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403(b) Plan Fiduciaries Fend Off Excessive Fee Claims


Yet another excessive fee suit has been dismissed for failing to make a “plausible” case.

The plaintiff in this case is Kaila Gonzalez, a participant in the Northwell Health 403(b) Plan, who filed suit against Northwell Health, Inc., the Northwell Health 403(b) Plan Committee, and 10 other unidentified Plan fiduciaries. She alleged that the defendants here allowed the Plan to be charged excessive recordkeeping fees and imprudently retained certain investment options in the Plan's investment menu in violation of the Employment Retirement Income Security Act of 1974. The plaintiff here is represented by Miller Shah, LLP, who has been most visible of late in its multiple suits filed against plans that held the BlackRock Lifepath funds.

That’s not the case here—this $5.6 billion plan offers its participants 25 investment options; target funds, index funds and mutual funds. According to the court, the six mutual funds offered by the Plan are actively managed, while the four index funds offered by the Plan are passively managed. The suit claims that since the fourth quarter of 2014, plaintiff has invested through the Plan in the 50% Diamond Hill/50% Dodge & Cox Large Value Option and the 50% Champlain/50% Diamond Hill Small Cap Option.  Moreover, that since the third quarter of 2016, plaintiff has also invested through the Plan in the Lazard Emerging Markets Fund and the 50% Causeway/50% BNY Mellon International Option.

Four Breaches

By alleging that defendants breached their fiduciary duties by retaining each of the four Challenged Funds in the Plan's investment menu, Judge Rachel P. Kovner of the U.S. District Court for the Eastern District of New York noted that the plaintiff effectively alleges four breaches of fiduciary duty that caused her injury. That is, she alleges that defendants made four decisions that violated their fiduciary duties: the retention of the Large Value Option, the retention of the Small Cap Option, the retention of the Lazard Emerging Markets Fund, and the retention of the Causeway/BNY Mellon Option—and alleged that each of these retention decisions caused her injury. Ibid.

In evaluating the motion to dismiss the suit, Judge Kovner found (Gonzalez v. Northwell Health, Inc., 2022 BL 351179, E.D.N.Y., No. 1:20-cv-03256, 9/30/22) that the plaintiff here HAD adequately made a case with regard to (a) standing to bring suit for imprudently retaining the funds in question, (b) her having suffered an injury/loss, and (c) for there being a link (causation) between those actions and her injury.

That said, Judge Kovner determined that the plaintiff had failed to state a fiduciary breach claim. More specifically, she noted that the plaintiff “has failed to set out circumstantial factual allegations from which a court may reasonably infer that the decision to retain each Challenged Fund was the product of a flawed decision-making process.” Pointing to allegations that “in specified quarters, the Challenged Funds' ‘[p]erformance, adjusted for investment expense’ trailed their respective benchmark index or indices on three- and five-year rolling, trailing average bases,” she commented. Judge Kovner added that, “These allegations of underperformance compared to benchmark indices over a relatively short period of time do not support a plausible inference that defendants acted imprudently in retaining these four funds. While a plaintiff may allege a breach of fiduciary duty based on a fund's underperformance relative to a benchmark index, the comparative underperformance must generally be ‘consistent’ and ‘substantial’ to support an inference of imprudence.” 

‘Indicia of Imprudence’

If you’re wondering what timeframe she considered substantial, she cited several cases that ultimately held that "allegations of consistent, ten-year underperformance may support a duty of prudence claim," if the underperformance is "substantial."  And she did not seem to feel that a “relatively short” 5-year history was sufficiently long enough, referring to 10-year data as a “traditional hallmark of viable claims based on underperformance relative to an index.” Even so, she commented that the underperformance cited for the shorter time periods was relatively modest”—and after spending some time detailing the gap presented in the suit,[i] she writes “this is not the type of substantial underperformance over a lengthy period that gives rise to a plausible inference that a prudent fiduciary would have removed these funds from the plan's menu of options.”

Judge Kovner went on to note that “plaintiff's circumstantial case is not aided by the fact that the only funds she identifies as better alternative options for the Challenged Funds are index funds”—commenting that “plaintiff has not identified meaningful comparators that outperformed the Challenged Funds.” She echoed comments from other cases that, “While these passively managed funds typically charge lower fees, ‘[t]hey have different aims, different risks, and different potential rewards that cater to different investors’ than actively managed funds.” Ultimately, she concluded that “plaintiff has pleaded relatively modest underperformance by actively managed funds, compared only to index funds, over a relatively short period of time. And she has not put forward any ‘other indicia of imprudence,’ such as evidence of self-dealing or conflicts of interest, that might bolster an otherwise weak circumstantial case. Her allegations fail to nudge her claim of imprudence from the merely possible to the plausible. Plaintiff has therefore failed to state an imprudent-retention claim.”

