Ramos v. Banner Health

          ORDER GRANTING IN PART AND DENYING IN PART SLOCUM'S MOTION FOR SUMMARY JUDGMENT

          William J. Martinez United States District Judge.

         This case arises out of alleged mismanagement of Defendant Banner Health's (“Banner”) employee 401(k) plan (the “Plan”). Plaintiff Lorraine Ramos and others (together, “Plaintiffs”) bring this lawsuit against Banner Health and certain current and former employees (together, “Banner Defendants”) and Jeffrey Slocum & Associates, Inc. (“Slocum”) (collectively, “Defendants”) alleging that Defendants breached their fiduciary duties under the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. §§ 1101 et seq. (ECF No. 118.) Plaintiffs earlier moved for class certification, which the Court granted as to the Banner Defendants and denied as to Slocum. (ECF Nos. 296 & 345.)

         Currently before the Court is Slocum's Motion for Summary Judgment (the “Motion”). (ECF Nos. 306 (restricted) & 307 (public).) For the reasons discussed below, the Court grants in part and denies in part the Motion.

         I. BACKGROUND

         The following facts are undisputed unless otherwise noted.^[1]

         A. Plan Investment Options

         Banner offers employees an opportunity to invest and save for retirement through the Plan, a defined contribution plan under ERISA and a 401(k) plan under the Internal Revenue Code. Plan participants may invest their voluntary and company-matching contributions in a “choice of investment options that allow [participants] to create a diversified portfolio to help [them] meet [their] individual needs.” (ECF No. 322-3 at 6; ECF No. 306 at 11, ¶ 5.)^[2] Until August 2014, the Plan offered three “levels” of funds to participants: (1) “Level 1: Ready-mixed Investment Options” or target-date funds that allowed a participant to invest in a single fund based on a desired retirement date; (2) “Level 2: Core Investment Options” described as “8 core investment options to help you create and manage a diversified portfolio”; and (3) “Level 3: Expanded Investment Options” intended as “[a]dditional investment opportunities for more sophisticated investors.” (ECF No. 322-4 at 10, 16, 20.) Changes to the investment options in any of these three levels required a letter of direction by Banner sent to the Plan recordkeeper.

         Level 3 Funds in the form of the “mutual fund window” were eliminated in August 2014, though participants could still access options beyond Levels 1 & 2 Funds through the Plan's “brokerage-account window.” (ECF No. 306 at 11, ¶ 7.) Participants were specifically informed that the Plan fiduciaries did not monitor investments available through the brokerage link.

         Slocum refers to Levels 1 & 2 Funds collectively as the “Core Funds” and Level 3 Funds as the “Mutual Fund Window” (ECF No. 306 at 11, ¶¶ 5-6). Plaintiffs refer to the Level 1 Funds as the “Freedom Funds” and the Level 3 Funds by the level number. (ECF No. 322 at 8-9, ¶ 5; id. at 33-40; see ECF No. 322-33 at 14, ¶ 63.) For the sake of clarity, the Court will use the level number, unless referring to a specific fund within a particular level.

         B. Contractual Responsibility for Plan Investment Options

         1. The Plan's Delegation of Responsibility

         The Plan delegates responsibility “for all investment and administrative functions related to the Plan” to the Retirement Plan Advisory Committee (the “RPAC”). (ECF No. 306-2 at 44; ECF No. 306 at 10, ¶ 2.) In addition to the RPAC, Banner Health, its Board of Directors, and the Chief Executive Officer of Banner Health have responsibilities regarding the operation and administration of the Plan. (ECF No. 306-2 at 43; ECF No. 322 at 8, ¶ 2.)

         Banner hired Fidelity Management Trust Company (“Fidelity”) to serve as the Plan's recordkeeper in 1999. The Plan's recordkeeping services were never put out for competitive bidding. Until the end of 2016, Fidelity was compensated for its services through a revenue-sharing arrangement, which was a percentage of the retirement savings that participants invested in the Plan and was sent to Fidelity in uncapped asset-based fees. Banner also retained Drinker Biddle as outside ERISA counsel to attend quarterly meetings, provide training to RPAC members, and advise the RPAC on ERISA issues.

         The RPAC was tasked with “advis[ing] the Company on Plan investments and administrative functions.” (ECF No. 306-2 at 43; ECF No. 322 at 8, ¶ 2.) The RPAC's investment responsibilities included, among other things, selecting investment options; reviewing and evaluating the performance of investment options; taking “prudent and appropriate” corrective action regarding investment options, including adding, removing, or replacing options; and “appoint[ing] investment managers to oversee the investment options” and “an independent investment consultant to (I) act as a fiduciary of the Plan, (II) evaluate investment options, and (III) make recommendations regarding appropriate investment funds.” (ECF No. 306-2 at 44; ECF No. 306 at 10, ¶ 3; ECF No. 322 at 8, ¶ 3.) On the administrative side, the RPAC was responsible for serving as the Plan Administrator, reviewing the reasonableness of administrative fees, and monitoring the recordkeeper. (ECF No. 306-2 at 44-45.)

