Another 401(k) excessive fee suit has been dismissed—because the participant bringing suit suffered no injury, and thus, had no grounds to bring suit according to a federal court.
The suit—brought by one Danny Sabana, a former employee and participant of the CoreLogic 401(k) plan—charged that CoreLogic, Inc. together with its plan administrator, breached its duties under ERISA to employees invested in its 401(k) retirement plan.
“In broad strokes”, U.S. District Judge Hernán D. Vera wrote, “…CoreLogic fell short of these standards because it (1) overpaid for recordkeeping services by offering costly investment options that used revenue sharing to pay high fees to the plan’s recordkeeper, and (2) offered and retained several funds that performed worse than industry standard benchmarks.”
Grand ‘Standing’
Judge Vera observed (Danny Sabana v. CoreLogic Inc. et al., case number 8:23-cv-00965, in the U.S. District Court for the Central District of California) that, in support of the first plaintiff Sabana claimed that a reasonable annual recordkeeping fee is just $40 per participant, while alleging that participants in CoreLogic’s 401(k) plan “paid, on average, substantially more than $40 in recordkeeping costs per year.” As for the defendants in this case—and their motion to dismiss the suit, Judge Vera noted that they not only dispute the fiduciary breach arguments, but argue that the plaintiff “lacks standing to assert these claims on behalf of the putative class.” Specifically, that the plaintiff was unable to allege any financial injury—and thus lacked grounds—“standing” in legal terms—to bring suit.
“The doctrine of standing, grounded in Article III of the Constitution,” Judge Vera wrote, “limits the category of litigants who can sue in federal court to those who can demonstrate, among other things, an actual and redressable injury.” He further noted that “the fact that other plan participants—perhaps even most—may have paid more than this amount has no bearing on Plaintiff’s individual standing. Plaintiff, moreover, was not invested in any of the underperforming funds he specifically challenges, and so cannot allege that he was injured by their lackluster returns.”
Judge Vera noted that the plaintiff identified five funds he argues should have been replaced due to their underperformance compared with recognized benchmarks, including the Morningstar Category Index, the Primary Prospectus Benchmark, and the Morningstar-selected Best-Fit Index. But he noted that evidence presented by the CoreLogic defendants “demonstrates, however, that Plaintiff was not invested in any of these five funds.”
‘Not Necessarily Fatal’
He then acknowledged that—“under the Ninth Circuit’s class action approach to ERISA standing, this observation alone is not necessarily fatal,” as he could nonetheless seek relief that “sweep[s] beyond their own injuries on behalf of the Plan and other plan participants….” That said, he continued “but in no event may a plaintiff bring an ERISA claim without demonstrating, through some theory, concrete and individual harm. ‘ERISA’s grant of statutory standing only applies once plaintiffs first demonstrate Article III standing’”—and that because this plaintiff was not invested in any of the funds in question, he could only pursue the claim “by alleging ‘plan-wide’ misconduct that injured all plan participants.”
The suit had challenged the selection of funds that include a revenue-sharing arrangement. As to how this impacted standing to bring suit, Judge Vera continued to note that “Plaintiff has Article III standing if the Plan’s allegedly excessive recordkeeping fees—which he claims resulted from the availability of high-cost share classes that used revenue sharing, rather than cheaper, otherwise identical share classes—injured him”—but concluded that the plaintiff “cannot make this showing.”
Math ‘Problems’
Judge Vera noted that the decision to pay fees proportional to assets differentially affects Plan participants; that investment accounts above a certain value will pay more than they would under a flat-fee structure; those below, less. Turning to the Form 5500, Judge Vera noted that the plaintiff “calculates that the average recordkeeping fee per participant—total direct and indirect fees, minus rebates, divided by the number of employees—was higher than $40 in five out of six relevant years.” That said, he noted that the plaintiff “paid far less than $40 per year during the relevant period”—a determination he made by first observing that recordkeeping fees for his account were apparently paid by the revenue-sharing arrangement, leaving only the 0.15% investment fee for the T. Rowe Price 2050 fund.
“Multiplying 0.15% by the year-end values of Plaintiff’s account and subtracting rebates indicates that he paid annual indirect compensation significantly below $40,” Judge Vera wrote. “Put another way, Plaintiff would have been worse off had he invested in the cheaper share class without revenue sharing, and instead paid $40 per year in direct recordkeeping costs. Although the Court can imagine many Plan participants who might have standing based on high recordkeeping fees, this plaintiff cannot demonstrate any injury traceable to Defendants’ alleged plan-wide practice of overpayment.”