Recordkeeping ‘Charges’

Judge Kovner also ruled that the plaintiff failed to “plausibly allege” a breach of fiduciary duty by “allowing recordkeeping fees.” Noting that, “at the motion to dismiss stage, the key question is whether plaintiff's ‘circumstantial factual allegations’ are sufficient to ‘allow the court to reasonably infer the process’ of managing the Plan's fees ‘was flawed.’” Judge Kovner said there were essentially “five factual allegations as to recordkeeping fees: that (i) until January 1, 2020, the Plan charged a $60 annual fee for these services to participants; (ii) after January 1, 2020, that fee was reduced to $52; (iii) the Plan is very large; (iv) very small plans averaged $35 in direct fees for recordkeeping services per participant; and (vi) ‘[o]ther courts have acknowledged that a plan with $3.4 billion in assets and 41,863 active participants should be paying $30 per participant and that the market rate of total administrative fees for jumbo plans, i.e., those within the top 1%, should be $35 per participant.’” 

Perhaps most significantly, she then noted that the allegation that Transamerica’s (the recordkeeper) fees were excessive “rests principally on a comparison of the recordkeeping fees billed to Plan participants to the $35 average per participant fee reported in the 401k Averages Book for ‘smaller’ plans.” But—and she noted that the plaintiff acknowledged this in oral argument—“ERISA plans commonly pay recordkeeping fees through direct fees, indirect mechanisms like revenue sharing, or a direct/indirect payment combination”—while (again acknowledged by the plaintiff) the 401k Averages Book $35 figure reflects only the average direct fees paid by the smaller-plan participants. And so, once again, having put forth what was deemed to be an inadequate comparator, Judge Kovner was disinclined to accept the benchmark. 

Beyond that, she wrote that, “even if plaintiff's claim were not deficient on those grounds, it would fall short because plaintiff fails to plead that defendants allowed higher recordkeeping fees than the average small plan for a comparable ‘basket of services.’" She noted that there was no allegation that there were “entities that could provide the Plan with services comparable to Transamerica's at lower rates, let alone name any of those providers or describe their service-based pricing models,” nor did it make any attempt to compare service/service levels, “or allege facts suggesting that those services are worth less than $52 to $60. Without more, plaintiff's allegations amount to the ipse dixit that it is categorically imprudent for a large plan to charge higher fees than a small plan.”

‘Legal Conclusion’

As for the assertions regarding $30/participant or $35/participant being reasonable for “jumbo” plans, she commented that “this allegation appears to be a ‘a legal conclusion’ about what a prudent fiduciary of a particular sized plan should be able to negotiate ‘couched as a factual allegation.’" Nor did the suit name any plans that paid that rate, specifically for the same level of service(s). “If plaintiff's minimal allegations were sufficient to state a claim, then other plaintiffs could state a breach of fiduciary duty claim against every plan with more than 100 participants and $5 million dollars in assets that charged more than $35 per participant in direct fees. But [citing the recent Supreme Court decision in Hughes v. Northwestern] the motion-to-dismiss inquiry on a fiduciary-breach claim is context-specific, not categorical, and plaintiff has failed to allege the necessary context for her excessive-fee claim.”

And—having dismissed those claims, Judge Kovner also dismissed the claims regarding the monitoring of the committee’s actions, co-fiduciary breach and knowing participation claims. 

That said, and while granting the fiduciary defendants’ motion to dismiss, she allowed the plaintiff to “file a motion seeking leave to file a second amended complaint within thirty days. Any such motion should include the proposed second amended complaint as an exhibit and explain why leave to amend should be granted. If plaintiff does not seek leave to amend within thirty days, judgment shall be entered and the case closed.”

What This Means

The conclusions here are not inconsistent with the recent trend in granting motions to dismiss, citing a lack of plausibility in the assertions made to overcome the motion—here basically stating that the comparison points are invalid, the benchmark sources inadequate—and a new one here to my reading, that the timeframes of investment performance comparison weren’t long enough. That said, the door has been left open for a resubmission of the allegations—and it’s not the first case to do so—so we’ll just have to wait and see.


[i] Plaintiff alleges that—after management fees are deducted from investment earnings—the Large Value Option underperformed its benchmark on average by 1.03% on a rolling three-year trailing basis and 1.94% on a rolling five-year trailing basis, the Small Cap Option underperformed its benchmark on average by 2.33% on a rolling three-year trailing basis and 2.57% on a rolling five-year trailing basis, the Lazard Emerging Markets Fund underperformed its benchmark on average by 1.86% on a rolling three-year trailing basis and 1.99% on a rolling five-year trailing basis, and the Causeway/BNY Mellon Option underperformed its benchmark on average by 0.96% on [*11] a rolling three-year trailing basis and 0.32% on a rolling five-year trailing basis.