines” imposed by JP Morgan on
Fidelity had placed Fidelity’s product in an uncompetitive
Pls.’ Statement Facts 19 ¶ 87; Def.’s Resp. Facts
In February 2012, Fidelity noted that the crediting rate
for the Portfolio was “trending well below the industry.”
Statement Facts 20 ¶ 88; Def.’s Resp. Facts ¶ 88.
Also in 2012,
Fidelity noted that its portfolios were more conservatively
positioned than key competitors, and that this had resulted in
lower crediting rates.
Pls.’ Statement Facts 20-23 ¶¶ 89, 90,
95, 96, 102-03; Def.’s Statement Facts ¶¶ 90, 95, 96, 102-03;
Def.’s Resp. Facts ¶ 89.
This was repeated in 2015.
Statement Facts 21 ¶ 97; Def.’s Statement Facts ¶ 97.
In mid-2012, Fidelity changed the Portfolio’s DSF
guidelines to impose a three-year duration limit, and changed
the fund’s credit rating minimums from A- to BBB-.
Statement Facts 12 ¶ 51; Def.’s Resp. Facts ¶ 51.
Fidelity acknowledged that the Portfolio’s “[i]nvestment
performance ha[d] lagged competitors due to the highly
competitive market and [Fidelity’s] conservative portfolio
Pls.’ Statement Facts 25 ¶ 115; Def.’s Resp. Facts
In late 2014, Fidelity began developing a new Stable
Value Business Plan.
Resp. Facts ¶ 106.
Pls.’ Statement Facts 24 ¶ 106; Def.’s
The plan noted that to improve the
Portfolio’s competitive positioning, Fidelity would aim to
negotiate with wrap providers to allow a longer duration and
higher allocations to investment grade credit sectors, update
benchmarks, and improve knowledge of the competitiveness and
structural advantages of Portfolio pools.
26 ¶ 117; Def.’s Resp. Facts ¶ 117.
Pls.’ Statement Facts
In 2016, Fidelity reported
that the new business plan had resulted in improved Portfolio
Pls.’ Statement Facts 26 ¶ 119; Def.’s Resp.
Facts ¶ 119.
Dr. Steven Pomerantz’s Testimony
The Plaintiffs’ expert, Dr. Steven Pomerantz, conceded that
“[a] prudent stable value manager could decide that . . . the
extra return that one gets . . . is not worth the tradeoff in
Pls.’ Statement Facts 79 ¶ 166; Def.’s
Statement Facts ¶ 166.
Dr. Pomerantz also testified that,
hypothetically, economic circumstances could have occurred
during the class period in which a conservative investment
approach like the Portfolio’s would have outperformed SVFs with
less conservative approaches.
Pls.’ Statement Facts 79 ¶ 167;
Def.’s Statement Facts ¶ 167.
He opined that all else being
equal, the greater a portfolio’s duration, the greater the
magnitude of negative returns in the portfolio when interest
rates rise, Pls.’ Statement Facts 82 ¶ 178; Def.’s Statement
Facts ¶ 178, and that prudent reasons for favoring a shorter
duration benchmark would include concerns about difficulties in
obtaining wrap capacity and an interest in presenting an
attractive risk proposition to a prospective wrap provider,
Pls.’ Statement Facts 82 ¶ 181; Def.’s Statement Facts ¶ 181.
Dr. Pomerantz noted, however, that the 1-5 G/C Index is not
a very common benchmark for SVFs.
¶ 54; Def.’s Resp. Facts ¶ 54.
Pls.’ Statement Facts 12
He testified that Fidelity did
not need to extend the Portfolio’s duration precisely to three
years to manage the Portfolio prudently, but just needed “to
follow a well-defined process.”
Def.’s Statement Facts ¶ 183.
Pls.’ Statement Facts 83 ¶ 183;
Finally, he concluded that in his
expert opinion, in comparison to the Portfolio, a prudent
portfolio could have had (1) a larger allocation to government
securities, (2) a smaller allocation to corporate securities,
(3) a smaller allocation to asset-backed securities, or (4) a
smaller allocation to mortgages.
Pls.’ Statement Facts 84-85
¶¶ 187-91; Def.’s Statement Facts ¶¶ 187-91.
Fidelity has moved for summary judgment on the Plaintiffs’
remaining claim for breach of fiduciary duty.
Def.’s Mem. 1.
