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Ellis v. Fidelity Management Trust Co.

United States District Court, D. Massachusetts

June 19, 2017

JAMES ELLIS and WILLIAM PERRY, individually and as representatives of a class of similarly situated persons, Plaintiffs,




         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 prudence. 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.

         A. Procedural History

         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.” WGY 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. Def.'s Mot. Summ. J., ECF No. 97. 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.

         B. Factual Background

         The Portfolio is a stable value fund (“SVF”). Pls.' Statement Facts 33 ¶ 26; Def.'s Statement Facts ¶ 26. SVFs are 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 high-quality, 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. Pls.' Statement Facts 29 ¶ 13; Def.'s Statement Facts ¶ 13. Wrap 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. Pls.' 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 (“AUM”). Pls.' Statement Facts 3 ¶ 13; Def.'s Resp. Facts ¶ 13.

         The Portfolio is governed by the Declaration of Separate Fund (“DSF”). Pls.' Statement Facts 33 ¶ 30; Def.'s Statement Facts ¶ 30. 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. Pls.' Statement Facts 36 ¶ 41; Def.'s Statement Facts ¶ 41. Ellis invested in the Portfolio from 2009 to 2015, while Perry invested in the Portfolio between 2009 and 2013. Compl. ¶ 12; Answer ¶ 12.

         1. 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 1-5 A (“1-5 G/C Index”) or better as a benchmark to manage the Portfolio throughout the class period. Pls.' Statement Facts 12 ¶ 52; Def.'s Resp. Facts ¶ 52. 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].” Pls.' Statement Facts 34 ¶ 33; Def.'s Statement Facts ¶ 33. “Interest rate sensitivity” is the weighted average duration of the securities in a portfolio. Pls.' Statement Facts 35 ¶ 34; Def.'s Statement Facts ¶ 34. 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. Pls.' 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 bonds. Pls.' Statement Facts 38 ¶ 52; Def.'s Statement Facts ¶ 52. 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. Pls.' Statement Facts 40 ¶ 57; Def.'s Statement Facts ¶ 57. The 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.

         2. The Portfolio's Management Process

         A portfolio manager (“PM”) evaluates potential investments and investment strategies, and makes investment decisions for Fidelity's SVFs. 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. ¶ 98.

         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. The analysts 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. The research 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. Id. ¶¶ 95-96. 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 investment opportunities. 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' decision-making, 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. Pls.' Statement Facts 70 ¶ 135; Def.'s Statement Facts ¶ 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 ...

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