‘Close Question’ Commodity Claims Clear 401(k) Excessive Fee Dismissal

An excessive fee suit has moved past a motion to dismiss—apparently because of a slight shift in its arguments about recordkeeping services.

This suit was filed by participant-plaintiff Michael Mazza, a former participant (and senior director of marketing) in the $879 million, 10,205 participant Pactiv Evergreen Services Inc. Employee Savings Plan against Pactiv and its Board of Directors. The (amended) suit alleged that the Defendants breached their fiduciary duty of prudence by causing participants to pay excessive recordkeeping and administrative ("RKA") fees—and that they failed to adequately monitor other plan fiduciaries. The defendants moved to dismiss Mazza's amended complaint for failure to state a claim (under Federal Rule of Civil Procedure 12(b)(6)). The opinion, written by U.S. District Judge Sara Ellis, noted that during his six-year tenure with the firm he held investments in target date funds, international funds, bond funds, and small cap funds through the plan.

‘A Commodity with Little Variation in Price’

After outlining the role(s) and responsibilities of 401(k) recordkeepers, Judge Ellis noted (Mazza v. Pactiv Evergreen Servs. Inc., 2023 BL 169431, N.D. Ill., No. 1:22-cv-05052, 5/18/23) that recordkeeping fees were “relatively stable and did not materially change for mega plans during the class period,” and stated (as most of this type of litigation presumes) that “the underlying cost to recordkeepers of providing recordkeeping services primarily depends on the number of participant accounts in a plan, not the plan's total assets.” She noted that “minor variations in the level and quality of Bundled RKA services have little to no material impact on the fees the recordkeepers charge, with virtually all recordkeepers providing the same core services. Indeed, industry experts, and even Fidelity, a top recordkeeper, have maintained at least since 2016 that Bundled RKA services ‘are a commodity with little variation in price.’" 

Mazza used Principal as its recordkeeper and third party administrator—and Judge Ellis commented that they provided “a standard level of Bundled RKA services that is ‘of a nearly identical level and quality’ as other recordkeepers servicing mega plans,” and that—citing the Plan's 2018 Section 404(a)(5) disclosure—the Plan charged participants an annual administrative expense of $42.25, with administrative expenses "typically includ[ing] items such as recordkeeping, participant website, participant statements, Plan compliance services and financial professional services." She noted that the plan didn’t disclose anything “to suggest that the annual administrative fee it charged participants included any unusual services or services above and beyond standard recordkeeping and administrative services,” though she acknowledged a disclosure that Ad Hoc services and participation in the Principal Managed Account Program would incur additional fees. She also noted the disclosure of revenue-sharing that was to be credited back to participant accounts on a monthly basis.

She then turned to a table provided by the plaintiff that indicated (according to Judge Ellis) that indicated “a hypothetical prudent plan fiduciary would have paid on average an effective annual RKA fee of around $32 per participant between 2016 and 2020, or approximately $388,841 per year in RKA fees total.” She then commented—based on those numbers that “the Plan cost its participants on average an additional $439,106 per year (or approximately $36 per participant per year) in RKA fees between 2016 and 2020, totaling $2,195,529.” She then noted (presumably based on the plaintiff’s assertions, though it may have been established elsewhere) that the defendants here “did not regularly reassess the Plan's Bundled RKA fees that it paid to Principal during the class period, solicit quotes from other recordkeepers, or perform competitive comparisons of the Bundled RKA fees.”

Standards of Review

Having outlined her assessment of the situation, Judge Ellis turned to the standard of judicial review for a dismissal of such actions, noting that “a motion to dismiss under Rule 12(b)(6) challenges the sufficiency of the complaint, not its merits.” She recounted, as other courts in multiple jurisdictions routinely do, that in such considerations “the Court accepts as true all well-pleaded facts in the plaintiff's complaint and draws all reasonable inferences from those facts in the plaintiff's favor,” and that in order to survive a motion for dismissal, “the complaint must assert a facially plausible claim and provide fair notice to the defendant of the claim's basis.” Moreover, she noted that “a claim is facially plausible ‘when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.’"