Fidelity contends that the Plaintiffs have failed to establish a
breach of either the duty of loyalty or the duty of prudence.2
Def.’s Reply 1-2.
This Court agrees.
Standard of Review
Summary judgment is appropriate when “there is no genuine
dispute as to any material fact and the movant is entitled to
judgment as a matter of law.”
Fed. R. Civ. P. 56(a).
moving party initially bears the burden of demonstrating that
“the nonmoving party has failed to make a sufficient showing on
an essential element of her case with respect to which she has
the burden of proof.”
Celotex Corp. v. Catrett, 477 U.S. 317,
If the movant does so, then the nonmovant must set
forth specific facts sufficient to establish a genuine issue for
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475
U.S. 574, 586-87 (1986).
In reviewing the evidence, the Court
must “draw all reasonable inferences in favor of the nonmoving
party, and it may not make credibility determinations or weigh
Reeves v. Sanderson Plumbing Prods., Inc., 530
Fidelity also argues that the Plaintiffs’ claim is
impermissibly based on hindsight. Def.’s Mem. 15-19. The Court
disagrees with this characterization and declines to address the
argument further herein.
U.S. 133, 150 (2000) (citations omitted).
“[I]f the evidence is
such that a reasonable jury could return a verdict for the
nonmoving party,” a court cannot grant a motion for summary
Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986).
Fiduciary Duties Under ERISA
ERISA section 404(a), 29 U.S.C. § 1104(a), imposes two
duties upon a fiduciary: the duty of loyalty and the duty of
See Bunch v. W.R. Grace & Co. (Bunch II), 555 F.3d 1,
6 (1st Cir. 2009).
To succeed on a claim for breach of duty, a
plaintiff must show (1) that the defendant was “acting as a
fiduciary of the Plan when it engaged in the conduct about which
[the plaintiff] complains,” Watson v. Deaconess Waltham Hosp.,
141 F. Supp. 2d 145, 152 (D. Mass. 2001), aff’d, 298 F.3d 102
(1st Cir. 2002), and (2) that conduct sufficed to breach the
fiduciary duty that ERISA imposes, id. at 154.
whether a breach has occurred, a court looks to the totality of
the circumstances, assessing both the substance of the
transaction and the process leading up to it.
See Bunch v. W.R.
Grace & Co. (Bunch I), 532 F. Supp. 2d 283, 288 (D. Mass. 2008),
aff’d, 555 F.3d 1 (1st Cir. 2009).
Duty of Loyalty Claim
The Plaintiffs argue that Fidelity acted in its own selfinterest by agreeing to overly stringent wrap insurance
guidelines that sacrificed the competitiveness of the Portfolio
while allowing Fidelity to grow its AUM.
Pls.’ Opp’n 15.
Specifically, the Plaintiffs allege that Fidelity had a
financial incentive to increase its stable value AUM and to
amass wrap capacity to improve its competitive position and
increase its management fees, and that Fidelity pursued these
aims rather than acting in the Plaintiffs’ best interests.
Fidelity responds that the Plaintiffs do not present
evidence that Fidelity put its interests ahead of the
Portfolio’s, and thus cannot establish a breach of the duty of
Def.’s Reply 12.
Fidelity argues that because the
Plaintiffs have not disputed that SVFs need wrap coverage or
that Fidelity was facing the potential withdrawal of several of
the Portfolio’s wrap providers in 2009, to prove a breach of the
duty of loyalty, the Plaintiffs need to show that the Portfolio
did not need additional wrap coverage and that the new wrap
guidelines to which Fidelity agreed were overly conservative.
Id. at 4-5.
Because the Plaintiffs fail to carry their burden
of proof, this Court grants summary judgment on the issue of
whether Fidelity breached the duty of loyalty.
ERISA section 404(a) requires an ERISA fiduciary to honor
the duty of loyalty by “discharg[ing] his duties with respect to
a plan solely in the interest of the participants.”
This duty, however, is not limitless -- the First
Circuit has noted an accompanying benefit to the fiduciary is
not impermissible -- it more simply “require[s] . . . that the
fiduciary not place its own interests ahead of those of the Plan
Vander Luitgaren v. Sun Life Assurance Co. of
Can., 765 F. 3d 59, 65 (1st Cir. 2014).
Accordingly, to succeed
on a claim for breach of the duty of loyalty, a plaintiff needs
to show that the fiduciary served an interest or obtained a
benefit at the expense of the plan beneficiaries.
