A 401(k) excessive fee suit has been given a green light to proceed to trial—relying almost exclusively on the assertions of those bringing suit to establish a “plausible” case for doing so.
This suit was brought last October against plan fiduciaries on behalf of the $432 million (14,400 participant) Knight-Swift Transportation Holdings, Inc. Retirement Plan by participant-plaintiffs Robert Hagins and Tommie Woodard for breaching its fiduciary duties of prudence in violation of the Employee Retirement Income Security Act (ERISA). More specifically, the suit (Hagins v. Knight-Swift Transportation Holdings, Inc., D. Ariz., No. 2:22-cv-01835, complaint 10/26/22) alleged that, rather than “leveraging the Plan’s tremendous bargaining power to benefit participants and beneficiaries, Defendant caused the Plan to pay unreasonable and excessive fees for recordkeeping and other administrative services.”
Defendant also selected and retained for the Plan high priced investments when identical investments were available to the Plan at a fraction of the cost. The suit continues by arguing that the defendant’s “mismanagement of the Plan constitutes a breach of the fiduciary duty of prudence”—and that “defendant’s actions (and omissions) were contrary to actions of a reasonable fiduciary and cost the Plan and its participants millions of dollars.”
Standard of Review
U.S. District Judge Roslyn O. Silver began her analysis (Hagins et al. v. Knight-Swift Transportation Holdings Inc., case number 2:22-cv-01835, in the U.S. District Court for the District of Arizona) by noting that, “A pleading must contain a ‘short and plain statement of the claim showing that the pleader is entitled to relief,’” and that in order “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” That said, she also commented (as is customary in such things) that while a federal court ruling on a motion to dismiss “must take all of the factual allegations in the complaint as true, [they] ‘are not bound to accept as true a legal conclusion couched as a factual allegation.’”
At a high level, citing precedent, she commented that “A claim for breach of the duty of prudence will ‘survive a motion to dismiss if the court, based on circumstantial factual allegations, may reasonably infer from what is alleged that the process was flawed’ or ‘that an adequate investigation would have revealed to a reasonable fiduciary that the investment at issue was improvident.’”
Judge Silver noted that while the fiduciary defendants here asserted that the “plaintiffs have alleged no facts to support their calculation of recordkeeping fees being $200 per person, no facts to support the claim that a reasonable fee is $25 per person, and no facts to show that the recordkeeping fees were imprudent in light of the services provided.” Additionally, she noted that the defendant took issue with the plaintiff’s calculation of direct and indirect recordkeeping expenses, arguing the calculation “appears to be taken out of thin air.” However, “taken as true,” she noted that those allegations “sufficiently state a claim of breach of fiduciary duty.” Moreover, while the defendants had pressed for consideration of their read on the Form 5500 rather than the plaintiff’s calculation—“the Court cannot do so at this stage. Plaintiffs’ allegations—that a combination of direct and indirect payments for recordkeeping expanded without any oversight or monitoring by Defendant—is enough to state a claim.” Indeed, she noted that, “At this stage, the Court need not determine the factual accuracy of Plaintiffs’ calculation.”
As for points of comparison, Judge Silver explained that the plaintiffs cited “a handful of other cases and specifically reference one comparison plan to substantiate this allegation,” and that while the defendants took issue with that, calling for a more specific basis for that comparison, Judge Sliver declined to “…decide this question of fact at this stage. Indeed, ‘[t]he Court cannot conclude that the pleading contains insufficient benchmarks for a meaningful comparison of fees at this stage of the proceedings, where such a conclusion evidently requires the Court to resolve fact disputes.’”
Now, the defendants pushed back—as similarly positioned defendants have in other cases—commenting that the suit “…should be dismissed because they fail to allege facts to show the recordkeeping fees were imprudent ‘in light of the specific services provided.’” More specifically, she states that the defendants argued that the “plaintiffs failed to allege particular services provided by the recordkeeper, or any facts to support that ‘the same services were available for less on the market.’”
That said, in this case Judge Silver was willing to accept a stock recitation of general recordkeeping services alongside an assertion that “[n]early all recordkeepers in the marketplace offer the same range of services,” as well as the claim “that other plans spend less per participant on recordkeeping fees than the Plan here” as sufficient. “The natural logical conclusion of those factual allegations is that ‘the same services were available for less on the market,’” she concluded. She also commented that issues raised with the applicability of the comparator plan—which apparently had a much smaller number of participants—further supported the allegation that “here, where the Plan included thousands of participants, Defendant failed to monitor recordkeeping fees and negotiate for lower fees using their superior bargaining power in accordance with its fiduciary duty.”
Similarly, with regard to the challenge regarding share class selections (basically that the defendants breached their fiduciary duty of prudence by investing in more expensive share classes instead of lower-cost shares of the same funds), Judge Silver noted that the fiduciary defendants had argued that there had been no allegations about the process used to select the share class, and that “plaintiffs’ allegations of the availability of ‘identical’ share classes ignores the fact that some share classes allowed for revenue sharing to pay recordkeeping fees, meaning a ‘higher-cost’ share class may be equal or lower-cost in the context of the Plan as a whole.”
However, she found that the plaintiffs here had alleged facts sufficient to survive the motion to dismiss; that they cited “numerous share classes where a lower-cost share class of the same fund existed,” that “plan participants had nearly $200 million invested in those identified imprudent share classes, meaning plan participants are paying about double to invest in those share classes than the less expensive options”—and that, while the defendants had argued that there might be reasons for investing in those particular more expensive share classes—its “explanation for the more expensive choice is unavailing at the pleading stage.”
She concluded that, “ultimately, taken together and accepted as true, Plaintiffs’ allegations regarding recordkeeping fees and expensive share classes are sufficient to state a claim for breach of fiduciary duty of prudence.”
As for the associated claim regarding a failure to monitor the plan committee, having found reasons to let the claims regarding a potential breach to proceed to trial, Judge Silver also allowed those claims to proceed.
What This Means
If you’re finding the determination of plausibility in this case somewhat different than that in other jurisdictions—well, you’re not alone. Arguably the assessment in this case is more consistent with what has traditionally been the threshold—basically you take the plaintiffs at their word, and if the elements of the allegation are there, that’s enough to move past the inevitable motion to dismiss the suit.
More recently, courts in certain jurisdictions have wanted more—not just generalized assertions, but details specific to the case in question. Details that some might well argue are difficult, if not impossible, to obtain prior to the process of discovery that precedes trial. On the other hand, it’s hard not to see many/most of these suits as mere “fishing expeditions,” making generalized, generic claims—either hoping for a settlement, or the opportunity during discovery to actually find specific grounds for the claim.
Your opinion on that differentiation likely reflects the side of the suit on which you’re sitting. But if you’re looking for some judicial consistency in the matter… well, you’re probably still looking.