ERISA fee litigation seems out of control. In fact, the number of lawsuits filed in 2020 was double the number filed in 2018. While some of the fiduciaries who were sued didnt take their fiduciary responsibilities seriously, many others who tried to do a good job were caught in the sights of aggressive class action attorneys.
There have been fewer decisions on the merits than you might expect in these cases, relative to the number filed. Many are settled without a final decision. This may leave fiduciaries wondering if it is ever possible to avoid a trial or extensive discovery if they are sued. Sometimes it is, as two recent federal district court decisions have shown. One was dismissed with prejudice, which means that the plaintiffs cant refile and bring the claims again. These decisions may provide a template for further dismissals of cases filed based on conclusory allegations and speculation rather than the actual conduct of the defendants.
The Vail Decision.
In Kurtz v. the Vail Corporation, a federal district court judge in Colorado dismissed the suit with prejudice without the need for fact-finding or a trial. Plaintiff had sought to bring a class action based on a number of conclusory allegations about the plans investments. These were that:
Plan fees of .63% were excessive because they were 90% higher than fees paid by comparable plans.
The plan fiduciaries didnt select the share class with the lowest fees.
The plan fiduciaries should have selected passive rather than actively managed funds.
Both the duty of prudence and the duty of loyalty had been violated.
Defendants also argued that the plaintiff was entitled to challenge only the funds in which she actually invested.
The Legal Analysis.
The court rejected the argument, based on the recent U.S. Supreme Court decision in Thole, [(140 S.Ct. 1615 (2020)] that plaintiff couldnt challenge funds in which she had not invested. The Supreme Court had found no constitutional standing, and no injury in fact, when defined benefit plan participants sought to sue for fiduciary breach based on allegedly imprudent investments because they would get the same benefit regardless of whether they prevailed. Here, plaintiffs retirement benefit would reflect the performance of the plans investments, so the Supreme Court decision didnt apply.
The court also found that fiduciary breach claims cannot be based on hindsight or solely on the performance of the investments chosen, but must be based on conduct. More than conclusory allegations must be made to prevent the lawsuit from being dismissed. Specifically, these standards apply in reviewing fiduciary breach claims
Conclusory allegations are not entitled to be presumed true. Just stating that the fiduciaries should have picked the share class with the lowest fees or should have offered all passive investments arent enough.
If there is a prudent fiduciary process, there is no duty to take a particular course of action.
Plaintiffs must show that a prudent fiduciary would not have made the decision as part of a prudent investment strategy that considered the whole portfolio.
The complaint was defective in failing to allege that defendants process was imprudent or to include statements about the information available to defendants when they made their decisions.
The court even cited favorably a decision that found that fees were excessive only if there was no reasonable relationship to the services provided or they were not arms length.
An allegation of breach of the duty of loyalty must contain allegations that the purpose of the activity was to benefit the fiduciaries. Receiving an incidental benefit is not enough.
Davis v. Salesforce.com
This decision by a judge in federal district court in California dismissed claims against both the plan committee and the Board based on the Boards alleged failure to monitor the committee. The plaintiff alleged fiduciary breaches based on:
Failure to select the share class with the lowest expense ratio
Excessive investment fees, based on a comparison of fees for actively managed funds with fees for passive funds
Failure to investigate collective trusts and insurance company separate accounts as potentially lower cost investments
Breach of the duty of loyalty by selecting a recordkeeper and fund managers related to investors in the company
Using language consistent with the Vail decision, this court also rejected allegations based on mere conclusions. The court found that:
Passive investment fund fees were not an appropriate benchmark for evaluating fees for actively managed funds. The two types of funds have different risks and management approaches.
Allegations based on 5 year investment returns dont look at a long enough period to justify plausible claims of imprudence
Fiduciaries are under no duty to offer alternatives to mutual funds
Merely stating that the share class with the lowest fees was not selected without more wont support a fiduciary breach claim. In this case, the share class selected paid revenue sharing, which was offset against fees and provided a benefit.
The mere existence of ownership relationships, such as the fact that the Fidelity Contrafund owned shares of the company, does not support a claim of breach of the duty of loyalty. There must be allegations that the fiduciaries intended to benefit themselves or parties other than the participants in making decisions.
Take Aways for Fiduciaries.
While these two decisions dont constitute a trend, they represent a common sense rejection of the assumption that there is only one right way to invest. Different choices are not presumptively wrong or imprudent. The decisions also confirm that prudence is determined based on process and the information available at the time, not by reviewing decisions with 20/20 hindsight. If fiduciaries raising the arguments that were successful in these cases dont succeed in getting the cases dismissed, they will still have an opportunity to demonstrate that they followed a prudent process and could prevail on summary judgment or after trial. Therefore, it remains crucial to have and follow a good investment policy statement and to carefully document the reasons for all decisions.
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When Can 401(k) Fiduciaries Get Excessive Fee Suits Dismissed? Anatomy of Two Recent Wins - JD Supra