See Bunch I,
532 F. Supp. 2d at 291.
Excess Wrap Coverage
Although the Plaintiffs emphasize facts that would normally
lead to the reasonable inference that Fidelity acted to increase
wrap capacity rather than to pursue the investors’ interests,
the Plaintiffs fail to carry their burden because they do not
point to any excess wrap insurance for the Portfolio.
Plaintiffs cite a Fidelity presentation that stated that “[w]rap
capacity [was] priority #1; all investment changes essential to
maintaining capacity and creating new capacity” and
“[p]reservation of market/book risk trumps all other investment
Pls.’ Statement Facts 9 ¶ 38; Def.’s Resp. Facts
The Plaintiffs also stress that Fidelity portrayed the
Portfolio as desirable to wrap providers, due in part to a low
probability of withdrawals, Pls.’ Statement Facts 9 ¶ 35; Def.’s
Resp. Facts ¶ 35, its conservative approach, and a “portfolio
structure [that] minimizes risk to issuers,” Pls.’ Statement
Facts 15 ¶ 67; Def.’s Resp. Facts ¶ 67.
The parties, however, agree that in or around 2009,
Rabobank and AIG decided to exit the wrap business.
Statement Facts 8 ¶ 32; Def.’s Resp. Facts ¶ 32.
Both of these
companies provided wrap coverage for the Portfolio.
Reply 4 (citing Micheletti Decl., Ex. X, Dep. Ex. 65, at
FIDELITY_075041, ECF No. 121-25).
Although the Plaintiffs
assert that in 2009, the Portfolio was not affected by a lack of
wrap capacity because it was “open to new plans, business as
usual,” Pls.’ Statement Facts 8 ¶ 30, the Plaintiffs do not cite
evidence to support the argument that Fidelity did not need
replacement coverage or that the pending termination of Rabobank
and AIG’s wrap coverage was no longer an issue for the
In fact, Fidelity did not secure replacement wrap
coverage until 2012.
See Pls.’ Statement Facts 77 ¶¶ 159-60;
Def.’s Statement Facts ¶¶ 159-60.
Even taking all reasonable
inferences in favor of the Plaintiffs, this Court cannot
conclude on the basis of the facts before it that the
Portfolio’s need for replacement wrap coverage had somehow
Further, although the Portfolio’s taking on of excess wrap
coverage would almost certainly raise doubts as to whether
Fidelity acted in the investors’ best interests, the Plaintiffs
do not argue that this occurred.
feature of SVFs.
Facts ¶ 7.
Wrap insurance is a core
Pls.’ Statement Facts 28 ¶ 7; Def.’s Statement
The Portfolio was at risk of losing wrap coverage
from two of its providers, see Pls.’ Statement Facts 8 ¶ 32;
Def.’s Resp. Facts ¶ 32; Micheletti Decl., Ex. X, Dep. Ex. 65,
at FIDELITY_075041, until its eventual replacement in 2012, see
Pls.’ Statement Facts 77 ¶ 159-60; Def.’s Statement Facts ¶ 15960.
Thus, the Portfolio faced a potential gap in wrap coverage
The Plaintiffs submit that Fidelity’s alleged
single-minded pursuit of increased wrap capacity ran from 2009
to 2012, Pls.’ Statement Facts 9 ¶¶ 37-38, the same time period
during which Fidelity was searching for replacement wrap
The Plaintiffs fail, however, to explain how
Fidelity’s obtaining replacement wrap coverage would put
Fidelity’s interests ahead of the Plaintiffs’.
even taking these facts in the light most favorable to the
Plaintiffs, the Plaintiffs have failed to show that there was a
conflict of interest in Fidelity’s pursuit of wrap insurance for
the Portfolio, given that the Portfolio needed replacement
Unduly Conservative Wrap Guidelines
The Plaintiffs also fail to show that Fidelity entered into
unduly conservative wrap guidelines.
Although they assert that
Fidelity agreed to overly stringent wrap guidelines in order to
obtain more wrap capacity, Pls.’ Opp’n 15, Fidelity successfully
counters that the Plaintiffs have not set forth evidence that
any of the Portfolio’s wrap guidelines were unreasonable, Def.’s
As Fidelity notes, Dr. Pomerantz testified that he
“d[id]n’t think” he had any quarrel with the appropriateness of
the wrap providers’ guidelines with Fidelity, nor did he believe
there was material or immaterial imprudence to them.