Required Context

Turning first to allegations regarding a breach of the duty of prudence, Judge Ellis distinguished the dismissal of similar claims in Albert v. Oshkosh from those in Northwestern University v. Hughes— basically by noting that in the former there were no specific allegations that the fees charged were excessive relative to the services provided. She went on to comment that in the Seventh Circuit's most recent decision in Hughes , the Seventh Circuit “distinguished Albert and found that the plaintiffs provided the required context to allege that their plan's RKA fees "were excessive relative to the recordkeeping services rendered”—including allegations that "the quality or type of recordkeeping services provided by competitor providers are comparable to that provided by Fidelity and TIAA," that "recordkeeping services are fungible and that the market for them is highly competitive," and that "$35 per participant was a reasonable recordkeeping fee based on the services provided by existing recordkeepers and the Plans' features." 

All that alongside “examples of several other university I.R.C. § 403(b) plans that successfully reduced recordkeeping fees by soliciting competitive bids, consolidating to a single recordkeeper, and negotiating rebates," and that Northwestern had "successfully lowered the Plans' administrative fees (including recordkeeping fees) in the October 2016 restructuring, which suggests that Northwestern's recordkeeping fees were unreasonably high and that means to lower such fees were available." She went on to note that that court “specifically rejected the defendant's argument that a plaintiff would have to ‘prove that another recordkeeper would have offered a lower fee’ in order to proceed past a motion to dismiss.”

‘A Close Question’

Acknowledging that this was case presented a “close question,” Judge Ellis held that the allegations here were more like “those the Seventh Circuit allowed to proceed in Hughes than those it rejected in Albert.” She did note that the “alleged failure to regularly solicit quotes or competitive bids on its own does not amount to a breach of the duty of prudence,” but commented that plaintiff Mazza “alleges more than that, and, as Hughes recognized, ‘fiduciaries who fail to monitor the reasonableness of plan fees and fail to take action to mitigate excessive fees—such as by adjusting fee arrangements, soliciting bids, consolidating recordkeepers, negotiating for rebates with existing recordkeepers, or other means—may violate their duty of prudence.’" 

Apparently persuasive to her, Judge Ellis noted that the amended suit “includes allegations that recordkeepers for mega retirement plans like Pactiv's all provide the same level and quality of services with insignificant variation in price, suggesting that the Plan's RKA fees were excessive compared to the services the Plan received based on comparisons to other plans using recordkeepers that provided comparable services for less”—and that, “following Hughes, these allegations suffice to allege a breach of the duty of prudence.”

She then said that while the fiduciary defendants here contended that those allegations about comparable services and fees were “conclusory and that alternative explanations exist for the differences in charged fees (citing Probst v. Eli Lilly & Co.,” and that while the fiduciary defendants offered alternative explanations that warrant exploration during discovery, “they are not so obvious that they require dismissal of Mazza's claim at the pleading stage, particularly given Mazza's allegations that RKA services are commoditized and that recordkeepers quote fees on a per participant basis without regard for individual differences in the services requested.”

Ultimately, she concluded (citing precedent from other cases) that “whether a claim survives dismissal necessarily depends on the strength or obviousness of the alternative explanation that the defendant provides. ... Where alternative inferences are in equipoise—that is, where they are all reasonable based on the facts—the plaintiff is to prevail on a motion to dismiss”—and allowed the claims to proceed.

As for the claims regarding a failure to monitor—since the underlying claim (the breach of duty of prudence) was allowed to proceed, Judge Ellis allowed the failure to monitor claim to proceed as well.

What This Means

A flurry of recent decisions[i]—led by Albert v. Oshgosh (and subsequently cited in multiple decisions) have dismissed suits for what were deemed conclusory claims that fees were excessive relative only to plans alleged to be comparable based solely on size (participants and/or assets). What seems to have made the difference here was the (not terribly more substantive claim) that the services provided for those fees were identical, a fungible commodity. 

Now, there doesn’t appear to be much in the way of substantive proof offered for those assertions—on the other hand, at the stage of reviewing a motion to dismiss the party arguing against the dismissal is granted a fair amount of latitude.

That said, could these suits find new life by simply amending their claims to allege that the services provided to plans of similar sizes are comparable? One would hope not.