Another excessive fee suit filed on behalf of participant-plaintiffs by Capozzi Adler PC has been dismissed by a federal appellate court.
This time the defendants are the fiduciaries of Berkshire Hathaway-owned Iowa power utility MidAmerican Energy Co.—in a case before the U.S. Court of Appeals for the Eighth Circuit (Matousek v. MidAmerican Energy Co., 2022 BL 364661, 8th Cir., No. 21-2749, 10/12/22). The decision by that court— Judge David R. Stras and joined by Judges Bobby E. Shepherd and Ralph R. Erickson—was summed up quickly by that court as follows: “Like many companies, MidAmerican offers a retirement plan to its employees. Some thought it saddled them with unreasonably high costs and low-quality investments. In their complaint, however, they failed to identify better alternatives, so we affirm the district court's decision to dismiss.”
The Original Suit & Dismissal
The ruling noted that MidAmerican’s 401(k) plan—like 401(k) plans generally—depends on the choices that participants make: when and how much to contribute, what investments to select, and when to start withdrawing money—not to mention (citing the Hughes v. Northwestern University case) “how well the plan managers carry out their fiduciary duties, including their diligence in keeping costs low and their skill in selecting ‘which investments’ belong ‘in the plan's menu of options.’” However, “according to Daniel Matousek and the other plaintiffs, MidAmerican's plan did neither well.”
More specifically, the plaintiffs alleged that (1) the plan's investment committee let recordkeeping expenses spiral out of control, and (2) the investment committee allegedly failed to "monitor all plan investments and remove [the] imprudent ones." More to the point, the court noted the plaintiffs’ arguments that “some consistently underperformed. Others cost too much. Either way, keeping these investments showed that the investment committee (and the directors who appointed them) must have been ‘asleep at the wheel.’”
The district court granted the MidAmerican fiduciaries’ motion to dismiss, and, “Without mentioning the recordkeeping allegations, it concluded that Matousek and the other plaintiffs had failed to plead meaningful benchmarks for ‘assessing the performance of the challenged funds,’” according to the appellate court analysis.
Standard of Review
In considering the case on appeal, the U.S. Court of Appeals for the Eighth Circuit started by restating the standard of review—"accepting as true the allegations . . . in the complaint and drawing all reasonable inferences in favor of the nonmoving party." Citing previous case law, they noted that a complaint can only survive a motion to dismiss if it contains "'sufficient factual matter' to state a facially plausible claim for relief."
The court then proceeded to note that “the allegation here is that the plan's fiduciaries have violated their duty of prudence, which is about how they must act. If they failed to use the same "care, skill, prudence, and diligence under the circumstances" as "a prudent man," then they have breached their duty,” and finally “the process is what ultimately matters, not the results.”
“A plaintiff typically clears the pleading bar by alleging enough facts to ‘infer . . . that the process was flawed,’” the court noted, going on to state that “the 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.’”
Plan Operations & Costs
Having set the stage, the court then noted that in order to manage the "day-to-day operations" of the plan, MidAmerican hired Merrill Lynch, which served as the plan's recordkeeper. In return, Merrill Lynch received $1.9 million to $3.1 million in fees per year, which translates to between $326 and $526 per plan participant. “The claim here is that these amounts were too high. In the absence of "significant allegations of wrongdoing," the court said the way to plausibly plead a claim of this type is to identify similar plans offering the same services for less.
Now, the plaintiffs here alleged that no more than $100 per participant is reasonable for a plan with approximately $1 billion in total assets and 5,000 participants. But the court noted (citing the recent OshKosh case), “even if the fees here look high, we cannot infer imprudence unless similarly sized plans spend less on the same services.” But first the court noted they had to determine what those services are. “Two documents fill in the details. One is a participant-disclosure form, which describes the services offered by the plan and the costs accompanying them. The other is an ‘Annual Return/Report of Employee Benefit Plan’—otherwise known as a Form 5500—which discloses the aggregate payments made to the plan's recordkeeper.” Turning to the participant-disclosure forms, the court noted that the cost of Merrill Lynch's "suite of administrative services" ranges between $32 and $48 per participant for providing “a suite of administrative services typically provided . . . by [a] plan's 'recordkeeper."
Plaintiffs’ Math
So what about those larger numbers in the complaint? “A portion are indirect ‘revenue-sharing payments,’ which account for no more than $37 per participant per year,” the court noted. “The remainder appears to come from what Merrill Lynch received from its other, non-recordkeeping services: investment advice for those with self-directed brokerage accounts; commissions for individual trades; and trading, loan-origination, returned-payment, and check-service fees. Each is "charged against the account of [individual] participant[s] . . . rather than on a [p]lan-wide basis."
The court noted that the Form 5500s, “which describe Merrill Lynch's ‘total compensation’ for ‘services rendered to the plan,’ seem to bear this out.” The court noted that, “according to the form's ‘service codes,’ Merrill Lynch's compensation includes investment-management fees, redemption fees, shareholder-servicing fees, and securities-brokerage commissions. In plain English, the per-participant fees cover more than just standard recordkeeping services.”
