Prudent appointment and monitoring of Russell Investments Trust Company (“Russell”) as an ERISA section 3(38) investment manager by the 401(k) Plan Committee (“Committee”) for the Caesars Entertainment Corporation Savings & Retirement Plan (“Plan”) recently paid dividends for the Committee and the plan sponsor, Caesars Holdings, Inc. (“Caesars”) when facing fiduciary breach allegations in connection with the engagement of Russell to provide outsourced investment management services with respect to the Plan.  The impetus for the lawsuit was that the plaintiffs, who are Plan participants, are unhappy with the alleged underperformance of the Russell target date funds (“TDFs”) offered under the Plan.  In addition to suing Russell, the plaintiffs sued Caesars and the Committee (collectively, the “Caesars Defendants”) for allegedly failing to adhere to their duty of prudence, including the failure to monitor Russell. 

On summary judgment, the United States District Court for the District of Nevada ruled for the Caesars Defendants, finding no genuine issue of material fact when viewing the evidence in the light most favorable to plaintiffs. But no such luck for Russell – the Court denied its motion for summary judgment on both duty of loyalty and duty of prudence claims.

The decision underscores the importance of prudent, well-run, and well-documented fiduciary practices at a time when many plan fiduciaries and sponsors have resigned themselves to the possibility, even likelihood, that they will be targets of a lawsuit related to their ERISA employee benefit plans even in the absence of evidence of any wrong doing and/or based solely on second guessing with the benefit of hindsight. While lawsuits may still happen, the decision demonstrates the quick exit that plan fiduciaries may be able to achieve when they employ prudent processes.

Background

Participants sued Russell and the Caesars Defendants in a class action for alleged ERISA fiduciary breaches tied to the Plan’s investment lineup. According to the plaintiffs, after a competitive RFP led by an independent consultant, Caesars hired Russell in late 2016 as an ERISA section 3(38) investment manager and executed an Investment Management Agreement (“IMA”). In 2017, when Russell assumed control over the Plan’s investments, Russell allegedly implemented a new investment menu that replaced the existing fund lineup with exclusively Russell investments, including “Lifecycle” TDFs (the qualified default investment alternative) and white‑label funds. Plaintiffs alleged that Russell made these changes because the Russell TDFs needed an infusion of capital, among other reasons.  Total plan assets were around $1.4 billion, and more than $1 billion were transferred to the Russell TDFs.

According to plaintiffs, the Russell TDFs underperformed compared to both the Plan’s prior TDFs and industry benchmarks.  Similarly, plaintiffs allege that the Plan’s other investments did not perform well. As a result, the plaintiffs claim that the Plan lost more than $100 million.  

Plaintiffs alleged that Russell engaged in self‑dealing, breaching its duties of loyalty and prudence when selecting the Russell TDFs and other investments for the Plan.  Plaintiffs alleged that Russell selected these proprietary funds to increase assets under management (“AUM”) for Russell rather than serving participants’ best interests.

As to the Caesars Defendants, plaintiffs claim that they were imprudent in both hiring and monitoring Russell. In making these claims, the plaintiffs focused largely on the alleged imprudence of the investments selected by Russell.  The plaintiffs also noted that Caesars was emerging from bankruptcy around the same time and may not have been paying as close attention to the Plan investments as needed.

As more fully described below, the court held that Caesars’ selection and monitoring processes were prudent as a matter of law and therefore found that the claims against the Caesars defendants fail. By contrast, the claims against Russell survived motion for summary judgment, and therefore in the absence of settlement will continue to trial.

The Court’s Analysis

Selection of Russell: Process Over Outcomes

The court credited the Caesars Defendants with a robust, well‑documented selection process that included independent consulting support, a structured RFP, diligence and finalist meetings, conflict screening, negotiated fees, and robust deliberation of pros and cons of each finalist. The court observed that in hiring Russell as an ERISA section 3(38) investment manager, the Committee expected that Russell would select investments that best served in the interests of the Plans’ participants, but hiring Russell was not an instruction to Russell to select Russell‑branded funds. Instead, under the IMA and Investment Policy Statement (“IPS”) maintained by the Committee, Russell was legally and contractually obligated to discharge its duties in accordance with ERISA and in participants’ best interests, even if that resulted in selecting non‑Russell funds. 

