Another 401(k) Excessive Fee Suit Gets Dismissal Recommendation—with Prejudice

A federal magistrate judge—who has been tasked with a number of recommendations regarding dismissals of late—has recommended that an excessive fee suit be dismissed, this one with prejudice.

In outlining the controversy (Genna B. Laabs v. Faith Technologies Inc. et al., case number 1:20-cv-01534, in the U.S. District Court for the Eastern District of Wisconsin), U.S. Magistrate Judge Stephen C. Dries (who has been on something of a streak commenting—and so far as we’ve seen recently, recommended dismissing these cases) noted that participant-plaintiff Genna B. Laabs[i] worked for Faith Technologies from September 2018 until September 2020, that she was “was a participant in the plan, was enrolled in GoalMaker, and held investments in the Prudential GIF.” 

She asserted four causes of action against her former employer but according to Dries “the main thrust of the amended complaint is that the defendants breached their fiduciary duties under ERISA during the putative class period. The case had been referred to Judge Dries for consideration by United States District Judge William C. Griesbach.    

The Considerations

Judge Dries then restated the baseline consideration(s) for reviewing a motion to dismiss—that (a) courts must “construe the complaint in the light most favorable to plaintiff, accept all well-pleaded facts as true, and draw reasonable inferences in plaintiff ’s favor,” but that (b) courts “need not accept as true . . .unsupported conclusory factual allegations,” and (c) courts may also “ignore any facts alleged in the complaint that undermine the plaintiff ’s claim.”

Judge Dries also reiterated the conditions required to support a claim of a fiduciary breach under ERISA, specifically that “(1) that the defendant is a plan fiduciary; (2) that the defendant breached its fiduciary duty; and (3) that the breach resulted in harm to the plaintiff.” He then acknowledged that “the first and third elements are not at issue here. Rather, Faith Technologies insists that Laabs has failed to plausibly plead that the defendants breached their duty of prudence and duty to monitor other fiduciaries.”

Judge Dries then, citing a decision from the Eighth Circuit (Matousek v. MidAmerican Energy Co.), noted that “[t]he process is what ultimately matters, not the results.” He went on to cite other cases for precedent that “[T]he ultimate outcome of an investment is not proof of imprudence,” and Hughes II (which, in turn, cited Tibble v. Edison Int’l) regarding the continuing duty to monitor—systemically and “at regular intervals to determine whether each is a prudent investment,” as well as to “…‘incur only costs that are reasonable in amount and appropriate to the investment responsibilities of the trusteeship.’”

The Case

Then turning to the case at hand, Judge Dries noted that it had been alleged that “Faith Technologies paid too much to and failed to timely remove its recordkeeper, Prudential.”  However, he continued that, “Because she doesn’t know what process Faith Technologies used to select, retain, or determine the fees paid to Prudential, Laabs does not allege any direct instances of misconduct or mismanagement. Instead, Laabs says we should infer an imprudent decision-making process from circumstantial evidence, including Faith Technologies’ failure to regularly monitor the plan’s recordkeeping fees, failure to regularly solicit quotes or competitive bids from Prudential and other recordkeepers, and failure to leverage its substantial bargaining power to negotiate a lower fee.”

He continued to explain that, in support of her “theory, Laabs compares publicly available data for the Faith Technologies plan with eight allegedly comparable plans that are supposedly prudent when it comes to recordkeeping fees,” noting that these comparator plans had between about 1,500 and 17,000 participants, had total assets ranging from about $300 million to $2.5 billion, and paid a total annual recordkeeping fee of $20 to $52 per plan participant. In contrast, plaintiff Laabs claimed that from 2014 through 2022, the Faith Technologies plan averaged about 3,000 participants, nearly $200 million in total assets, and a total annual recordkeeping fee of $100 per plan participant,” and that—“based on a trend line constructed from this data, Laabs alleges that “a hypothetical prudent plan fiduciary would have paid on average an effective annual [recordkeeping] fee of around $42 per participant, if not lower.”

Faith Technologies rebutted those arguments, citing the Seventh Circuit’s decision in Albert where the court “affirmed the dismissal of a similar recordkeeping claim that relied on a price comparison of fees charged to other plans,” noted Judge Dries. As you may recall, that’s a case where the judge cited prior case law in explaining that “the cheapest investment option is not necessarily the one a prudent fiduciary would select,” and “‘that a failure to regularly solicit quotes or competitive bids from service providers’ does not, as a matter of law, breach the duty of prudence.” 

