A Minnesota federal district court judge has dismissed claims of a breach of fiduciary duties under the Employee Retirement Income Security Act (ERISA) against 3M Company. The plaintiffs alleged that the company’s offering of custom target-date funds in its 401(k) plan violated ERISA because the funds underperformed. The judge disagreed, finding that the plaintiffs failed to show that their proposed benchmarks were meaningful comparisons to the disputed funds. The case is Batt et al. v. 3M Company et al., 0:25-cv-03149 (U.S. District Court, District of Minnesota).
Current and former 3M employees filed the ERISA suit, claiming that its customized target-date funds underperformed other available target-date funds and indices. The plan participants alleged that the company’s choice to offer these custom 3M target-date funds as an investment option — and retain them despite their underperformance — violated its fiduciary duty of prudence under ERISA. The duty of prudence states that plan fiduciaries must discharge their duties with the “care, skill, prudence, and diligence” under the prevailing circumstances that a reasonably prudent person would exercise in a similar situation.
3M filed a motion to dismiss the complaint for failure to state a claim upon which relief could be granted, as per the Federal Rule of Civil Procedure. The company argued that the allegedly comparable funds and indices the plaintiffs included in their complaint were inappropriate benchmarks for assessing the appropriateness of its custom target-date funds.
The judge agreed with 3M’s argument. Ultimately, the judge found that the plaintiffs’ complaint was fundamentally flawed. The plaintiffs’ failure to establish that the identified target-date funds and indices were appropriate benchmarks for the 3M target-date funds warranted dismissal of the suit.
In its ruling, the court emphasized the process by which a fiduciary makes its decisions, not the results of those decisions, when considering whether a fiduciary has met ERISA’s duty of prudence. In this case, the court found that the plaintiffs failed to present sufficient evidence to show that 3M’s process was deficient, even at such an early stage of the proceedings. While fiduciaries are not required under ERISA to select the highest-performing investments or ensure good returns, plaintiffs must identify specific comparable funds and show why those comparisons are an appropriate measure of the challenged funds. So long as the decision-making process is prudent, the outcome of that process in terms of fund performance is irrelevant.
Despite the dismissal, the court offered plaintiffs the opportunity to file an amended complaint to remedy the deficiencies. The court’s actions in this regard acknowledge the typical practice of allowing amendment of a defective complaint that was subject to an early pleading-stage dismissal, especially in complex ERISA litigation.
Nonetheless, the ruling highlights the need for plan fiduciaries to regularly use comparable and meaningful benchmarks to evaluate plan investment options. Plan fiduciaries also should keep detailed records of the investment option evaluation and selection process. These records can be crucial in defending against ERISA lawsuits based on investment options.
The case also opens the door for fiduciaries defending against breach of fiduciary duty allegations involving fund underperformance to challenge such claims on the grounds of insufficient comparators. In particular, the assessment of customized funds may require a more nuanced approach than standard retail funds. This type of challenge may lend itself to early dismissal of litigation, even before undertaking the costly and lengthy discovery process.
This case is indicative of a continuing trend in ERISA litigation that targets 401(k) plan investment options. Some of these cases focus on overly expensive recordkeeping fees, but some — like the instant case — focus on certain underperforming investment plan options, such as target-date funds.
HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.