Monitoring of Russell: What the Court Found Adequate

The heart of the ruling was the court’s finding of the adequacy of the Caesars Defendants’ monitoring of Russell (specifically, the Committee’s monitoring) after Russell took over as an ERISA section 3(38) investment manager. The court emphasized ERISA’s focus on process, not short‑term results, and that performance alone is insufficient to sustain a fiduciary breach claim.  Accordingly, the court focused on the Committee’s oversight process, noting the Committee’s adherence to specified requirements under the IPS and consistent with the IMA.  In determining that the Committee adequately monitored Russell, the court found the following relevant:

• Regular, documented oversight. Russell provided quarterly performance reports in advance of quarterly committee meetings, and those reports were reviewed at the quarterly meetings. Minutes and materials of the quarterly Committee meetings reflected ongoing review of market conditions, fund performance, and the Plan’s lineup.
• Alignment with governing documents. The IPS charged the Committee with periodic, detailed review of the outsourced investment manager, and the IMA required quarterly reporting. The record showed that the Committee followed these requirements.
• Appropriate evaluation horizon. The IPS called for performance evaluation over a period sufficient to cover economic and capital market cycles, generally five years or longer. With approximately only four years of results, it would have been premature for the Committee to override Russell’s decisions on investment lineup, particularly given that Russell was delegated full investment authority under ERISA section 3(38). 

Having prudently engaged an ERISA section 3(38) manager, the Committee’s duty was to monitor rather than micromanage day‑to‑day selections. The court found that there were no red flags or departures from the IPS or IMA that would have required escalation or Committee override of Russell’s decisions.

Claims Against Russell: Summary Judgment Motion Denied

Internal communications presented to the court suggested that Russell had AUM‑driven incentives to select and retain its proprietary funds with respect to the Plan, including Russell TDFs, which served as the Plan’s qualified default investment alternative, and that the economics of the arrangement made Russell unwilling to manage a non‑Russell TDF as part of the Plan’s lineup. The court found that this direct evidence of prudence and loyalty concerns gave rise to triable issues as to Russell’s motives and methods thereby precluding summary judgment in Russell’s favor on any of the claims.

Thompson Hine Takeaways

Developing and following a prudent process takes work, and like what was facing the Caesars Defendants, often there are competing demands for the attention of plan fiduciaries wearing multiple hats within an organization.  The decision serves as an important reminder that a prudent process, not outcomes, is what is required of fiduciaries under ERISA, that the investment in a prudent process is worth it, and that if litigation occurs, a prudent process can get plan fiduciaries out of litigation more quickly and less expensively than they might otherwise.

With respect to the selection and monitoring of an outsourced ERISA 3(38) investment manager, the decision highlights several best practices:

• Selection. Engage in well-run and robust RFP processes consistent with the Plan documents and policies, including the IPS, when making investment manager selections.
• Monitoring. After prudent appointment, monitor the manager; do not micromanage absent red flags or IPS/investment management agreement triggers.
• Honor the IPS. Follow the evaluation window and triggers as set forth in the IPS. If the IPS prescribes a multi‑year evaluation window, short‑term underperformance alone should not establish imprudence.
• Document, Document, Document. Quarterly reports, meetings, and minutes that track IPS/investment management agreement requirements should go a long way toward leading to a court finding monitoring to have been adequate.

While the case focused on the selection and monitoring of an ERISA 3(38) investment manager, the principals in the decision may extend to other fiduciary delegations with respect to ERISA-covered employee benefit plans.  If you have any questions, please contact the authors or your Thompson Hine attorney.