Starwood Excessive Fee Suit Moves Ahead

Arguments by a plan’s fiduciaries that a plaintiff’s claims were time-barred under ERISA’s statute of limitations (mostly) fell short.

The suit, Creamer v. Starwood Hotels & Resorts Worldwide Inc. (C.D. Cal., No. 2:16-cv-09321), filed Dec. 16, 2016 in the U.S. District Court for the Central District of California, charged that Starwood Hotels & Resorts Worldwide Inc. “caused Plan participants who invested in index funds to pay seven times more than a reasonable fee due to multiple layers of fees. It failed to follow the express written instructions of Plan participants. It failed to make adequate disclosure concerning its practice of revenue sharing. Further, it failed to include a stable value fund instead of a money market fund in the investment option” – and it “ignored explicit instructions of Plan participants as to how their retirement money should be invested. It intentionally and consciously chose investment options which subjected Plan participants to poor performance and high fees.”

In ruling on the motion by Starwood Hotels to dismiss the suit, Judge Dale S. Fischer of the U.S. District Court for the Central District of California noted (Creamer v. Starwood Hotels & Resorts Worldwide, Inc., C.D. Cal., No. 2:16-cv-09321, 5/1/17) that Starwood argued the statute of limitations bars the plaintiffs’ claim for all five theories of liability. Specifically, that the plaintiffs had actual knowledge of all the alleged breaches via participant disclosures, and that the limitations period for an ERISA breach of fiduciary duty claim is three years after the earliest date on which the plaintiff had actual knowledge of the breach or violation.

The plaintiffs argued that the three-year limitations period does not apply to excessive fees cases like this one, citing Wildman v. Am. Century Servs., LLC and Urakhchin v. Allianz Asset Mgmt. of Am., L.P. However, the court noted that since those cases it relies on are from circuits that have not adopted the 9th Circuit’s more lenient actual knowledge standard, they “are not relevant to the Court’s analysis.” However, the court considered the determination in the Northrop Grumman decision (which found a breach of fiduciary duty claim time-barred where documents sent to plaintiffs disclosed the fees charged, putting them on notice of the allegedly excessive fees) to be not only more persuasive but also “in line with the Ninth Circuit’s actual knowledge standard.” Since the plaintiffs did not dispute that they received – outside the three-year limitations period – documents disclosing the fees charged by the BlackRock LifePath 2050 Index Fund, the court tossed that claim to the extent that it relies on excessive fees pertaining to this fund.

On the matter of determining whether the plaintiffs had actual knowledge of the allegedly excessive recordkeeping and administrative fees, while Starwood argued the plan statements disclosed the plan’s fees, the court said “…it is not apparent whether fees shown on the statements represent those allegedly excessive fees.” Specifically, while annual notices for the plan specify that some fees are deducted from the investment returns and do not appear as separate line items on the statements, and while the account statements also specify that some administrative expenses are paid from the expenses of the investment funds, that did not appear to meet the actual knowledge standard.

Viewing the arguments in the light most favorable to the plaintiffs, the court said it could “infer from these facts that Starwood’s recordkeeping and administrative fees were excessive prior to 2015 and are still excessive,” and that the plaintiffs “have pleaded sufficient facts from which the Court can reasonably infer that Starwood employed a flawed process for selecting recordkeeping and administrative services.” And therefore, having determined that the plaintiffs have stated a claim for breach of fiduciary duty for Starwood’s alleged failure to ensure reasonable recordkeeping and administrative fees, the court denied Starwood’s motion to dismiss the case.

Oh – and in a footnote, Judge Fischer noted that the parties failed to address Starwood’s arguments regarding the stable value fund, investment instruction and revenue sharing theories of liability, holding that they conceded their merit, but giving the parties until June 1 to amend their lawsuit.

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