Plaintiffs have had their appeal of a district court’s dismissal of their excessive fee suit rejected by the appellate court.
Appellants Cole Matney and Paul Watts[i]—participants in the Barrick Gold 401(k) plan—filed suit against Barrick Gold of North America, Inc., Barrick Gold’s Board of Directors, and the Barrick U.S. Subsidiaries Benefits Committee for breach of fiduciary duty and failure to monitor fiduciaries under sections 409 and 502 of the Employee Retirement Income Security Act (ERISA). More specifically, the suit alleged that the Committee breached the fiduciary duty of prudence by offering high-cost funds and charging high fees, and that Barrick Gold and the Board were responsible for failing to monitor the Committee’s actions.
Case History
In reviewing the history of the case, the three-judge panel in the 10th Circuit noted (Matney v. Barrick Gold of N. Am., No. 22-404 (10th Cir. Sept. 6, 2023)) that, in order to support imprudence by the Committee based on the allegedly higher note fees, “the complaint compared the costs of the Plan’s investment options against comparable alternatives. The complaint also compared the Plan’s recordkeeping fees against the average fees charged by smaller plans. These cost comparisons alleged the Plan offered more expensive investment options and charged higher fees when cheaper alternatives were available.” They continued to explain that, according to the plaintiffs, this disparity in fees “raised a reasonable inference that the Committee breached its fiduciary duty of prudence to plan participants in violation of ERISA.”
In response, the Barrick Gold defendants said that claim relied on “flawed cost comparisons and conclusory allegations” that the Plan’s funds were more expensive than allegedly cheaper alternative options. They argued that there was no “fiduciary duty to obtain competitive bids for recordkeeping services,” and that in any event, the amended suit by the plaintiffs made “apples to oranges comparisons” of recordkeeping services without ever alleging “what a reasonable fee in this case would be.” They also moved to dismiss the claims regarding monitoring of the committee as being derivative of the allegedly flawed arguments about the fiduciary breach.
Not surprisingly, the plaintiffs pushed back on those arguments, arguing that they had, in fact, alleged “circumstantial facts from which the Court [could] reasonably infer that Defendants’ investment selection and monitoring processes were imprudent.”
Then on April 21, 2022, the district court issued a written order dismissing the plaintiffs’ complaint with prejudice, concluding that the duty of prudence allegations failed to raise an inference “that a prudent fiduciary in the same circumstances would have acted differently,” and that the plaintiffs failed to separately allege facts relevant to the duty of loyalty claim, instead relying only on the allegations about the Committee’s alleged imprudence.
Appellate Review
The court reiterated the standards for review—a role “…like the district court’s: we accept the well-pleaded facts alleged as true and view them in the light most favorable to the plaintiff...,” though—as the court also noted, they “need not accept ‘[t]hreadbare recitals of the elements of a cause of action [that are] supported by mere conclusory statements.’” By that, the court means “one in which an inference is asserted without ‘stating underlying facts’ or including ‘any factual enhancement.’”
Turning to ERISA’s standards of prudence, the court then noted “our circuit has yet to consider a plaintiff’s pleading burden when the breach of the duty of prudence claim under ERISA arises in the specific context alleged here—that the Committee acted imprudently by offering higher cost funds and charging higher fees than comparatively cheaper options in the marketplace.” That said, the panel noted that “some of our sister circuits have addressed this issue, so we look to those decisions for guidance.”
Specifically, they looked at the conclusions in Meiners v. Wells Fargo & Company (8th Circuit), where the court had determined that “[t]o show that ‘a prudent fiduciary in like circumstances’ would have selected a different fund based on the cost or performance of the selected fund, a plaintiff must provide a sound basis for comparison—a meaningful benchmark”—a standard that that court had said was not met by stating “that cheaper alternative investments with some similarities exist[ed] in the marketplace.” That “meaningful benchmark” (or lack thereof) was also telling in the case of Matousek v. MidAmerican Energy Co.
They also looked to the 3rd Circuit decision of Sweda v. University of Pennsylvania where they noted that “the court determined the plaintiffs’ allegations showed ‘that despite the availability of low-cost institutional class shares, [the defendant] selected and retained identically managed but higher cost retail class shares.’”
The court invoked Smith v. CommonSpirit Health, explaining that “the Sixth Circuit concluded that ‘a showing of imprudence [does not] come down to simply pointing to a fund with better performance.’” The court also cited Albert v. Oshkosh Corporation, where that court “…stated that ‘[i]n the absence of more detailed allegations providing a ‘sound basis for comparison,’ the plaintiff could not plausibly plead imprudence.” That 7th Circuit court also “rejected the imprudence claim based on the allegedly too-high recordkeeping fees, concluding the complaint provided insufficient factual allegations about the recordkeeping services.”
