Goldman Sachs Beats Appeal Over In-House 401(k) Mutual Funds

Goldman Sachs Group Inc. defeated an appeal by a class of employees who said their 401(k) plan offered poorly performing in-house mutual funds that paid fees to the company.

The employees never introduced evidence showing that Goldman kept its funds in the plan for the purpose of advancing its own interests, the US Court of Appeals for the Second Circuit said Wednesday in an unpublished opinion rejecting claims that Goldman breached its duties of prudence and loyalty. In fact, the record “suggests otherwise,” because it includes evidence that Goldman managed the plan using a “robust process” that included fiduciary training sessions and reliance on an unbiased, outside investment adviser, the court said.

The court declined to fault Goldman for allegedly waiting too long to remove certain challenged funds from the plan, explaining that retirement plan fiduciaries don’t breach their duties by choosing to keep investments “that, in the fiduciary’s reasonable assessment, may perform well in the long term despite short-term underperformance.” And Goldman’s alleged failure to adopt a formal investment policy statement for the plan doesn’t amount to a fiduciary breach, the court said, noting that both parties’ experts agreed that this step isn’t a requirement for prudent fiduciaries.

The employees’ claims under the Employee Retirement Income Security Act’s prohibited transaction rules also fail, the court said, because the plan was treated “no less favorably” than other retirement plans serviced by the same recordkeeper.

The 17,000-person class action challenges Goldman’s decision to offer its own proprietary funds in the 401(k) plan covering its workforce. Goldman kept these funds in the plan when they performed poorly, charged excessive fees, and engaged in self-dealing under ERISA, according to the lawsuit.

A Manhattan federal judge sided with the company in 2022, concluding that it appropriately monitored these funds at regular meetings and with outside investment advice. The judge previously denied the company’s motion to dismiss in 2020, together with its motion to quickly appeal that decision to the Second Circuit.

Dozens of recent ERISA lawsuits have targeted financial companies that put their own funds in their workers’ 401(k) plans. These cases have garnered hundreds of millions of dollars in settlements, with settling employers including Reliance Trust Co. ($39.8 million), McKinsey & Co. ($39.5 million), Wells Fargo & Co. ($32.5 million), SunTrust Banks Inc. ($29 million), and Deutsche Bank ($21.9 million).

The Second Circuit’s opinion was issued by Judges Gerard E. Lynch, William J. Nardini, and Sarah A. L. Merriam.

Nichols Kaster PLLP and Apollo Law LLC represent the workers. Sullivan & Cromwell LLP represents Goldman.

The case is Falberg v. Goldman Sachs Grp., Inc., 2d Cir., No. 22-2689, unpublished 2/14/24.