An excessive fee suit that made a series of allegations common to this genre—one of several targeting the Fidelity Freedom Funds—has been dismissed with prejudice by a federal judge.
Here the plaintiff (former participant Yosaun Smith) alleged roughly a year ago that the committee overseeing Commonspirit Health’s (also known as Catholic Health Initiatives, the country’s largest nonprofit health system) $3.2 billion, 100,000-participant 401(k) retirement savings plan, breached its fiduciary duty to its members by providing an inadequate selection of investment options and by allowing for unreasonable expenses to be charged for the administration of the plan.
In response, the defendants moved to dismiss the suit, arguing that the plaintiff lacked standing to bring the suit (as she wasn’t invested in all of the funds challenged), and that she failed to state a claim upon which relief may be granted. There were subsequently responses to those actions by both parties, “multiple notices of supplemental authority along with responses,” and a telephonic oral argument.
The Claims
More specifically the plaintiff, as have others in other plans and litigation, challenged the used of actively managed options—arguing that passively managed alternatives were available that were less expensive and better performing. Specifically called out were the Fidelity Freedom Funds, a suite of 13 funds that are actively managed by Fidelity fund managers. The plaintiff here asserted that collectively, participants who invested in these funds would have saved over $1.24 million in fees in 2018 alone, compared with Fidelity’s passively managed alternative. The plaintiff (represented by Miller Shah LLP[i], Goldenberg Schneider LPA, and Capozzi Adler PC) claims that at least 76% of the plan’s assets were invested in the actively managed option.
That wasn’t the only option(s) challenged (the American Beacon Large Cap Value Fund and the AllianzGI NFJ Small Cap Value Fund were also cited) on performance grounds, but she also claimed that the total amount paid in investment management fees during the relevant period was “far too high.”
Finally, the complaint alleges that the plan paid excessive administrative fees to Fidelity and that the defendants’ failure to defray these costs was a breach of fiduciary duty., that Fidelity received “…a flat fee charged at between $30 and $34 per person,” which, according to the plaintiff, was higher than that of comparable plans.
On the issue of standing—having a right to bring suit—Judge David L. Bunning of the U.S. District Court for the Eastern District of Kentucky rejected (Smith v. CommonSpirit Health, 2021 BL 339537, E.D. Ky., No. 2:20-cv-00095, 9/8/21) the notion that the plaintiff had to be invested in all of the funds challenged, noting that “contrary to Defendants’ contention, Plaintiff’s investment in one of the challenged funds is sufficient to confer standing to sue on behalf of plan members who invested in the remaining challenged funds,” citing previous case law that he said established that the defendant has “…standing to represent other Plan participants who allegedly suffered similar, though not identical, injury.” He also determined that the plaintiff here “…has a sufficient personal stake in the adjudication of the claims relating to the American Beacon Fund and the Allianz Fund,” in that “those funds, like the Fidelity funds Plaintiff invested in, are alleged to have been improperly included in the Plan menu due to poor performance and high investment management fees.”
Active vs. Passive
Judge Bunning dismissed the comparison of performance between active and passive management benchmarks, citing a recent case which concluded that, “actively managed funds and passively managed index funds are not ideal comparators: they have different aims, different risks, and different potential rewards that cater to different investors.”
In fact, he went on to note that “offering funds with different management approaches and varying levels of risk is one way to diversity the portfolio of available investments,” explaining that “…a plan fiduciary does not necessarily act unreasonably merely by including an actively managed fund that happens to perform worse or cost more than any given passively managed fund. Any other conclusion would in effect prohibit plan managers from offering investment options a plaintiff views as inferior, something which courts have repeatedly held is not the law under ERISA.”
