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401(k) Excessive Fee Suit Tossed


A 401(k) excessive fee case was dismissed for failing to make a case sufficient to go to trial—but given a chance to remedy that situation.

Here plaintiff Lauren Cunningham[i] alleged that the USI Insurance Services defendants failed to prudently and loyally monitor the plan’s RPS expenses, “instead allowing the Plan to pay USICG nearly three times what a prudent and loyal fiduciary would have paid for such services.” More specifically, Judge Nelson S. Román of the U.S. District Court for the Southern District of New York noted that the suit—filed a little more than a year ago—alleged that plan participants pay USI excessive RPS fees because it extracts these fees directly from their accounts, as well as indirectly through the investment options that contain revenue sharing.

Not only that, the suit claims the plan is paying more for RPS provided by USI than other smaller plans (fees that ranged between $81 and $154 per participant, when a reasonable annual fee would have been about $42 per participant), and that USICG’s fees were excessive “when compared with other similar-sized plans[ii] receiving materially the same services.” Those fees resulted in lower net returns, “substantially reducing the retirement savings of Plaintiff and other Plan participants, resulting in millions of dollars in additional losses to them, to the benefit of USI.”

Motion to Dismiss

In deciding a motion to dismiss under Rule 12(b)(6), Judge Román noted that “the Court must accept all factual allegations in the complaint as true and draw all reasonable inferences in the plaintiff’s favor,” 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.” Further, he explained—citing precedents—that “mere labels and conclusions” or “formulaic recitation[s] of the elements of a cause of action will not do”; rather, the complaint’s “[f]actual allegations must be enough to raise a right to relief above the speculative level.”

In making that motion to dismiss, Judge Román explained (Cunningham v. USI Ins. Servs., LLC, S.D.N.Y., No. 7:21-cv-01819, 3/25/22) that the USI defendants pushed back for failure to state a claim. “Specifically,” he wrote, “they argue that: (1) Plaintiff disregards the pleading requirement that a claim for breach of the duty of prudence premised on excessive fees must establish that the fees were excessive relative to the specific services rendered; (2) Plaintiff’s claim for breach of the duty of loyalty fails because the allegations underlying that claim represent a mere repackaging of the ‘excessive fee’ allegations; and (3) Plaintiff’s claim for failure to monitor fails because it is premised on her futile claim for breach of duty of prudence.”

As for the first point, Judge Román noted that the suit provides a table compiled of data from the 2018 Form 5500 filings of several “comparable retirement savings plans,” and that “in this table, Plaintiff identifies ten plans with a range of different number of participants, assets, recordkeeping and administrative (“RK&A”) price, and RK&A price per participant,” as well as the plaintiff’s own calculated estimates of the Plan’s average number of participants, RK&A price, and RK&A price per participant from its Form 5500 filings from 2015 to 2019. “Ultimately,” he notes, “the table shows that while the other plans’ RK&A price per participant range between $28 and $53, the one for the Plan is $109.” 

He goes on to note that the defendants argue that while the Plaintiff’s excessive fee allegations attempt to compare these other “‘cherry-picked 401(k) plans’ with the Plan based on certain figures,” she “fails to allege how these retirement savings plans are comparable in the services they render….” Basically, the comparison was fees alone without regard to the services performed for those fees. And while the plaintiff here alleged that the services were “materially the same,” Judge Román pointed out that “none of these ten purportedly ‘comparable’ plans offer participants the pension consulting or valuation services USICG offers to the Plan participants.”

‘Crucially Fail’

That, however, was not the primary shortcoming in Judge Roman’s assessment. Citing it as “most significantly,” he explained that the allegations “also crucially fail” because there is no “indication of how [she] calculated the per-participant fees for recordkeeping and administrivia costs” for the Plan and each of the comparable retirement savings plans. While the claim was that USI allegedly charging fees to the Plan participants directly through periodic deductions from their accounts, and indirectly through revenue sharing, “Plaintiff seems to allege that the Plan’s RK&A price per participant of $109 in the Complaint’s table is the average of the sum of the Plan’s direct and indirect fees per participant from 2015 to 2019. However, Plaintiff fails to specify how she calculated the Plan’s indirect fees because they are not available by themselves on the Form 5500 filings.” In fact, he noted, “…nowhere in the Complaint does Plaintiff provide any figures, estimates, or formulas from which the Court could reasonably infer Plaintiff obtained such results.”

“Instead,” he explained that the “Plaintiff alleges that (i) $49 per year were deducted directly from the Plan participants’ accounts; and (ii) the money amounts that USI received as direct compensations from 2015 and 2019. Plaintiff then generally alleges that USI indirectly charged Plan participants through sub-transfer agency fees (without mentioning any figures), after which she offers another table allegedly providing for the sum of the direct and indirect fees charged to each Plan participant for each year from 2015 to 2019.” Moreover, he explained that there was no explanation as to how the same figures were calculated for the allegedly “comparable” plans.

As for the second and third complaints, Judge Roman commented that “…even when construing the Complaint in the light most favorable to her, Plaintiff’s claim for breach of the duty of loyalty appears intrinsically dependent on her claim for breach of the duty of prudence. In other words, if Plaintiff’s claim for breach of the duty of prudence fails, then her claim for breach of duty of loyalty will also consequently fail.” Thus, because Plaintiff essentially “recast[s] purported breaches of the duty of prudence as disloyal acts, she fails to sufficiently state a claim for breach of the duty of loyalty”—and dismissed the Plaintiff’s claim for breach of the duty of loyalty—but without prejudice—giving the plaintiff until May 20 to amend the complaint/suit and remedy its shortfalls.

What This Means

In recent days in the wake of the U.S. Supreme Court’s decision in the Northwestern case, the Ninth Circuit Court of Appeals has been willing to reinstate two suits that had previously been dismissed for adjudged lack of credible, specific allegations—concluding that the allegations made by the party not seeking to dismiss the suit were, in fact, plausible, and taken as factual. 

Here we have another district, and what seems to be a pretty detailed analysis of the claims made and the math behind them. While the dismissal may only be temporary (pending an amendment), it reveals a willingness to actually probe into the details behind these comparison tables, rather than simply accept them at face value. 

Will there be an amendment? Will it prove the case—at least to the point of proceeding to trial? We shall see.

[i] Represented by Franklin D. Azar & Associates PC and Chimicles Schwartz Kriner & Donaldson-Smith LLP.

[ii] The original suit noted the plan had 9,867 participants holding account balances and nearly $848 million in net assets as of Dec. 31, 2019, based on publicly available Form 5500 data.