‘Meaningful Benchmark’
Ultimately, the court here wrote, “We find these authorities persuasive. ERISA requires fiduciaries to exercise a duty of prudence in operating and managing plans on behalf of participants. And as our colleagues in the Third, Sixth, Seventh, and Eighth circuits confirm, there is no doubt a claim for breach of ERISA’s duty of prudence can be based on allegations that the fees associated with the defined-contribution plan are too high compared to available, cheaper options.” But they went on to explain that “to raise an inference of imprudence through price disparity, a plaintiff has the burden to allege a ‘meaningful benchmark’”—and adopted that approach to an ERISA plaintiff’s pleading burden articulated by the 8th Circuit in Meiners.
As for what constituted a “meaningful” benchmark, the court said that the answer to this question will depend on context because (citing the Hughes v. Northwestern University decision) “the content of the duty of prudence” is necessarily “context specific.” With regard to comparing investment management fees, the judges wrote that a "meaningful comparison will be supported by facts alleging, for example, the alternative investment options have similar investment strategies, similar investment objectives, or similar risk profiles to the plan’s funds.” As for recordkeeping fees, the court said such a “comparison will be meaningful if the complaint alleges that the recordkeeping services rendered by the chosen comparators are similar to the services offered by the plaintiff’s plan,” citing the Smith v. CommonSpirit ruling.
The judges noted that “a court cannot reasonably draw an inference of imprudence simply from the allegation that a cost disparity exists; rather, the complaint must state facts to show the funds or services being compared are, indeed, comparable. The allegations must permit an apples-to-apples comparison.”
And then—“applying these principles here, the district court did not err in concluding the complaint failed to state a plausible claim for breach of the duty of prudence.”
Apples and Oranges
The judges also took issue with the varied basis for cost comparisons (“the Plan funds’ expense ratios were taken from the individual funds’ 2019 summary prospectuses, while the comparator median expense ratios were taken from the ICI Study”).[ii] The judges also criticized comparing the costs of different share classes within a single mutual fund (commenting that there was revenue-sharing with regard to the allegedly higher priced fund that undermined the plausibility of their argument, particularly since documents were presented that confirmed the amount of the fee offset as higher), what the court saw as a flawed comparison between active and passive strategies, as well as the comparison of those fees “against a different investment product, collective trusts.”
All in all, noting that the district court held that the amended suit “…failed to plausibly state a breach of the duty of prudence based on the allegedly higher investment management fees because (1) the FAC ‘misstate[d] expense ratios of Plan funds’ and (2) the FAC ‘ma[de] ‘apples to oranges’ comparisons that d[id] not plausibly [permit the court to] infer a flawed monitoring and decisionmaking process,’” the court here commented, “We agree with the district court.”
As for the recordkeeping fee allegations, the court here affirmed the determination of the district court that there was nothing imprudent about the committee’s RFP process (or lack thereof), particularly as that court also found “there is no question that [the Committee] regularly re-negotiated their fee arrangement with Fidelity, resulting in lower costs for participants.”
The district court had dismissed data from the 401(k) Averages Book, and the court here concurred with that assessment, in no small part because the plaintiff “fails to offer factual allegations about the services provided either by Barrick Gold’s plan or the plans assessed in the 401k Averages Book,” as well as the disparity in plan sizes covered by that resource and the Barrick Gold 401(k).
In sum, the court affirmed the district court’s decision granting the motion to dismiss the suit with prejudice.
What This Means
The court here clearly aligned itself with other jurisdictions (the Third, Sixth, Seventh and Eighth circuits) in embracing a pleading standard that requires a higher threshold for determining plausibility for moving past a motion to dismiss. Along the way to that decision, they also permitted the defense to include evidence that supported their claims (such as the impact of revenue-sharing), which other courts have not allowed until trial.
Along with that, they adhered to the notion that the reasonability of fees can’t be ascertained without some associated indication of services provided for those fees—and they employed the emerging standard of a “meaningful benchmark” alongside some objective standards against which those can be evaluated.
All in all, these would seem to be reasonable thresholds to warrant going to trial, though doubtless those bringing these suits would disagree.
[i] They’re represented by attorneys from Capozzi Adler, P.C. in this action.
[ii] The court here wrote that “a comparison to median expense ratios in broad investment strategy categories, without more, does not provide the ‘meaningful benchmark’ necessary to satisfy a plaintiff’s pleading burden in this context. A median expense ratio derived from a broad range of funds—for example, all funds within the domestic equity investment category—reveals no information about how the specific funds within that category operate.”
