Noting that “precedent has overtaken some of the debates in the case,” a federal appellate court has weighed in on an excessive fee case—affirming the rejection of most, but not all, of the plaintiffs’ claims.
The defendants in this case 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 specific allegations made 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.” That said, last October Judge Matthew W. McFarland of the U.S. District Court for the Southern District of Ohio dismissed the suit, ruling that the allegations made failed to make a “plausible inference” that a fiduciary breach had occurred.
“At issue in this case,” the appellate court wrote[i] (Forman v. TriHealth, Inc., 6th Cir., No. 21-3977, 7/13/22), “are the various ways in which the duty of prudence applies to the investment options that a company offers to its employees for their 401(k) and other defined-contribution plans.”
The court here (the U.S. Court of Appeals for the Sixth Circuit) happens to be the same one that ruled in the recent CommonSpirit decision—a decision that, among other things, backed the dismissal of an excessive fee suit, rejecting the notion that offering actively managed funds—even those with disappointing performance—by itself doesn’t support allegations of a fiduciary breach.[ii] Perhaps not surprisingly, then, this court felt that that prior judgment “largely resolves several of the plaintiffs’ claims: that their employer TriHealth should not have offered its employees the option of investing their retirement money in actively managed funds, that the performance of several funds was deficient[iii] at certain points, and that the overall fees charged for the investment options were too high.”
The court did, however, note that this case contained one element not covered by CommonSpirit—that being that “even if a prudent investor might make available a wide range of valid investment decisions in a given year, only an imprudent financier would offer a more expensive share when he could offer a functionally identical share for less.” Here the plaintiffs claim—as do plaintiffs in most of these excessive fee cases—that the TriHealth defendants offered “more expensive mutual fund shares when shares with the same investment strategy, the same management team, and the same investments were available to their retirement plan at lower costs.”
While finding those allegations “plausible,” the court here acknowledged that “equally reasonable inferences in the other direction” could “exonerate TriHealth once all of the facts come in. Perhaps the fund is not large enough or does not have enough participants interested in a particular investment to qualify for the less expensive share class. Perhaps the plan has revenue-sharing arrangements in place that make the retail shares less expensive or that benefit plan participants on the whole.
“But at the pleading stage, it is too early to make these judgment calls. In the absence of further development of the facts, we have no basis for crediting one set of reasonable inferences over the other. Because either assessment is plausible, the Rules of Civil Procedure entitle [the three employees] to pursue [their imprudence] claim (at least with respect to this theory) to the next stage.”
And therefore, “because the plaintiffs in this last respect have stated a plausible claim that TriHealth acted imprudently,” the court reversed the lower court’s dismissal for failure to state a claim of this element, while affirming the dismissal of the other elements.
What This Means
Fiduciaries can surely draw some comfort from the acknowledgement by this court that there are multiple factors that can go into a prudent decision—factors beyond price and performance (though those are surely considerations). However, by basically stating that the decision to offer what would appear to be an identical fund in every flavor but price creates a “plausible” inference of a breach of fiduciary duty, it’s clear that this (and other, similarly positioned suits) will get their day in court, if not a monetary settlement.
For plan fiduciaries, it should serve as a warning that offering that ostensibly identical, but higher priced fund without other supporting rationale is likely to be problematic—certainly at the pleading stage, if not at trial.
[i] Chief Judge Jeffrey S. Sutton authored the opinion, which Judges Raymond M. Kethledge and Chad A. Readler joined.
[ii] The court reiterated its grounds for decision in the CommonSpirit case thusly: “As for the allegedly overpriced features of the plan compared to others, we held, the plaintiffs offered nothing plausibly imprudent about the fiduciary’s process. The price distinctions reflected reasonable alternative services and strategies for different investors, say for those with a preference for active over passive fund management. ‘Offering actively managed funds in addition to passively managed funds,’ we said, ‘was merely a reasonable response to customer behavior’—and the wide variety of investment goals of a large group of employees with different ages, different risk profiles, and different existing wealth. So too with the performance-based disparities. Although ERISA does not allow fiduciaries merely to offer a broad range of options and call it a day, a showing of imprudence cannot come down to simply pointing to a fund with better performance.” Said another way, the court noted that “disappointing performance in the near term and higher costs do not by themselves show deficient decision-making, especially when we account for competing explanations and other common sense aspects of long-term investments.”
[iii] In comparing the ruling here with its determinations in CommonSpirit, the court noted, “Important though the meaningful benchmark hurdle may be, it is at its most salient when a beneficiary challenges an investment choice in a vacuum. The plaintiff in that setting must do the work of showing that the comparator investment has sufficient parallels to prove a breach of fiduciary duty. But if the plaintiff, as in this case, alleges that the fiduciary should have chosen a less expensive share class (with the same investment strategy, portfolio, and management team), the meaningful benchmark comes with the claim. Different ERISA claims have different requirements, to be sure. But this claim has a comparator embedded in it.”