A 401(k) saver suing over her employer's fund switch does not have to find a matching fund to compare it with, the Eleventh Circuit has ruled

For years the fight in these cases has been about finding the right fund to compare. The Eleventh Circuit has now said a plaintiff does not always need one.

The court reversed summary judgment for Royal Caribbean on Monday in a class action brought on behalf of savers in its retirement plan, and sent the case back to the Southern District of Florida. Judge Brasher wrote for a panel that also included Judges Jill Pryor and Luck. The opinion is published, so it binds the circuit.

Ann Johnson sued over a switch. In 2014 Royal Caribbean's investment committee added the Vanguard target date series to the plan and made it the default. Then it replaced that series with target date funds run by Russell. The Russell funds came out of the menu again in 2019.

The rule the district court applied

A target date fund holds a mix that gets more conservative as a retirement year approaches. The path it takes is called a glidepath, and funds differ on it. Russell used what the industry calls a "to" glidepath, reaching its most conservative allocation at the target date, and tilted towards emerging markets and real assets where competitors held more American shares.

Those differences were the whole case below. The district court held that to prove the investment was objectively imprudent, Johnson had to compare it with a fund of the same strategy and risk profile, an apples-to-apples comparison. Russell's own custom benchmark was the only comparator it would accept. Measured that way the funds trailed by an asset-weighted average of 0.71 percent a year, and the court granted judgment to the defence without weighing the rest of the evidence.

Why that was circular

Johnson's argument was that the distinguishing features were the problem. The court took the point. The custom benchmark had those same features built into it, so testing the funds against it could never answer whether choosing funds of that design was reasonable in the first place.

Comparator evidence still matters, and the panel kept the limit that a quantitative comparison must be like for like. What it removed is the requirement to have one at all. A plaintiff may instead show that a fund was not a popular option in plans of comparable size, or that analysts rated it poorly. Qualitative or quantitative, and not necessarily both.

The sentence that will be quoted from this opinion is the reason why. Some of the most objectively imprudent investments, the court wrote, will lack an apples-to-apples comparison precisely because they are such bad decisions.

What the record contains, and what it does not settle

The opinion recites evidence Johnson put in. The Russell series never had more than 12 clients and lost its two largest to Vanguard in 2014, the year before the switch. Morningstar rated the retail version negative that December. Against the series it replaced, and the American Funds series that later replaced it, the Russell funds trailed by an annualised 1.51 and 2.12 percent between October 2015 and May 2019. Internal Russell emails from 2017 quoted in the opinion record an executive noting that other clients were leaving because "as a fiduciary it is hard to go with worse numbers and higher fees."

None of that is a finding against anybody. Russell settled with Johnson while the appeal was pending and is out of the case, on terms the opinion does not give. Royal Caribbean and its investment committee remain, and the court was explicit that it makes no determination about whether the record warrants summary judgment under the correct standard.

That question now goes back to the district judge, this time with the whole record in front of him.