Having laid that groundwork, the court stated that for a benchmark to be "sound" and "meaningful" here, it must do the same. “After all, we have been clear that the key to stating a plausible excessive-fees claim is to make a like-for-like comparison.” But “[r]ather than point to the fees paid by other specific, comparably sized plans, the plaintiffs rely on industry-wide averages. But the averages are not all-inclusive: they measure the cost of the typical ‘suite of administrative services,’ not anything more. And using this information creates a mismatch between Merrill Lynch's total compensation, which includes everything it does for MidAmerican's plan, and the industry-wide averages that reflect only basic recordkeeping services.”
Source ‘Spots’
The court dismissed the plaintiffs’ sources for reasonability, commenting that while the NEPC report “says that no similarly sized retirement plan paid more [*4] than $100 per participant for recordkeeping, trust, and custodial services. MidAmerican's plan compares favorably, with the fees for these basic recordkeeping services totaling between $32 and $48 per plan participant.” That said, the court noted that NEPC's report says nothing about the fees for the other services that Merrill Lynch provided, which means it cannot provide a "sound basis for comparison" for anything else.
As for the other source—the 401K Averages Book—the court described it as “similarly unhelpful,” noting that the fee ranges it presents doesn’t include fees arising out of participant-initiated transactions like "loans" and "distributions." Moreover that the revenue-sharing category consists of fees "received by other service providers to the plan," including "recordkeepers, advisors[,] and platform providers,” concluding that “it is almost impossible to tell if these figures provide a meaningful benchmark” because they also “leave out the total fees charged for individualized services like ‘loans’ and ‘distributions,’ just like the NEPC Report, making them a less-than-helpful benchmark for the larger, total-compensation numbers in the complaint. For another, they analyze smaller plans: those with less than half the number of participants and under a quarter of the total assets.”
“The point is that neither of these sources tells us much about whether MidAmerican pays too much to Merrill Lynch overall. And without a meaningful benchmark, the plaintiffs have not created a plausible inference that the decision-making process itself was flawed,” the court concludes.
Familiar Ground(s)
“The plaintiffs tread on familiar ground with their investment-by-investment duty-of-prudence claims,” the court continued. “As the Supreme Court recently explained, fiduciaries like MidAmerican's investment committee ‘normally ha[ve] a continuing duty of some kind to monitor investments and remove imprudent ones,’” and the complaint “alleges that the committee should have removed five investments from MidAmerican's lineup, each of which was a poor performer, cost too much, or both.” However, “beyond these bare allegations, there still must be a ‘sound basis for comparison—a meaningful benchmark.’” The court explained that in one case, a combination of a "market index and other shares of the same fund" did the trick, but there is no one-size-fits-all approach. Moreover, “nudging the complaint past the plausibility threshold depends on the ‘totality of the specific allegations.’”
Describing the plaintiffs’ approach here as “multifaceted,” the court noted that while the complaint starts by comparing the performance of three of the five funds to their "peer groups,” it then “evaluates the expense ratios of all but one fund to the mean and median expense ratios in their groups. And finally, it analyzes the expenses and performance of two of the funds against alternative investments. None clears the pleading bar.” The court goes on to note that, “On its own, the raw performance data provided by the plaintiffs falls short of providing a ‘meaningful benchmark.’” The main reason for that? “[T]he composition of the peer groups remains a mystery. The complaint says that Oakmark Equity and Income Investor is in the ‘Non-target date Balanced’ category and that Dodge & Cox International Stock is in the ‘International Equity’ category. But there is no explanation of what types of funds are in each group, much less the criteria used to sort them. And for Aristotle Small Cap Equity I, the complaint does not even identify a peer group.”
“With so little information, we have no way of knowing whether the peer-group funds provide a "sound basis for comparison”—citing details as missing including “whether they hold similar securities, have similar investment strategies, and reflect a similar risk profile. If they are indeed different, then the peer-group data is unlikely to be ‘sound’ or ‘meaningful’ on its own.” Ultimately, the court notes that with the data presented, “there is no way to compare the large universe of funds—about which we know little—to the risk profiles, return objectives, and management approaches of the funds in MidAmerican's lineup. The bottom line is that the aggregate data fails "to connect the dots in a way that creates an inference of imprudence."
As for the other funds cited, the court found that there appeared to be differences in the underlying strategies to which the funds were compared.
“One loose end remains,” the court noted—“the district court dismissed the complaint with prejudice without giving the plaintiffs a chance to amend it. We conclude that there was no abuse of discretion” in doing so. The court concluded that while the plaintiff had a right to amend, they never requested that option, and “a failure to do either is reason enough to reject their argument now.”
And affirmed the judgement of the lower court in dismissing the suit.
What This Means
The Eight Circuit has become something of a home-field advantage for fiduciary defendants of late, with the establishment of what appears to be a higher threshold for plaintiffs to get past a motion to dismiss. More specifically, this district—and a couple of others that have made reference to decisions from this district—have stated what to those in this industry is obvious; the determination of reasonable fees requires an awareness/assessment of the services rendered for that fee. This case also highlighted the limitations of two commonly cited (by plaintiffs, anyway) benchmark sources, among other benchmarking references.
All in all, it’s a good message for plan fiduciaries—until you remember that this case has now gotten to court—twice. And it’s not the only one.