That noted, and because at the time Hughes v. Northwestern was still pending on remand from the Supreme Court, he commented that the court “relied primarily on Smith v. CommonSpirit Health, a case in which the Sixth Circuit ‘held that an ERISA plaintiff failed to state a duty of prudence claim where the complaint ‘failed to allege that the [recordkeeping] fees were excessive relative to the services rendered.’” While in that case the court said the suit didn’t provide sufficient context to move the case from “possibility to probability”—it allowed that “recordkeeping claims in a future case could survive the ‘context-sensitive scrutiny of a complaint’s allegations’ courts perform on a motion to dismiss.”

Precedent 'Shell'

Indeed, Judge Dries commented that “after the parties in our case briefed Faith Technologies’ motion to dismiss, the Seventh Circuit issued its decision in Hughes II. The court clarified the pleading standard for ERISA duty-of-prudence claims, explaining that “a plaintiff must plausibly allege fiduciary decisions outside a range of reasonableness”—a range that that court had said would depend on “the circumstances . . . prevailing at the time the fiduciary acts” (here the court in Hughes II was invoking a ruling from another commonly cited case by the U.S. Supreme Court—Dudenhoeffer v. Fifth Third). Once again, the significance of CONTEXT was emphasized.  Judge Dries then observed that, applying that “newly formulated pleading standard,” the Hughes II court reversed the dismissal of an excessive recordkeeping fees claim, distinguishing that from the decision in Albert v. Oshgosh, noting that the complaint in its case alleged that “the quality or type of recordkeeping services provided by competitor providers [were] comparable to that provided. Said another way, the Hughes II decision found that the plaintiff “provided the required context to allege that their plan’s recordkeeping fees ‘were excessive relative to the recordkeeping services rendered,’” whereas that was not the case in the Albert decision.

As for the application of all that to the current case, Judge Dries drew a comparison to the facts in Hughes II, noting that “the operative complaint here includes the allegations missing from the complaint in Albert about the quality or type of services provided. Specifically, the amended complaint alleges that Prudential provided plan participants standardized, bundled recordkeeping and administrative services that all “large” 401(k) plans—those with between $100 and $500 million in assets—receive from their recordkeepers.” He went on to note that “It also alleges that recordkeepers for all large plans provide more or less the same level and quality of service and that any minor variations do not materially affect the fees charged.”

‘Arguably More Conclusive’

“Given these allegations, Laabs asserts that the Faith Technologies plan’s fees were excessive relative to the services received, as the plan could have obtained the same recordkeeping services for less from other, similar recordkeepers,” Judge Dries noted. “Contrary to Faith Technologies’ suggestion, Laabs does not need to describe the specific recordkeeping and administrative services received by the Faith Technologies plan and the comparator plans”—reminding that in Hughes II, “the Seventh Circuit clarified that level of specificity is not required at the pleading stage.” Indeed, he commented that “the allegations in Hughes II were arguably more conclusory and less supported than the allegations here, and yet the Seventh Circuit found them sufficient.”

With regard to an assertion that all recordkeeping services are the same, Judge Dries noted that “Laabs, however, does not allege that all recordkeepers provide the exact same level and quality of service. Rather, she alleges that any minor variation in the level and quality of recordkeeping services has little material impact on the fees charged.”

“Pleading that recordkeeping fees were too high, however, is not sufficient to state an ERISA duty-of-prudence claim,” he continued. “Rather, the plaintiff must “plead[] sufficient facts to render it plausible that [the plan] incurred unreasonable recordkeeping fees,” he wrote, citing Hughes II. Judge Dries went on to note that “In Matousek, the Eighth Circuit explained that ‘[t]he key to nudging an inference of imprudence from possible to plausible is providing ‘a sound basis for comparison—a meaningful benchmark’—not just alleging that ‘costs are too high, or returns are too low” (quoting Davis v. Wash. Univ.). That, Judge Dries commented, was the same rule embraced in Albert, as it relied on the same Davis quote to affirm the dismissal of two duty-of-prudence claims. He went on to note that “in Hughes II the court found it crucial that the plaintiffs had alleged that the proposed alternative fee was reasonable “based on the services provided by existing recordkeepers and the Plans’ features.” 

