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A(nother) Excessive Fee Suit Tossed for Insufficient Allegations

Litigation

Another excessive fee suit has been tossed by a federal judge for failing to “assert sufficient allegations to support their claim…”

This time the defendants are the fiduciaries of Cincinnati-based TriHealth, Inc.’s retirement plan—a relatively small plan ($457 million)—and the suit filed on behalf of participant-plaintiffs by a law firm relatively new to these type actions (Greg Coleman Law and Jordan Lewis PA), who have nonetheless filed several other suits against smaller plans (smaller than the multi-billion plans that customarily draw the attention of the plaintiffs’ bar, anyway) on behalf of plaintiffs Danielle Forman, Nichole Georg and Cindy Haney, individually and as representatives of a Class of Participants and Beneficiaries (some 12,168 members, according to the filing).

The Allegations

The specific allegations here are familiar—all about the fees paid, with the inference being that the only explanation for the higher fees is imprudence. The suit claims that, for every year between 2013 and 2017, the administrative fees charged to plan participants was “greater than 90 percent of its comparator fees when fees are calculated as cost per participant or when fees are calculated as a percent of total assets,” and that “the total difference from 2013 to 2017 between TriHealth’s fees and the average of its comparators based on total number of participants is $7,001,443.”

Moreover, they claimed that the total difference from 2013 to 2017 between TriHealth’s fees and the average of its comparators based on plan asset size is $7,210,002, and that the TriHealth plan charged 401(k) fees of $328 per person in 2017, when similarly sized plans—those with between $250 million and $500 million in assets—charged an average of only $166 per person that year.

The Analysis

That said, Judge Matthew W. McFarland of the U.S. District Court for the Southern District of Ohio here (Forman v. TriHealth, Inc., 2021 BL 363942, S.D. Ohio, No. 1:19-cv-00613, 9/24/21) noted that, at least in his estimation, “plaintiffs have failed to assert sufficient allegations to support their claim that Defendants breached their duty of prudence by permitting the Plan to incur allegedly excessive administrative fees. They have simply not provided the Court with sufficient factual allegations to permit an inference of imprudence.”

More specifically, Judge McFarland said (that it wasn’t enough to allege that fees were high, there needed to be proof that there were “unjustifiably (or imprudently) high. Plaintiffs did not describe what services the Plan received in exchange for these administrative fees or what services the ‘comparable 401(k) plans’ received in exchange for their less costly fees. The fact that the 401(k) plans are ‘comparable’ is not sufficient.”

He went on to note that the “plaintiff has the burden to plead facts that create more than a ‘sheer possibility that [the Plan's fiduciaries] halve] (sic) acted unlawfully’ such that Plaintiffs' claim is plausible and thus survives a motion to dismiss,” and that the plaintiffs here “have failed to allege facts that permit this Court to "infer more than the mere possibility of misconduct.”

‘Allegedly Underperforming Funds with High Fees’

As for allegations regarding “allegedly underperforming funds with high fees,” Judge MacFarland explained that “when evaluating an alleged breach of an ERISA fiduciary, while ‘plaintiffs need not plead facts 'relating directly to the methods employed by the ERISA fiduciary, they must 'allege[] (sic) facts that, if proved, would show that an adequate investigation would have revealed to a reasonable fiduciary that the investment at issue was improvident." But Judge MacFarland went on to explain that “when raising a challenge ‘investment-by-investment,’ a plaintiff cannot merely allege underperformance or high fees,” but that the complaint "must provide a sound basis for comparison—a meaningful benchmark." To that end, he noted not only that “simply alleging that a fund underperformed is insufficient,” but that “while ‘allegations of consistent, ten-year underperformance may support a duty of prudence claim,’ such underperformance must be substantial." 

More specifically, he noted that courts have previously held that less than 1% or just over 2% differences in performance between the challenged fund and the alleged benchmark “…was not sufficient to create a plausible inference of imprudence.” He concluded that here the plaintiffs “failed to assert sufficient facts to plausibly allege that Defendants breached their fiduciary duties because they failed to (1) sufficiently describe a comparable benchmark[i] and (2) sufficiently allege actionable underperformance.”

Even If

But then, Judge MacFarland noted that even if they had “provided sufficient factual allegations to describe a meaningful benchmark, Plaintiffs have failed to plausibly allege that Defendants acted imprudently because the variances identified by Plaintiffs are simply too small.” In his estimation, the underperformance claimed was, in every case, “less than 1%, with every fund except one being less than 1/2% difference in performance between funds.” He also found the fee variances to be “similarly small, ranging from .01%–.74%, with all but one fund having a variance of less than .5%.”

He concluded that “while the fact that other courts have previously approved such fee ranges as reasonable does not per se insulate the fee range in this case from challenge, in the absence of a meaningful benchmark demonstrating the unreasonableness of the fees, these cases bolster the Court's conclusion that Plaintiffs' allegations do not plausibly state a claim for imprudence.”

“Thus,” Judge MacFarland concludes, “these variances alleged by Plaintiffs are simply too small to raise a plausible breach of the fiduciary duty claim against Defendants, as there can be no inference that Defendants' process was flawed.” Oh, and as if that weren’t enough, he also had issues with the reliance on three-year annualized returns, rather than yearly performance and “because the Court cannot review the yearly figures, which is how the data would presumably be presented to and considered by Defendants, it cannot infer that Defendants' process is flawed from the perspective of the ‘prudent man’ standard.” Not that three years was too long a period, mind you—Judge MacFarland opined that “…even assuming consistent underperformance in all three years, several courts have recognized that a three-year period is too short to support a breach of fiduciary duty claim.”

‘Plausible Inference’

“In sum,” he wrote, “Plaintiffs' allegations that the identified funds underperformed alleged ‘comparator’ funds by such a slim margin do not raise a plausible inference that a prudent fiduciary would have found [the Plan] to be so plainly risky as to render the investments in them imprudent."

That said, he refrained from “…the invitation to wholesale bless the Plan or Defendants' processes,” going on to state that his ruling was “…premised on Plaintiffs' failure to plead allegations that permit the Court to plausibly infer that Defendants have breached their fiduciary duty of prudence.” 

The plaintiffs fared no better on their allegations of a breach of loyalty. “They do not assert any allegations of self-dealing, nor do they sufficiently allege facts to show that Defendants' actions were for their own benefit, or for the benefit of someone else other than the beneficiaries. Indeed, their allegations pertaining to the breach of the duty of loyalty primarily reincorporate their breach of the duty of prudence allegations. This is plainly insufficient,” Judge MacFarland wrote—going on to grant the defendants’ motion to dismiss as “the facts as pled do not raise a plausible inference that Defendants breached their fiduciary duties.”

What This Means

This is the third case in nearly as many weeks where the allegations made regarding fees as excessive and processes alleged to be imprudent have been rejected by federal judges as…insufficient. This judge, in particular, “gets” the reality of prudence and process—and that what determines a reasonable fee is more than just an amount or a comparable size plan, but the service(s) for which that fee is paid. 

Will more courts take notice?  We shall see.

 

[i] Plaintiffs have not actually identified a meaningful benchmark. Sure, they identified several funds that they characterize as "the lower-cost share classes" and state that the only difference was the fees—but they offer no further information to permit the Court to conclude that the funds were, in fact, similar enough to permit an "apples-to-apples" comparison.

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