Id. at 8
(citing Jacob Decl., Ex. T, Pomerantz Dep. 263:21-264:25, ECF
Further, the only wrap guidelines that the
Plaintiffs address are those that Fidelity and JP Morgan
negotiated in 2009,3 Micheletti Decl., Ex. AG, Dep. Ex. 91, at
FIDELITY_0154857, ECF No. 121-34.
Although a 2011 email
retrospectively described JP Morgan’s wrap guidelines as “overly
stringent,” Pls.’ Statement Facts 10-11 ¶ 44; Def.’s Resp. Facts
¶ 44, both parties also acknowledge that when Fidelity agreed to
those guidelines, it did so with the understanding that JP
Morgan would apply the same guidelines to all other SVFs moving
forward, Pls.’ Statement Facts 11 ¶ 45; Def.’s Resp. Facts ¶ 45.
Fidelity argues that these guidelines were negotiated and
went into effect prior to ERISA’s six-year statute of
limitations, 29 U.S.C. § 1113(1), and thus are not actionable.
Def.’s Reply 8. Fidelity does not, however, cite evidence
regarding the period during which the guidelines were in effect.
Therefore, ERISA’s statute of limitations is an inappropriate
basis upon which to dispose of the issue on summary judgment.
Given these facts, it is not reasonable to infer that Fidelity
viewed the wrap guidelines as overly stringent when initially
agreeing to them.
Nor do the Plaintiffs point to any term or
combination of terms within these guidelines that they assert is
Instead, they merely give the guidelines a
conclusory label, but fail to argue why such a label is merited.
Furthermore, the Plaintiffs do not argue that Fidelity had other
wrap insurance options with less stringent guidelines.
of facts or any argument by the Plaintiffs to support the
inference that Fidelity chose JP Morgan’s more stringent
guidelines over other options would almost certainly persuade a
reasonable factfinder that other options did not exist.
combined with the Plaintiffs’ refusal to challenge the wrap
guidelines more specifically, causes the Court to conclude that
the Plaintiffs have failed to carry their burden to establish
that any of the guidelines were unreasonable.
Court holds that there is not sufficient evidence to find that
Fidelity breached its duty of loyalty.
Duty of Prudence Claim
The Plaintiffs assert that Fidelity breached the duty of
prudence by structuring and managing the Portfolio with the
intention that it underperform competing stable value funds, as
particularly evidenced by Fidelity’s chosen benchmark and delay
in addressing the Portfolio’s underperformance.
Pls.’ Opp’n 18.
Fidelity counters that the record is full of evidence of
Fidelity’s robust decision-making and management process for the
Portfolio -- a process which the Plaintiffs fail effectively to
Def.’s Reply 12-13.
Fidelity argues that because this
process was procedurally prudent, this Court ought hold that
Fidelity did not breach its fiduciary duties.
Def.’s Mem. 13-
The Plaintiffs respond that Fidelity’s process and motives
were self-interested and thus the process was not prudent.
Pls.’ Opp’n 17-18.
Although a procedurally prudent process is
not enough to insulate a fiduciary’s decisions, the Plaintiffs
do not set forth sufficient evidence to establish that Fidelity
acted with imprudence.
The duty of prudence requires a fiduciary to act “with the
care, skill, prudence, and diligence under the circumstances
then prevailing that a prudent man acting in a like capacity and
familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims.”
This applies to a fiduciary’s investment
decisions, as well as to the fiduciary’s continuing
responsibility “to properly monitor investments and remove
Tibble v. Edison Int’l, 135 S. Ct. 1823, 1828-
To determine whether an ERISA fiduciary has breached
the duty of prudence, courts consider “both the substantive
reasonableness of the fiduciary’s actions and the procedures by
which the fiduciary made its decision,” Fish v. GreatBanc Tr.
Co., 749 F.3d 671, 680 (7th Cir. 2014), focusing on “whether the
fiduciary employed proper methods to investigate and evaluate
decisions regarding the plan and its assets,” Glass Dimensions,
Inc., ex. rel. Glass Dimensions, Inc. Profit Sharing Plan & Tr.
v. State St. Bank & Tr. Co., 931 F. Supp. 2d 296, 305 (D. Mass.
2013) (Tauro, J.).