‘Apples to Apples’

“Unlike the factual allegations in Hughes II, the alleged facts in this case do not render it plausible that the proposed alternative fee—here $42 per participant—was a reasonable recordkeeping fee,” he wrote. “Laabs arrived at that $42 figure from a trend line based on the fees paid by eight other plans. She says that recordkeeping services essentially are the same for all large 401(k) plans, which she defines as plans with between $100 million and $500 million in assets. But half of the eight comparator plans had more than $500 million in assets, and the amended complaint does not contain any allegations about the recordkeeping services of such plans,” he concluded. Oh, and Judge Dries also noted that the “so-called comparators vary significantly in size,” concluding that “Laabs is not comparing apples to apples.”

“Courts may permissibly question a plaintiff ’s selected comparators at the pleadings stage of litigation,” Judge Dries noted. “In Albert, the Seventh Circuit explained that providing a meaningful benchmark is a pleading requirement, and the court affirmed the dismissal of several ERISA fiduciary-breach claims at the pleadings stage because the plaintiff failed to “provide a sound basis for comparison—a meaningful benchmark.” He noted that “Laabs insists that her proposed benchmarks should be accepted as true. However, her own allegations—not a factual dispute—show that her selected comparator plans do not provide a sound basis for comparison.”

He concluded that “without the comparison to fees paid by other plans, Laabs simply alleges in conclusory fashion that the Faith Technologies plan paid too much for the same quality of services and failed to regularly solicit competitive bids for recordkeeping fees. Those allegations, however, are not enough to cross the line from possibility to plausibility. Laabs therefore has failed to state a duty-of-prudence claim regarding the Faith Technologies plan’s recordkeeping and administrative fees.”

Investment Management—TDF & Stable Value

As for the second count—involving investment management—more specifically that the defendants “also breached their duty of prudence by not removing two ‘high-cost and low-performing’ investment options: the GoalMaker asset allocation service and the Prudential GIF stable value fund”—Judge Dries noted that plaintiff Laabs alleged that the former cost participants over $4.7 million in losses.

Judge Dries commented that “Faith Technologies argues that Laabs’ GoalMaker theory fails because the amended complaint does not allege facts demonstrating that her preferred alternative investment options are meaningful benchmarks. I agree.” Once again, he characterized as “surface-level similarities” the plaintiff’s allegations that “all target date funds are similar to GoalMaker because both products allocate a participant’s savings among funds in the investment menu and periodically rebalance a participant’s asset allocation over time”—and said they were “insufficient to create an inference of imprudence based solely on GoalMaker’s higher fees.”

As for the Prudential GIF stable value fund, the plaintiff alleged that it “consistently charged the Faith Tech employees on average 119 basis points more and, consequently, returned 119 basis points less than the very same fund offered by Prudential to another similarly situated retirement plan, the WEA Plan.” Moreover, the suit alleged that the failure to timely remove the Prudential GIF resulted in nearly $2 million in lost retirement savings.

“As with the GoalMaker theory, Faith Technologies argues that Laabs has failed to sufficiently allege a meaningful benchmark to support her Prudential GIF theory. Again, I agree,” Judge Dries noted. He continued to state that “Laabs does not provide any facts to support her conclusory allegation that the Prudential GIF provided to the WEA plan was identical to the Prudential GIF provided to the Faith Technologies plan or that the WEA plan was similarly situated to the Faith Technologies plan.” Moreover, he noted “by offering just a single comparator, the amended complaint lends itself to reasonable accusations of cherry-picking that further undermine any inference of plausibility. In sum, the lack of a meaningful benchmark dooms Laabs’ Prudential GIF theory.”

Oh—and though it’s hardly a surprise at this point, having found that the plaintiff failed to make a (plausible) case on the foregoing counts, Judge Dries also recommended that the “derivative duty-to-monitor” claims be dismissed as well. 

The Decision

Judge Dries concluded his analysis noting that “Faith Technologies argues for dismissal with prejudice given that Laabs has failed to state a viable claim for relief despite having ample time to replead. Laabs has not responded to that argument. Because Laabs has already amended her complaint once, and because she has not requested leave to amend again, I recommend that this action be dismissed with prejudice.”[ii]

Now we’ll see what Judge Griesbach has to say about the recommendation.

What This Means

This is, of course, only a recommendation at this point—one that Judge Griesbach might disagree with, in whole or in part. Once again, the difference in proceeding past the motion to dismiss rests on whether or not the judge deems the case made to be plausible—and that, in large part, rests on a determination as to whether the basis for the allegations is deemed to be truly comparable. 

Judge Dries seems to have set aside any need to make claims about service levels—accepting as other courts have—that an allegation that at some level those services are, in fact, fungible (at least with regard to the fees charged). 

If this all seems a bit subjective to you at this point—well, you’ve got company.