While a number of excessive fee suits have failed to make their case sufficient to go to trial, one filed in a federal court in Massachusetts will get its shot in court.
The participant-plaintiff here is one Brian Waldner, who brought suit against Natixis Investment Managers, L.P., its Retirement Committee, and the committee members (here referred to as John and Jane Does 1–20). The suit claimed that the plan—which they said included more than 30 investment options (though they counted the suite of target-date funds as a single option) and somewhere between 12 to 15 proprietary options—used “high-cost proprietary mutual funds” that “led to participants incurring excessive fees, substantially more than the average of comparator funds with similar investment styles.”
Plaintiff Waldner also claimed that the plan’s proprietary funds “underperformed in comparison to prospectus benchmarks and other funds,” that the Natixis defendants “failed to prudently monitor and remove them out of self-interest,” and that the defendants “employed an imprudent and disloyal fund selection process through only adding proprietary funds to the Plan since 2014.” Oh, and that Natixis itself “failed to monitor the performance of its fiduciaries, such as the Committee and its members.”
For its part, Natixis moved to dismiss the suit for the customary “failure to state a claim upon which relief can be granted” pursuant to Federal Rule of Civil Procedure 12(b)(6).
Motion Slickness
Now, as has been pointed out in other cases, to survive such a motion to dismiss, the “complaint must contain sufficient factual matter to state a claim to relief that is plausible on its face.” In considering the situation and establishing its purported “plausibility,” the court must first “distinguish the complaint’s factual allegations (which must be accepted as true) from its conclusory legal allegations (which need not be credited)” and then it “must determine whether the factual allegations are sufficient to support the reasonable inference that the defendant is liable.”
Judge Leo T. Sorokin of the U.S. District Court for the District of Massachusetts held that (Waldner v. Natixis Inv. Mgrs., LP, D. Mass., No. 1:21-cv-10273, 12/20/21) Waldner had standing to bring the suit and represent the class of plan participants, even though he didn’t join the plan till 2017 while bringing claims going back to 2015. “The Court concludes that Waldner has asserted an injury in fact, as he alleges personally investing in multiple options managed by the Defendants and being financially injured due to their conduct,” Judge Sorokin wrote.
“Importantly, where Plaintiffs claim that “a prudent fiduciary in like circumstances would have selected a different fund based on the cost or performance of the selected fund, [Plaintiffs] must provide a sound basis for comparison—a meaningful benchmark,” he commented, going on to acknowledge that “the exact contours of the pleading standard here is under consideration at the Supreme Court,” referencing the excessive fee case involving Northwestern University’s 403(b) plan.
Specific Allegations
That said, Judge Sorokin proceeded to outline several specific allegations made by the plaintiffs, that only proprietary funds were added to the plan during the period, including the replacement of a non-proprietary fund with a proprietary one, noting that “among thousands of similarly sized plans with $250 million or more in assets, 83% hold no Natixis-affiliated products,” that they provided examples of nine proprietary funds and specific notations as to cost comparisons with the plan’s non-proprietary options, as well as four proprietary funds that underperformed benchmarks and that “defendants have experienced more than $15 billion in outflows” from its “suite of affiliated mutual funds”—which the plaintiffs alleged resulted in part from prolonged underperformance of the proprietary funds in this Plan.
“Ultimately, the test under ERISA is whether a fiduciary acted solely in the interest of the participants, or loyally , and with prudence in its process of managing a plan,” Sorokin wrote. He continued: “even if the factual allegations do not directly address[] the process by which the Plan was managed,” a court may reasonably “infer from what is alleged that the process was flawed through circumstantial evidence,” and that “[C]ourts may draw a reasonable inference of liability when the facts alleged are suggestive of, rather than merely consistent with, a finding of misconduct.”
He concluded, “considering the Complaint as a whole, and taking the well-pleaded facts as true under the applicable standard, the Court finds that the Plaintiffs sufficiently state a claim for breach of the duties of prudence and loyalty to survive Defendants’ Motion to Dismiss. Plaintiffs’ several factual allegations charted above related to the Plan’s lineup of proprietary funds, their underperformance, excessive fees, trends in the marketplace, outflows, and negative alpha over a meaningful number of years are sufficient to suggest plausibly that had Defendants prudently monitored the investments within the Plan, in a process that was not tainted by self -interest,” many of the proprietary funds would not have been selected or would have been removed. Each of these allegation s taken individually are not sufficient to plausibly state a claim—for example, merely claiming that proprietary funds exist within a plan. Under the totality of circumstances, however, these facts taken together have “nudged [Plaintiffs’] claims across the line from conceivable to plausible that Defendants selected and managed the funds in the Plan with imprudence and disloyalty. The Court need not, and does not, decide more.”
What This Means
Indeed the determination as to which party bears the burden of proof in these type cases is currently before the U.S. Supreme Court. While other district courts have in recent months taken a dim view of relatively superficial allegations of comparative fund performance and fees, Judge Sorokin seemed willing to find sufficiency in the points made to support this case proceeding to trial.
Does that suggest that the allegations were more specific and/or detailed here than in those other cases, or simply that the judge here viewed the threshold for dismissal as being higher?
Stay tuned.
