It’s been said that the “third time’s a charm”—but apparently not with regard to 401(k) excessive fee suits.
This particular suit (Mator v. Wesco Distrib., Inc., W.D. Pa., No. 2:21-cv-00403, complaint 3/26/21) was filed on behalf of current participants Robert Mator and Nancy Mator against the fiduciaries of the Wesco Distribution, Inc. Retirement Savings Plan, a plan with 8,870 participants and some $750 million in net assets. The suit[i] claimed, as most in this genre have, that as a “large” retirement plan, the fiduciaries “…had tremendous bargaining power to demand low-cost administrative and investment management services,” but that “instead of leveraging the Plan’s substantial bargaining power to benefit Plan participants and beneficiaries, Defendants caused the Plan to imprudently pay unreasonable and excessive fees….”
As for the specifics, what the suit refers to as “the objectively unreasonable RPS fees charged to the Plan by Defendants” were between $159 and $194 per participant annually for recordkeeping services, whereas the plaintiffs state that during the period in question (2015-2019), “reasonable RPS fees for a plan of this size would have averaged $41 per participant annually.”
Interestingly enough, in July 2021, U.S. District Judge Marilyn Horan denied Wesco Distribution Inc.'s request for a stay in a suit brought against the plan and its fiduciaries pending the U.S. Supreme Court’s ruling in Hughes v. Northwestern University.
Standard of Review
The fiduciary defendants here (Mator v. Wesco Distrib., 2022 BL 288729, W.D. Pa., No. 2:21-cv-00403, 8/18/22) argued that this Second Amended Complaint only "window dresses" their prior allegations in comparing WESCO's total RPS fees to the total RPS fees for comparator plans for the same suite and scope of services—that it has, in practical impact, not changed. Specifically, Judge Horan noted that the defendants argue that “Plaintiffs still fail to plead requisite details about the specific type and scope of ‘services provided’ to the WESCO Plan or to any of their proposed comparators,” pointing out that while all plans my may provide "telephone support," the Second Amended Complaint's averments only address the service generally, because "it undoubtedly costs less to hire a team of two to provide telephone support than a team of ten, and even less to hire a single person who picks up only when automated systems fail."
In sum, she commented that “Defendants maintain that the Plaintiffs fail to account that a reasonable person or prudent fiduciary could disagree on the value of reduced wait times or reduced costs.” Similarly, the fiduciary defendants pushed back on the size (participant count and assets) comparatives because that effectively assumed that “the recordkeepers of comparator plans ‘all offered identical or similar packages of service of the same or similar quality’ to those received by the WESCO Plan.”
Apples to Apples
And even if it was concluded that the Second Amended Complaint cures the factual allegations about the scope and services provided by the alleged comparator plans, the defendants noted that “the alleged fees charged are still not ‘apples to apples’ comparisons, because the Second Amended Complaint compares the WESCO Plan, which includes both direct and indirect fees, to some comparator plans that include only direct fees.”
To all of this, the plaintiffs argued that they had to be allowed to engage in discovery “to uncover the type of information allegedly missing from its Complaint, Amended Complaint, and Second Amended Complaint with regards to the Plan's excessive payment of fees” (they also contested the notion that they hadn’t provided sufficient details on the other items. The plaintiffs also alleged that “for large plans with greater than 5,000 participants, like the Plan, any minor variations in the way that these [recordkeeping] services are delivered have no material impact on the fees charged by recordkeepers to deliver the services.” And, they argued that the defendants here hadn’t “provided any information that Wells Fargo provided unique or superior services that would justify the excessive fees charged.”
Judge Horan noted that here “the parties have competing legal arguments on whether the Second Amended Complaint meets the applicable pleading standard for an ERISA breach of fiduciary duty claim,” and that “because plaintiffs in an ERISA claim may not always have access to the information necessary to support their claim, courts have evaluated the pleadings in ERISA claims with special scrutiny.”
Standard(s) of Review
She noted that the standard of review was to first note the elements of a claim, to identify allegations that are conclusory and therefore not assumed to be true, and finally to accept the factual allegations and to consider “reasonable inferences drawn from them in the light most favorable to [the Plaintiffs] to decide whether ‘they plausibly give rise to an entitlement to relief.’"