         2. Slocum's 2010 and 2014 Contracts with Banner

         To assist the RPAC in carrying out its investment responsibilities under the Plan, Banner hired Slocum to serve as an independent investment consultant. Banner and Slocum signed the 2010 and 2014 Contracts for investment consulting services, and Slocum served as an independent investment consultant until October 24, 2016, when it was purchased by Pavilion Financial Corporation. The 2010 and 2014 Contracts state that the investment-related responsibilities of the RPAC and Plan service providers, including Slocum, would be defined in the Plan's “Statement of Investment Objectives and Policies” (referred to by the parties as the “Investment Policy Statements” or “IPSs”). These contracts also outlined other contractual obligations of Slocum, including reviewing investment performance of current investment options in (among other things) the Plan, helping to evaluate and select additional or replacement investment managers, providing written investment performance evaluations on a quarterly basis, and giving asset allocation and asset liability advice. (ECF No. 306-11 at 2-3; ECF No. 306-12 at 2-3.)

         Under the 2010 Contract, Slocum was paid fixed a percentage on Banner's Consolidated Investment Portfolio for services on “the Consolidated Investment Pool, defined benefit, supplemental executive retirement plans, insurance, Foundation and Planned Giving assets.” (ECF No. 306-11 at 4.) It also received an annual fee of $50, 000 for services to the Plan. (Id.) Under the 2014 Contract, Slocum received a variable percentage fee for non-Plan investments based on the total value of assets, as well as an annual fee of $75, 000 for services to the Plan. (ECF No. 306-12 at 4.)

         The 2010 Contract also contemplated Slocum's involvement with “large-scale special projects outside the scope of services” on a negotiated basis. (ECF No. 306-11 at 2-3.) The parties dispute whether Slocum was assigned or took on special projects. Slocum argues that it “was never assigned any special projects and was not paid beyond its contractual fee.” (ECF No. 306 at 15, ¶ 22.) Plaintiffs contend that Slocum did take on or perform additional work or projects, and cite the Plan Reviews that Slocum provided. (ECF No. 322 at 10, ¶ 22.) Plaintiffs do not address or present any evidence that Slocum was paid beyond its contractual fee for the Plan Reviews. In reply, Slocum cites the testimony of Kyle Schmit, a former Slocum investment advisor, who testified that Slocum's retention fee for services to the Plan would include a Plan Review. (ECF No. 334 at 3, ¶ 22; ECF No. 306-16 at 12.)

         The 2010 Contract described Slocum as a “fiduciary within the meaning of section (3)(21)(A)(ii) of ERISA with respect to the Defined Benefit and 401(k) Plans.”^[3](ECF No. 306-11 at 4.) The 2014 Contract provided that the “sole standard of care imposed on us [Slocum] by this Agreement is to act with the care, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims.” (ECF No. 306-12 at 5.)

         3. Delegation of Responsibilities by the IPSs

         The 2011 & 2014 IPSs outlined the responsibilities of, among other entities, Banner, Banner's Board of Directors, Banner's CEO, the RPAC, and Slocum. The 2011 and 2014 IPSs separately outlined the duties of the RPAC (referred to in the IPSs as the “Advisory Committee”) for investment functions and plan administration functions.

         a. The RPAC's Investment Functions Under the IPSs

         The RPAC was responsible for “overseeing and reviewing the investment of the Plan's assets” and required to “act prudently and solely in the interest of the Plan's participants and beneficiaries” when carrying out its “management, investment, and review of the Plan's assets.” (ECF No. 306-13 at 7; ECF No. 306-14 at 7.) Among other duties, the RPAC was responsible for “[e]valuating and selecting firms for consideration as . . . [r]ecordkeeper” reviewing the performance of the recordkeeper, taking prudent and appropriate corrective action as necessary, and “[r]eviewing the reasonableness of investment related fees paid by the Plan.” (ECF No. 306-13 at 8; ECF No. 306-14 at 8.) As Tom Koelbl, a former RPAC board member, testified, Slocum did not have final decision-making authority over which recordkeeper would provide services to the Plan and RPAC was responsible for insuring the reasonableness of recordkeeping and investment fees. (ECF No. 306-6 at 6.) RPAC chair Brenda Schaefer testified that RPAC had a fiduciary responsibility to ensure that the administrative fees for recordkeeping services were reasonable. (ECF No. 334-2 at 5.) She also testified that she understood that Slocum acted in a fiduciary capacity when assessing the reasonableness of the Plan's recordkeeping fees. (ECF No. 332 at 3-5, 8.)

         The RPAC was also tasked with “evaluating and selecting investment funds, which may include commingled accounts, bank, common or investment trust funds, or separately managed accounts for participants' directed investments to effect the [RPAC's] investment vehicle selections (collectively, ‘Investment Funds'), and, where appropriate, appointing one or more ERISA Investment Managers to provide separately managed Investment Funds.” (ECF No. 306-13 at 7; ECF No. 306-14 at 7.)