“ERISA’s prudence requirements ‘are
satisfied if the fiduciary: (i)[h]as given appropriate
consideration to those facts and circumstances that, given the
scope of such fiduciary’s investment duties, the fiduciary knows
or should know are relevant to the particular investment or
investment course of action involved,’ and ‘(ii) [h]as acted
Bunch I, 532 F. Supp. 2d at 291 (quoting 29
C.F.R. § 2550.404a-1(b)(1)).
The burden is on the Plaintiffs to
set forth sufficient evidence to show that Fidelity’s action (or
inaction) was imprudent.
Cf. Kenney v. State St. Corp., 694 F.
Supp. 2d 67, 76 (D. Mass. 2010) (Saris, J.) (dismissing an
imprudence claim for the plaintiff’s failure to allege
sufficient facts to demonstrate the defendant’s imprudence).
Merely following a procedurally prudent process is not
enough to establish that a fiduciary did not breach its duty.
See, e.g., Bunch I, 532 F. Supp. 2d at 288.
Rather, a court
must look to the surrounding circumstances before properly
determining whether a breach has occurred.
See id. (stating
that a court addressing a breach of fiduciary duty “look[s] at
the totality of the circumstances involved in the particular
transaction” (citing DiFelice v. U.S. Airways, Inc., 497 F.3d
410, 418 (4th Cir. 2007); Keach v. U.S. Tr. Co., 419 F.3d 626,
637 (7th Cir. 2005); Rogers v. Baxter Int’l Inc., No. 04-C-6476,
2007 WL 2908829, at *2 (N.D. Ill. Oct. 4, 2007))).
The Portfolio’s Benchmark
The Plaintiffs allege that Fidelity used an unduly
conservative benchmark that made it easier for PMs to receive
Pls.’ Opp’n 15.
Fidelity responds that its process
for assessing the benchmark considered the relevant facts and
circumstances and that Fidelity acted accordingly.
Because the parties do not dispute the detailed
analytical process Fidelity utilized in continually assessing
the Portfolio’s benchmark and the Plaintiffs do not submit
evidence that Fidelity acted unreasonably by retaining the 1-5
G/C Index, this Court grants summary judgment in favor of
Fidelity on the issue of whether the Portfolio’s benchmark
violated the duty of prudence.
Fidelity’s benchmark analysis process appears procedurally
The parties agree that throughout the class period,
Fidelity periodically explored changing the Portfolio’s
benchmark both to more and less aggressive options, regularly
conducting quantitative analyses of potential alternative
benchmarks, including their risks and the impacts changing the
benchmark could have on the Portfolio’s returns, duration,
market-to-book ratio, and tracking error volatility.
Statement Facts 40-41 ¶¶ 57, 59; Def.’s Statement Facts ¶¶ 57,
In each instance, however, Fidelity decided to retain the
1-5 G/C Index as the Portfolio’s benchmark.
Facts 41 ¶ 60; Def.’s Statement Facts ¶ 60.
Fidelity notes that
the only challenge the Plaintiffs raise with this process is
that it did not expressly integrate a comparison with
competitors’ returns into Fidelity’s benchmark analysis.
Fidelity argues that the Plaintiffs’ concession that
Fidelity paid attention to its competitors’ performance is
enough to show that Fidelity was giving appropriate
consideration to the relevant facts.
Id. (citing Pls.’ Opp’n
Indeed, it is not reasonable to infer that despite
Fidelity’s exhaustive benchmark evaluation process, the company
made the decision to retain the 1-5 G/C Index in a vacuum,
disregarding its competitors’ performance, despite the process
explicitly taking into account how the benchmark would impact
the Portfolio’s returns.
Additionally, the Plaintiffs do not effectively dispute
that Fidelity acted reasonably in the circumstances.
used the 1-5 G/C Index as the Portfolio’s benchmark throughout
the class period.
Pls.’ Statement Facts 12 ¶ 52; Def.’s Resp.
Facts ¶ 52.
Although Dr. Pomerantz describes this index as
being “not a very common benchmark” for SVFs, Pls.’ Statement
Facts 12 ¶ 54; Def.’s Resp. Facts ¶ 54, he also notes that
economic circumstances could have occurred during the class
period in which a conservative investment approach like the
Portfolio’s would have outperformed SVFs with less conservative
approaches, Pls.’ Statement Facts 79 ¶ 167; Def.’s Statement
Facts ¶ 167.