“After careful review of the Second Amended Complaint,” Judge Horan wrote, “the Court concludes that Plaintiffs have not cured the previously identified pleading deficiencies. Under the Plaintiffs' reasoning, bare allegations regarding the difference in recordkeeping fees and conclusory allegations regarding corresponding services would open the door to discovery and protracted litigation. However, she concluded “such a rule does not mesh with the standards set forth by the Supreme Court, which directs courts to apply ‘careful, context-sensitive scrutiny of’ ERISA fiduciary-breach claims to ‘divide the plausible sheep from the meritless goats.’" She noted that the plaintiffs did not address “the types or levels of services that any plan contracted to receive," and its purported “’side by side list comparison’ does not suffice”—that their allegations regarding services “…do little more than rearrange and rephrase prior iterations of their claims,” and that “such allegations are too generalized and speculative to move into the realm of the plausible.”
Judge Horan then noted that here the “Plaintiffs have presented nothing beyond conclusory allegations regarding services with no particularity as to the quality of the services that Plain participants received,” that the suit “should contain sufficient details regarding services,” and that “without such allegations, the Plaintiffs have engaged in a speculative fishing expedition without a plausible factual basis.”
Judge Horan found that “the alleged comparator plans face the same deficiencies as before,” in that “the comparator plans do not match the Plan relative to number of participants or asset sizes, or the average of all other plans of similar sizes.” In fact, she noted that as the “so-called comparators range from 4,950 participants to 13,502 participants and ranged from $218 million in assets to over $2 billion,” “such disparities raise serious doubt as to plausibility of how the purported comparator plans are indeed comparable.”
Regarding the claims regarding the cost differential in share classes, the fiduciary defendants argued once again that nothing had changed, and that it remained “…firmly grounded on the inflexible proposition that offering more expensive share classes, even where they may offer greater revenue sharing, is per se imprudent.” The last time Judge Horan considered their arguments, she found them to pose “conclusory and insufficient facts to support that Defendants' choice of such share classes breached their [d]uty of [p]rudence," and—as the plaintiffs did not “refute that they have re-raised the same arguments,” dismissed it again.
And to wrap it up, claims that the fiduciary defendants failed to monitor the activities/actions of other fiduciaries—since there was no supported claim that a breach of fiduciary duty had occurred—were also summarily dismissed.
And then—even though the plaintiffs here had not yet requested another opportunity to adjust their suit, Judge Horan noted that “the Second Amended Complaint is Plaintiffs' third attempt to state a plausible claim under ERISA. Despite 54 pages and 174 paragraphs, the Second Amended Complaint primarily leans on legal conclusions that read like a legal primer on ERISA fiduciary duties. However, such does not substitute for sufficient factual allegations to satisfy either the Twombly/Iqbal or Sweda standard. As Plaintiffs have had three bites of the apple, granting any further leave to amend would be inequitable. As such, no leave to amend will be granted.”
What This Means
Even in the wake of the Supreme Court’s decision in Hughes v. Northwestern University (which was expected to resolve the issue of which party bore the burden of proof in such litigation, but didn’t), there is an emerging split in various district courts as to what exactly constitutes a “plausible” inference of a fiduciary breach. Immediately after the Supreme Court’s decision, a couple of cases in the Ninth Circuit quickly moved to reinstate cases that had been dismissed for having fallen short of that standard.
However, and more recently, there have been a number of cases inspired by decisions in the Sixth Circuit (starting with Yosaun Smith v. CommonSpirit Health, et al.) that have demanded more than the ubiquitous tables with ostensibly comparable plans and fees to “plausibly” establish a fiduciary breach.
As did this one.
[i] The plaintiffs in this case were represented by Franklin D. Azar & Associates PC (and Chimicles Schwartz Kriner & Donaldson-Smith LLP), a firm that had previously held itself out as a personal injury law firm that specializes in motor vehicle accidents, defective products and slip-and-fall accidents.