         However, the IPSs made clear that the RPAC had no responsibility “for any self- directed brokerage accounts to the extent permitted by applicable law.” (ECF No. 306-14 at 8; see ECF No. 306-13 at 8 (2010 IPS disclaimed any responsibility for “any self-directed brokerage accounts/mutual fund windows”).) The IPSs explained that the “primary objective of the self-directed brokerage accounts is to allow participants access to investments not currently available through the core investment options in the Plan, ” and explicitly disclaimed any fiduciary liability for decisions made by participants within these options to the extent permitted by law. (ECF No. 306-14 at 8-9; see ECF No. 306-13 at 8-9 (also including “mutual fund window”)).

         b. Slocum's Functions Under the IPSs

         The IPSs state that RPAC retained “an Investment Consultant, ” Slocum, “to provide investment advice in accordance with ERISA.” (ECF No. 306-13 at 9; ECF No. 306-14 at 9.) Both IPSs provide that Slocum is a fiduciary “but only with respect to those matters specifically assigned or delegated to Slocum pursuant to its Contract for Consulting Services dated June 28, 2010, or any supplemental assignment of duties mutually agreed to by the parties.” (ECF No. 306-13 at 9; ECF No. 306-14 at 9.)

         In terms of the recordkeeper advice, under the IPSs, Slocum was tasked with advising the RPAC in selection of the “[r]ecordkeeper, and any other investment related service providers, as requested, by identifying and screening candidates for appropriate characteristics and assisting in performing due diligence checks.” (ECF No. 306-13 at 9-10; ECF No. 306-14 at 9-10.) Slocum contends that RPAC never requested Slocum to assist in selecting a recordkeeper, and Plaintiffs do not respond to this factual allegation. (ECF No. 306 at 18 ¶ 36; ECF No. 322 at 12-13, ¶ 36.)

         In addition, among other things, Slocum was responsible for:

• “[a]dvising the [RPAC] in selecting the Investment Funds to be offered under the Plan by identifying and researching potential Investment Funds”;

• “[p]reparing regular performance evaluations of Investment Funds” and providing a written report for each Investment Fund addressing returns, comparisons, diagnostics, reconciliation, and compliance;

• “[m]aking recommendations, with supporting material, as to the appropriate Investment Funds”; and

• reporting quarterly to the RPAC a “review and reappraisal of the Investment Funds, ” a “commentary on investment results of each Investment Fund in light of current market conditions and the appropriate standards of performance, ” and a “discussion of any key policy issues facing the Plan.”

(ECF No. 306-13 at 9-11; ECF No. 306-14 at 9-11.)

         Plaintiffs and Slocum dispute whether the term “Investment Fund” in the IPSs includes self-directed brokerage accounts or mutual fund windows. Slocum cites testimony of Slocum representatives and RPAC members stating that Slocum had no responsibility for monitoring or reporting to the RPAC on individual funds in the mutual fund window, and Slocum's responsibility was limited to the “Core Funds” (defined by Slocum as Levels 1 & 2). (ECF No. 306 at 16, ¶ 29; ECF No. 322 at 11, ¶ 29.)

         Specifically, Edward Oxford, Jr., a current or former member of the RPAC, testified that Slocum did not provide analysis on any of the approximately 300 funds within Level 3, nor did the RPAC expect Slocum to provide analysis of those funds. (ECF No. 306-9 at 12, 23.) Richard Sutton, another current or former member of the RPAC, testified that the RPAC monitored the general participation in the mutual fund window and the window “overall, ” but not the individual performance and fees associated with individual mutual funds. (ECF No. 306-5 at 13.) Kyle Schmit testified that he understood Slocum's responsibility to be the same as the RPAC, with no responsibility over funds in the mutual fund window. (ECF No. 306-15 at 153-54.)

         In addition, Slocum's principal, Jeffrey Slocum, stated that the annual fees of $50, 000 and later $75, 000 reflected an understanding that Slocum's responsibility did not include the Level 3 Investment Options. (ECF No. 306-58 at 2.) He also stated that he understood that the RPAC was not responsible for selecting and monitoring Level 3 options, and thus had no need for Slocum's services with respect to those funds. (Id.) Had Slocum been hired to perform services for Level 3 options, Mr. Slocum stated, the firm would have charged far more for its services. (Id. at 4-5.)

         However, Slocum's own expert witness, Terry Dennison, admitted at his deposition that the scope of Slocum's review of “the performance of the current options in the funds” is “[a]dmittedly . . . not precise” and “not terribly specific about . . . what is contemplated.” (ECF No. 322-7 at 14, 16.) He also testified, based on the Plan's fee disclosure to participants, that there was no “differentiation being made between the core investment options and the funds that are in the mutual funds window.” (Id. at 24.) Nonetheless, he went on to explain that because ...