The Very Heart
Not content with that result, the participant-plaintiff pushed back—and “claims that although he alleges that $40 in recordkeeping costs would have been a reasonable plan-wide average, this does not necessarily mean it would have been “an appropriate fee burden for Plaintiff.” This, Judge Vera noted, “ignores that the Complaint repeatedly attacks variable recordkeeping fees in general. Plaintiff claims that recordkeeping services ‘are essentially fixed and largely automated,’ that their costs ‘depend on the number of participants, not the amount of assets in the participant’s account’ and that, therefore, ‘the cost of providing recordkeeping services to a participant with a $100,000 account balance is the same for a participant with $1,000 in her retirement account.’”
He had also, according to Judge Vera, contended that the practice of paying recordkeeping fees through revenue-sharing offered by higher-cost share classes because such payments “bear no relation to the actual cost to provide services or the number of plan participants.” Judge Vera conclude that “at the very heart of Plaintiff’s theory of breach is the allegation that Defendants ‘paid Fidelity excessive and variable recordkeeping fees that were not tethered to the services provided.’”
“The only fair reading of the Complaint implies that Plaintiff believes it would have been more prudent to pay recordkeeping fees directly and at rates proportional to the services provided, which do not vary from participant to participant. If $40 is a reasonable average fee—and Plaintiff asserts as much—it follows that $40 is a reasonable fee for each individual participant, including Plaintiff.”
Prevention ‘Cure?’
The Plaintiff here also—“briefly” in the words of Judge Vera—argued that he had standing to seek “declaratory and injunctive relief” without establishing any existing loss or damages—essentially making an argument that the suit was intended to forestall FUTURE losses, citing precedents that Judge Vera found outdated and unpersuasive. “Plaintiff has not established that his share of recordkeeping costs—less than $40 in every year so far—will ‘certainly’ exceed that threshold and create an unreasonable drag on his investment returns. Indeed, Plaintiff’s net recordkeeping fees sharply declined between 2021 and 2022,” Judge Vera noted.
“Accordingly, the Court finds that Plaintiff’s ancillary prayers for declaratory and injunctive relief do not sanction an end-run around the injury-in-fact requirement. In so holding, this Court does not find that ‘the beneficiaries are powerless to rein in the fiduciaries’ imprudent behavior until some actual damage has been done.’” Judge Vera wrote that the very premise of the suit was that an injury had ALREADY occurred—“[t]he problem is simply that this plaintiff, through his allegations and representations, has shown exactly the opposite.”
And then—in what reads like a last desperate gasp, Judge Vera wrote that the plaintiff argued that he should be given the opportunity to not only amend his suit, but to “conduct jurisdictional discovery.” The latter he claimed would “establish the full fee burden on Plaintiff and what a reasonable fee for Plaintiff would be, challenge the fee calculations put forth by Defendants’ counsel, establish that Plaintiff was harmed by the use of high fee share classes, and establish harm based on the unavailability of low-fee, high performing funds.” More specifically, the plaintiff here argued that he should be provided with “the 408(b)(2) fee disclosure that would show what [Defendants’] actual fees paid for recordkeeping were.”
You could almost see Judge Vera’s eyes roll as he wrote that “Plaintiff’s own calculation of these recordkeeping fees simply adds indirect and direct fees, sourced from Defendants’ Forms 5500, to arrive at a total: the same basic method Defendants use. In his Opposition, Plaintiff does not explain (1) how his indirect recordkeeping fee could be higher than the 0.15% his fund allocates via revenue sharing; (2) how his direct recordkeeping fee could be greater than zero, when his statements show only a revenue credit; or (3) how his total recordkeeping fee burden could be higher than the sum of these two figures”—finding that an amendment to “cure Plaintiff’s lack of standing would be futile”—granting the motion to dismiss the suit—and doing so with prejudice.
What This Means
Any number of excessive fee suit claims have been put forth on claims of cost that didn’t take into account revenue-sharing offsets. Indeed, and as in this case, the mere existence of a revenue-sharing arrangement has often been referenced as indicative of unseemly practices (ostensibly by individuals who didn’t really understand the mechanics). In their defense, pre-discovery plaintiffs often have trouble getting to—and perhaps not understanding how to apply—that detail.
Here the judge—and the fiduciary defendants—had the math—and, importantly, the reality—to back their assertion that this was a participant that lacked the grounds to make a case.