Ultimately, and with some detail applied to an analysis of all the funds in question (which included a determination not only that the benchmarks chosen were inappropriate, but also that the funds in most cases performed better in different time windows), Judge Bunning determined that the “Plaintiff has failed to allege facts plausibly showing that the challenged investment funds were imprudently selected or retained, her claim on this basis is dismissed ... Given that a plan fiduciary is not imprudent simply for offering lower-performing or higher-cost funds, a complaint that pleads as much would be conclusory and fail to state a claim.”
He proceeded to explain why even if the claim(s) made were valid, they’d fall short in this particular case, ultimately concluding that “a small degree of underperformance is weak circumstantial evidence that is insufficient to infer fiduciary breach ... More fundamentally, however, Defendants were not obligated to choose the best fund available or to favor passively managed funds over actively managed funds, and for these reasons, were not bound by Morningstar’s fund rankings or generalized investor preference.” He similarly dismissed claims regarding claims about the American Beacon and Allianz GI funds, disqualifying the comparison to a market index as not being “meaningful.”
Expensive Menu
As for the charge that the plan’s investment menu was too expensive, Judge Bunning noted that while “…a meaningful mix and range of investment options does not insulate plan fiduciaries from liability for breach of fiduciary duty”… “a standard based solely on the number and variety of investment options provided would allow a fiduciary to avoid liability by stocking a plan with hundreds of options even if the majority were overpriced or underperforming,” and that “nowhere in the Complaint does Plaintiff allege that the funds offered were more costly or performed worse than comparable funds.” He concluded that “in sum, Plaintiff’s sole allegation that the total amount of investment management fees paid was higher than average is insufficient to plead a claim that Defendants violated the fiduciary duty of prudence. Plaintiff’s claim on this basis is therefore dismissed.”
On the issue of recordkeeping fees, Judge Bunning was similarly unimpressed with the plaintiff’s arguments, and went on to state that, “because Plaintiff has failed to allege facts plausibly showing that the recordkeeping fees paid were excessive, it makes no difference that she alleges Defendants engaged in no examination, comparison, or benchmarking of the Plan’s recordkeeping fees with similarly sized plans,” or ‘that the marketplace for service providers [is] very competitive’ such that Defendants should have negotiated a better rate.” Judge Bunning questioned the applicability of comparison to data from the 401(k) Averages Book, as well as the citation from the ICI/Brightscope findings versus the Form 5500 disclosures. “In sum, a close examination of the sources cited in the Complaint reveals that Plaintiff has failed to allege facts showing that the recordkeeping fees exceeded those of comparable plans or were excessive in relation to the service provided. Further, Plaintiff has failed to identify another recordkeeper that would have been willing to conduct the same service as Fidelity at the assertedly reasonable rate of $30 per person.”
Loyalty
On the issue of violating a duty of loyalty, Judge Bunning rejected the notion that “Defendants’ decision to retain the Active Suite, which pays Fidelity at higher rates than the Index Suite and more than any non-Fidelity investment option despite its consistent underperformance, can be plausibly traced to the motivation to keep Fidelity satisfied at the expense of the participants’ interests.” This argument, he concluded, came late in the process (“Notwithstanding the fact that Plaintiff alleges this ill-motive for the first time in her brief…”), he concluded that allegations that “various third parties benefitted from Defendants’ alleged mismanagement” do not support an inference that “Defendants acted for the purpose of benefitting those third parties or themselves”—and dismissed that claim as well.
That said, he was not persuaded, commenting that the “plaintiff has not alleged facts from which the Court can infer imprudent conduct on the part of the Defendants. Thus, Plaintiff has failed to state a claim under ERISA and Defendants’ Motion to Dismiss is granted.” With prejudice.
What This Means
The claims asserted here are common to much of this class of excessive fee litigation, certainly at the pleading stage, and yet all of these “common” assertions were rejected almost out of hand by Judge Bunning. It’s not that mere allegations stated as facts by the plaintiffs’ bar will cease as a result—but this court, at least, appears to be expecting more than circumstantial allegations to carry the day in a court of law.
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Freedom Fund Suit Falls Short - National Association of Plan Advisors
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