Class Representatives Peter Trauernicht and Zachary Wright (“Plaintiffs”), on behalf of themselves, the Genworth Financial Inc. Retirement and Savings Plan (the “Plan”), and all other similarly situated individuals, filed suit against Genworth Financial, Inc. (“Genworth” or “Defendant”) alleging that Genworth breached its fiduciary duties under the Employee Retirement Income Security Act.
Plaintiffs claimed that Genworth violated its fiduciary duties under ERISA by failing to appropriately monitor, and as a result, imprudently retaining the BlackRock LifePath Target Date Funds (“BlackRock TDFs”) in the Plan despite their significant underperformance. According to Plaintiffs, the retention of the BlackRock TDFs caused the Plan to incur substantial losses.
Genworth produced two expert reports in response to Plaintiffs’ experts. Genworth retained Lorie L. Latham to offer opinions regarding the Plan’s governance structure and monitoring process. Latham opined that the Plan’s governance structure and monitoring processes of the BlackRock TDFs were reasonable and consistent with widely accepted retirement plan fiduciary practices.
Genworth also retained Dr. Russell R. Wermers who explained that the BlackRock TDFs are economically reasonable investments once you account for their specific risk-balancing strategies and features, including their asset allocations and glide paths.
Finance Expert Witnesses
Russell R. Wermers is the Paul J. Cinquegrana ’63 Endowed Chair in Finance at the Smith School of Business, University of Maryland at College Park. Wermers’ research focuses on analyzing investment strategies of professional asset managers, including how to properly measure the risk-adjusted performance of such strategies. He has published in academic and professional journals on investment fund performance evaluation, equity strategies, the drivers of mutual fund and hedge fund investor flows, and the behavior of institutional investors. He has also previously testified as an expert on numerous ERISA cases involving 401(k) and other defined contribution plans.
Lorie L. Latham is the founder and president of L. Latham Consulting, LLC, an independent consultancy where she provides financial and strategic advice to financial firms and retirement plan fiduciaries, boards, and committees. Before that, Latham served in senior executive and consulting roles advising on strategies and investment selection for defined contribution plans. That work involved guiding plan fiduciaries in establishing reasonable and appropriate governance and monitoring practices for their defined contribution plans. Latham has also co-authored numerous publications, including articles on defined-contribution plan governance decision making.
Discussion by the Court
Whether Wermers and Latham Have Specialized Knowledge That Will Assist the Trier of Fact under Rule 702(a)
Wermers’ Qualifications and Opinions
Plaintiffs argued that Wermers lacked the relevant qualifications to address the issues in this case because he has no experience with retirement plan investing, including the monitoring responsibilities of investment fiduciaries governed by ERISA. He has never served as a fiduciary nor advised a retirement committee.
The record does not provide, and the Court does not see, any reason why an expert must be trained in fiduciary monitoring or ERISA, as opposed to general investment theory, to testify on the relative performance and comparability of various target date funds to aid the trier of fact in the determination of whether the BlackRock TDFs violated the Plan’s Investment Policy Statement’s (IPS) criteria.
The fact that Wermers’ offers more generalized opinions on the BlackRock TDFs and their comparators rather than opinions directly tied to fiduciary monitoring goes to the weight rather than admissibility of his testimony.
Latham’s Qualifications and Opinions
Plaintiffs also argued that Latham did not have specialized expertise or knowledge that will assist the trier of fact. Plaintiffs said that her experience came from generalized personal observations and work experience while consulting with plan sponsors and discretionary fiduciaries.
The Court found that, based on that experience, Latham has the requisite qualifications to assist the trier of fact regarding plan governance and fiduciary monitoring standards. The degree of connection between her experience and her opinions goes to the weight of her testimony. At trial, Plaintiffs will have the opportunity to cross-examine Latham on the relevancy of her experience and how that experience has informed her opinions.
Whether Latham’s and Wermers’ Opinions Are Supported by Reliable Principles and Methods
Whether Wermers’ Economic Reasonableness Analysis is Based on Reliable Principles and Methods
Plaintiffs argued that Wermers’ assessment of “economic reasonableness” is not based on any method or discipline recognized within his industry, and instead, is based on his own subjective view of what represents an “attractive combination” between risk and return.
The Court disagreed. Plaintiffs’ complaint is essentially that Wermers’ concept of “economic reasonableness” is not reducible to a rigid, rules-based methodology. However, a formulaic methodology is not required for a witness to offer an expert opinion. Wermers relied on his specialized knowledge and experience to offer guiding principles on how to evaluate and compare the performance of target date funds, and he applied those principles to the BlackRock TDFs under a standard he calls “economic reasonableness.”
Wermers explained that an “economically reasonable” investment is one that “offers ex-ante an attractive combination of risk and return” based on its “qualitative and quantitative characteristics and its investment strategy.” Rather than a term of art, economic reasonableness is just another way of saying an investment is reasonable from an economic perspective.
Plaintiffs did not challenge the reliability of any of Wermer’s specific analyses or conclusions, only that his overarching concept of “economic reasonableness” lacked clear guiding rules and principles.
The Court found that Wermers’ opinions are reliable because he thoroughly articulated his specialized knowledge on the evaluation of target date funds with supporting citations to peer-reviewed articles and other industry sources, and then he applied that knowledge in evaluating the “economic reasonableness” of the BlackRock TDFs and in criticizing Marin’s analyses.
