Split federal Appeals Court upholds ruling favoring Lowe’s consultant in 401(k) dispute

A split federal Appeals Court has sided with an investment consultant for Lowe’s Home Improvement in a lawsuit filed by employees linked to the company’s retirement plan.

The 2-1 ruling from the 4th U.S. Circuit Court of Appeals upholds a lower court decision. A trial judge had determined that the consultant, Aon Hewitt Investment Consulting, did not violate “core duties of loyalty and prudence” under the federal Employment Retirement Income Security Act.

Benjamin Reetz filed suit against Lowes’ and Aon as a representative of a class of employees and on behalf of the Lowes 401(k) Plan. The plan, “one of the largest in the country,” maintains about $5 billion in assets for 260,000 employee participants.

By some calculations, Lowes’ and Aon’s decisions after October 2015 cost employees between $70 million and $277 million, according to Judge Julius Richardson’s majority opinion. Lowe’s and its investment committee settled the legal dispute with employees. But Aon took the case to trial.

Richardson’s opinion addresses Reetz’s claims against the consultant. “First, the duty of loyalty. While Aon was Lowe’s investment consultant, it pitched its delegated-fiduciary services. Like it sounds, such services allow a fiduciary — here, the committee that runs Lowe’s plan — to outsource its duties to a third party. Reetz argues Aon’s sales efforts were self-motivated and thus violated the duty of loyalty.”

“Also, around the same time, Aon recommended that Lowe’s streamline the investment menu it offered to plan participants,” Richardson wrote. “Reetz suggests that this advice was not solely motivated by the plan’s best interest, it was shaded by the desire to land the deal, so it was disloyal.”

“Second, the duty of prudence. After Lowe’s accepted the recommendation to streamline its investment menu and hired Aon as delegated fiduciary, Aon moved $1 billion in plan assets to a relatively untested investment fund that it created,” Richardson added. “The fund didn’t do so well. So Reetz alleges the fund selection and retention breached the duty of prudence.”

“He argues that Aon did not seriously consider alternative funds when it invested the plan assets in the fund and did not properly monitor the fund once it was chosen,” the 4th Circuit majority opinion continued.

After a five-day bench trial, U.S. District Judge Kenneth Bell ruled in Aon’s favor.  “Reetz appeals, but we affirm,” Richardson wrote. “To start, Aon’s sales efforts to obtain the delegated fiduciary work were not investment advice, so Aon owed no duty of loyalty. The investment-menu recommendation was investment advice, but we agree with the district court that Aon’s recommendation was not motivated by self-interest.”

“And Reetz’s contention that Aon’s research conducted before it was Lowe’s delegated fiduciary could not discharge its duty of prudence also falls short,” the majority opinion explained. “Aon engaged a reasoned decision-making process by reviewing comparable funds. It makes no difference here that the review occurred when it established the fund (which was before Aon became Lowe’s delegated fiduciary). Plus, it continued to monitor the fund. So Aon did not violate the duty of prudence.”

Judge Barbara Milano Keenan joined Richardson’s opinion. Judge Robert Bruce King dissented from part of the majority’s ruling. King agreed with the plaintiffs that Aon breached its “duty of loyalty” under ERISA.

“Contrary to my friends in the majority, I am satisfied that Aon … did not ‘make [all] decisions … with an eye single to the interests of the . . . [plan] participants,’” King wrote. “That is, Aon ‘failed to act as if it were free of any conflict.’ Perhaps that point is best illustrated by the district court’s findings of fact, which tellingly reveal the extent of Aon’s self-serving and disloyal conduct.”

“[I]t is readily apparent that the fiduciary investment advice Aon provided to the Lowe’s 401(k) retirement plan was made ‘at least in part to enhance [Aon’s] position,’” King added. “Pursuant to our Court’s longstanding precedent, that alone constitutes a breach of ERISA’s exacting duty of loyalty.”

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