BALTIMORE (LN) — The U.S. District Court for the District of Maryland partially denied Lockheed Martin’s motion to dismiss a putative ERISA class action, allowing claims that the defense contractor’s in-house target date funds chronically underperformed industry benchmarks to move forward.
The ruling in Fezer v. Lockheed Martin Corporation permits plaintiffs to pursue allegations that Lockheed and its subsidiary, Lockheed Martin Investment Management Company, breached fiduciary duties by retaining underperforming funds and engaging in prohibited transactions. However, the court dismissed the plaintiffs’ claim that the funds charged unreasonable management fees, ruling that the plaintiffs compared actively managed in-house funds to low-cost, passively managed index funds, a comparison the court found not meaningful.
The suit, filed on behalf of tens of thousands of Lockheed employees, alleges that the company’s target date funds underperformed comparable funds from Capital Group, Fidelity, and T. Rowe Price by 0.46% to 1.95% annually over a 10-year period ending in 2024. The funds also underperformed S&P Target Date Indices by 0.34% to 1.09% annually over the same period.
The court rejected Lockheed’s argument that such underperformance was too minor to state a plausible claim for imprudence. It noted that the Fourth Circuit has not imposed a categorical rule barring claims based on underperformance of this magnitude.
"The Court will not dismiss the imprudence claim in Count 1 on the basis that the quantification of the underperformance is necessarily too low," the court wrote.
The court also allowed prohibited transaction claims to proceed, finding that plaintiffs plausibly alleged that Lockheed extended credit to the plans and that the plans transferred assets to Lockheed for services. The court cited the Supreme Court’s recent decision in Cunningham v. Cornell University, which held that plaintiffs need not plead around statutory exemptions for prohibited transactions at the motion-to-dismiss stage.
However, the court dismissed the fee-related imprudence claim because plaintiffs compared the in-house funds to low-cost Vanguard index funds rather than the actively managed competitors used in the underperformance analysis. Because actively managed funds typically charge higher fees than passively managed index funds, the court ruled the comparison was not meaningful.
"Where Plaintiffs do not allege that the Vanguard TDFs are actively managed, and where they have conspicuously failed to compare the LMIMCo management fees to those of the three actively managed funds designated as comparators for Count 1, the Court does not find that the allegations warrant an inference of imprudence based on unreasonable management fees," the court wrote.
The court also granted Lockheed’s request to strike the plaintiffs’ demand for a jury trial, ruling that the equitable relief sought under ERISA does not trigger Seventh Amendment jury rights.
Lockheed settled a previous lawsuit regarding its retirement plan management for $62 million in 2015.