Given the uncertainty as to how the low interest
rate would change over the class period, Pls.’ Statement Facts
82 ¶¶ 179-80; Def.’s Statement Facts ¶¶ 179-80, the increased
risk of negative returns in a longer-term portfolio should
interest rates rise, Pls.’ Statement Facts 38 ¶ 52, 82 ¶ 178;
Def.’s Statement Facts ¶¶ 52, 178, the Portfolio’s pressing need
for wrap insurance, Pls.’ Statement Facts 8 ¶ 32; Def.’s Resp.
Facts ¶ 32, and the intensive analytical process Fidelity
repeatedly performed in assessing its benchmark, Pls.’ Statement
Facts 40-41 ¶¶ 57-60; Def.’s Statement Facts ¶¶ 57-60, Fidelity
does not appear to have retained the benchmark unreasonably.
The Plaintiffs do not point to a specific moment when Fidelity
should have made a different decision nor to any particular
decision or set of decisions at all; rather, they vaguely
challenge the Portfolio’s overall structure without reference to
any specific events.
This is simply not a sufficient basis on
which to construct a finding of imprudence.
The Portfolio’s Performance
The Plaintiffs argue that despite knowing that the
Portfolio’s crediting rates were uncompetitive, Fidelity refused
to seek a competitive level of income.
Pls.’ Opp’n 16.
Fidelity responds that the Plaintiffs’ assertion is at odds with
the undisputed record.
Def.’s Reply 15.
The Plaintiffs again
fail to marshal sufficient evidence to suggest that Fidelity
The parties agree as to some aspects of the Portfolio’s
investment decision process, see, e.g., Pls.’ Statement Facts 47
¶¶ 79, 81, 49 ¶¶ 86-87, 62 ¶ 116; Def.’s Statement Facts ¶¶ 79,
81, 86-87, 116, but the Plaintiffs summarily respond that much
of the process is not material to their claim, see, e.g., Pls.’
Statement Facts 46-66.
Instead, they again generally argue that
the investment management process was guided by Fidelity’s
overarching desire to grow its wrap capacity.
Pls.’ Opp’n 18.
Fidelity sets forth evidence that it engaged in a comprehensive
process of evaluating potential investment strategies and
investments for the Portfolio.
¶¶ 89-98, 131-40.
See Def.’s Statement Facts
The Plaintiffs fail to dispute this evidence.
Pls.’ Statement Facts 50-53 ¶¶ 89-98, 69-72 ¶¶ 131-40.
The Plaintiffs attempt to use Fidelity’s 2015 business plan
to imply that Fidelity did not engage in any efforts to improve
the Portfolio’s crediting rate prior to 2015.
Pls.’ Opp’n 13.
This effort, however, is negated by the undisputed facts that
the Portfolio’s crediting rate improved from 2010 to 2014, Pls.’
Statement Facts 85 ¶ 195; Def.’s Statement Facts ¶ 195; Fidelity
adjusted the Portfolio’s holdings during the class period, Pls.’
Statement Facts 66 ¶ 126; Def.’s Statement Facts ¶ 126; and that
“there [was] an increase in the aggressiveness of the
[P]ortfolio over time,” Pomerantz Dep. 292:13-17, which was
“certainly a movement towards increasing the risk of the
[P]ortfolio,” id. at 293:2-4.
In light of Fidelity’s
submissions regarding the Portfolio’s investment process and the
Plaintiffs’ failure to refute these facts beyond bald assertions
about Fidelity’s motives, the Plaintiffs have not brought the
adequacy of Fidelity’s investment process into question.
Further, as Fidelity notes, the Plaintiffs do not point to
any specific decision violating the duty of prudence.
In the face of an undisputed process for making
investment decisions, the Plaintiffs cannot carry their burden
by vaguely asserting that Fidelity breached the duty of prudence
without explaining what action(s) could constitute the breach.
Accordingly, the Court holds that the Plaintiffs fail to
establish that Fidelity breached the duty of prudence in
responding to addressing the Portfolio’s investment performance.
For the foregoing reasons, the Court holds that the
Plaintiffs have not made a sufficient showing for the Court to
continue to entertain the claims against Fidelity.
this Court GRANTS Fidelity’s motion for summary judgment, ECF
/s/ William G. Young
WILLIAM G. YOUNG
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