Whether Latham’s “Accepted Fiduciary Practices” Analysis is Based on Reliable Principles and Methods
Plaintiffs argued that Latham’s testimony is unreliable because her opinions on “accepted fiduciary practices” are based on her work experience with unspecified clients rather than any specified method or discipline recognized within her industry. Her failure to explain how her opinions derive from those client experiences, without other guiding industry standards, makes her testimony unreliable according to Plaintiffs.
However, the Court is satisfied that Latham has the requisite experience to provide reliable experience-based opinions on the topics she addresses at this stage.
Second, Plaintiffs claimed that Latham’s opinions are unreliable and unhelpful ipse dixit because she did not rely on any objective, consistent, or rules-based analytical approaches for what she calls “accepted fiduciary practices.”
The Court held that rules-based standards are not necessary for an expert’s opinion to be the product of reliable principles and methods, particularly when the testimony is not scientific in nature. Latham explained that “there’s not a written checklist” of accepted practices and “[p]lan governance structures vary, depending upon the size and culture of the plan sponsor, the type of plan, and other factors.”
Consequently, in her report, Latham reviewed the specific practices of the Genworth Committee from the evidentiary record, and explains whether, in her professional experience, those individual practices comport with the typical industry practices she has observed over her decades-long career. Latham is permitted to rely on her experience to testify in that capacity. The Court held that Plaintiffs’ concerns over the objectivity of Latham’s opinions and the specific experiences on which she relies can be addressed on cross-examination and with contrary evidence.
Whether Latham and Wermers Reliably Applied Their Principles and Methods to the Facts of the Case
Whether Wermers Reliably Applied His Principles and Methods to the Facts of the Case
Plaintiffs argued that Wermers failed to fully consider the IPS in his analysis and relied on other data that was cherry-picked and never relied on by the Plan’s fiduciaries. According to Plaintiffs, that made Wermers’ analysis irrelevant to whether the Plan’s fiduciaries acted prudently in retaining the BlackRock TDFs. Plaintiffs also claimed that Wermers ignored discrepancies between his data and the data presented in materials provided to the Genworth Committee.
The Court held that Wermers was primarily retained to offer an opinion on whether the BlackRock TDFs were an “economically reasonable” investment and to rebut Marin’s conclusions, particularly those based on his ex-post performance comparisons of the BlackRock TDFs to other funds and benchmarks. Therefore, Plaintiffs’ criticisms about “the lack of references to the Plan’s Investment Policy Statement does not undermine the reliability of [Wermers’] methodology” because that methodology was not predicated on evaluating the BlackRock TDFs’ performance against the IPS’s criteria.
For the same reasons, it was not problematic for Wermers to have relied on external data which was not provided to the Genworth Committee. For instance, Wermers looked at third-party analyst ratings of the BlackRock TDFs as well as the BlackRock TDFs’ prevalence in the broader retirement plan market to demonstrate that Marin’s views on the BlackRock TDFs’ performance were not widely held among the industry. The Court held that using such data was not irrelevant or unreliable “cherry-picking.”
When Plaintiffs said that Wermers ignored discrepancies between his data and the data presented to Genworth’s Committee, the Court held that it would seem appropriate for Wermers to use that data if Plaintiffs’ own expert also used it.
Whether Latham Reliably Applied Her Principles and Methods to the Facts of the Case
Plaintiffs argued that Latham failed to sufficiently consider the Plan’s IPS in forming her opinions. According to Plaintiffs, Latham stated that the Plan’s IPS was merely a non-binding, guiding document even though the Plan’s fiduciary counsel provided advice to the Genworth Committee that the IPS was a binding, Plan document.
Plaintiffs did not dispute that Latham reviewed and relied on the IPS in forming her opinions. Instead, Plaintiffs disagreement was over Latham’s understanding of the IPS’ effect.
Since, the dispute appeared to be over what constituted a violation of the IPS, not whether the IPS is a legally binding plan document or not. The Court held that just because the Plaintiffs disagreed with Latham’s understanding of the IPS’ effect did not mean she failed to reliably apply her methods to the facts of the case.
Whether The Testimony Is Admissible Under Rule 403
Plaintiffs argued that Wermers’ and Latham’s testimony should also be excluded under Rule 403 because it threatens to mislead or confuse the issues for the same reasons already discussed.
Having found Wermers’ and Latham’s testimony to be admissible under Rule 702, the Court also finds that their testimony is generally admissible under Rule 403 for the reasons discussed. Moreover, in a bench trial, the risk that an expert’s testimony will be unduly confusing or misleading is much lower and excluding evidence under Rule 403 for such reasons is generally not appropriate.
Held
The Court denied Plaintiffs’ motion to exclude opinions and testimony of Lorie L. Latham And Russell R. Wermers, Ph.D.
Key Takeaways:
Wermers’ opinions are reliable because he thoroughly articulated his specialized knowledge on the evaluation of target date funds with supporting citations to peer-reviewed articles and other industry sources. Also, Plaintiffs’ concerns over the objectivity of Latham’s opinions and the specific experiences on which she relies can be addressed on cross-examination and with contrary evidence.
Case Details:
| Case Caption: | Trauernicht, Et Al. V. Genworth Financial Inc., Et Al. |
| Docket Number: | 3:22cv532 |
| Court: | United States District Court, Virginia Eastern |
| Order Date: | August 29, 2024 |
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