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Federal Court Dismisses Excessive Fee Suit


A 401(k) excessive fee suit has been decided—in favor of the plan fiduciaries.

We’re not talking about a mega-plan here; as of 2017, 2,600 employees participated in the CareerBuilder Plan, which reportedly had some $180 million in assets.

The suit was filed last fall by Carl Martin, a former CareerBuilder employee, who claimed that the plan fiduciaries (and unnamed "monitoring defendants" who appointed those members) caused the plan to invest millions in imprudent investment options, motivated by revenue sharing payments back to ADP and Morgan Stanley. 

That original suit alleged that the plan overpaid for administrative and advisory services by at least $1.1 million from September 2013 to September 2017—and claimed that a discovery process would turn up even more. The suit (the plaintiff was represented by Capozzi Adler PC—a name that has increasingly turned up in these cases of late—and Aharon S. Kaye of Gutnicki LLC claimed that the plan fiduciaries were “standing idly by” as the plan suffered significant losses due to the excessive fees, and failed to properly evaluate the plan's investments, including removing those with poor performance that could harm participants' retirement savings.

Precedent ‘Shell’

In dismissing the suit (Martin v. CareerBuilder, LLC, 2020 BL 244914, N.D. Ill., No. 1:19-cv-06463, 7/1/20), U.S. District Judge Robert M. Dow, Jr. relied heavily on a case also decided in favor of the plan fiduciaries earlier this year, Divane v. Northwestern University, now on appeal to the Supreme Court. 

While Judge Dow evidenced a fair amount of skepticism regarding the plaintiff’s arguments, the decision focused on the realities that “the factual allegations in the complaint must be sufficient to raise the possibility of relief above the ‘speculative level,’” citing precedent that “a pleading that offers ‘labels and conclusions’ or a ‘formulaic recitation of the elements of a cause of action will not do.’” 

On that front, Judge Dow notes that the plaintiff here “claims that four allegations together allow for the plausible inference of imprudence,” specifically that: “(1) the Plan did not invest in the cheaper 'institutional' funds as opposed to the 'retail' versions; (2) the Plan included expensive funds when it should have included more indexes; (3) 40% of these expensive funds remained in the Plan for five years; and (4) all of these expensive funds helped funnel monies to ADP and/or Morgan Stanley via revenue sharing.”

Dow noted that “the prudence standard is processed-based, not outcome-based,” and thus “a Plan’s mere underperformance is not actionable so long as the fund administrators acted prudently.” That said, he noted that since “ERISA plaintiffs, however, generally do not have insider information that speaks to process.” Thus, “an ERISA plaintiff alleging breach of fiduciary duty does not need to plead details to which she has no access, as long as the facts alleged tell a plausible story.”

‘Plausible’ Denial?

As for that plausibility, “Here, Defendants are correct that under binding Seventh Circuit precedent[i] Plaintiff has not adequately pled a breach of the duty of prudence,” Judge Dow explained. “Preliminarily, Divane resolves most of this case.” Dow continued that “the fund in Divane charged fees (partially through revenue sharing) that averaged between $153 and $213 per person, essentially the same as those at issue here (which range from $131.55 to $222.43),” and noted that “the Seventh Circuit held that such fees were not inconsistent with prudent portfolio management, particularly when revenue sharing was used to keep mandatory per-capita costs down.”

Dow also noted that “Divane clarified that a fund’s failure to invest in institutional as opposed to retail funds does not give rise to an inference of imprudence when a plan offers cheaper alternatives,” and “Divane also reiterated that a plan is not required to offer only index funds—it’s not a breach of fiduciary duty to include high-fee funds along with cheaper funds so long as the ‘fiduciary’s overall performance’ is not deficient.”

And thus, Dow concluded, “…without more, Plaintiff cannot proceed on its allegations that revenue sharing was too high, only institutional class funds should be on offer, and the Plan should offer exotic index funds.”

Recordkeeping Review

As for recordkeeping fees, Dow noted that the “inference of imprudence based on the average cost of recordkeeping is even less plausible here than in Divane, because Defendants’ Plan is smaller and has fewer participants. Here, then, there are fewer economies of scale, and Defendants had less leverage to negotiate smaller fees.” In sum, “Plaintiff’s allegations about excessive costs are entirely speculative, and the Court need not take these conclusory allegations as true in deciding this motion to dismiss.”

Judge Dow also brushed aside the plaintiff’s argument that “they should get a crack at discovery before the Court dismisses this complaint. This argument has it backwards. The Court must dismiss speculative suits lest a plaintiff with a largely groundless claim be allowed to take up the time of a number of other people, with the right to do so representing an in terrorem increment of the settlement value.”

And then, having dismissed those arguments, Dow commented that “all that remains is Plaintiff’s attempt to thread the needle between Divane and the Third Circuit’s recent decision in Sweda v. University of Pennsylvania regarding the maintenance of poorly performing funds.” Dow commented that “the Seventh Circuit has explained that, at least for this Court’s purposes, what sets Sweda apart from DivaneLoomis, and Hecker were the allegations about 'the fiduciary’s overall performance,' which permitted the plausible inference that the fiduciary was imprudent.”

A Far Cry

“Plaintiff’s allegations on this front are a far cry from the ‘detailed and specific’ factual allegations that made it past a motion to dismiss in Sweda,” Dow wrote. “Indeed, in Sweda, the plaintiffs included numerous and specific factual allegations,” and “offered specific comparisons between returns on Plan investment options and readily available alternatives, as well as practices of similarly situated fiduciaries to show what plan administrators ‘acting in a like capacity and familiar with such matters would [do].’” He continued: “the Sweda plaintiffs buttressed their complaint with the allegation that Penn ‘failed to remove underperformers’ and provided specific examples of these lapses.”

In contrast, Dow explained that in this case, “Plaintiff only alleges that ‘some’ of the funds under-performed their cheaper counterparts,” and goes on to explain that Defendants removed or modified a majority of the funds over a five-year period. It is hard to make out what part of this was “objectively unreasonable.” And as if that weren’t enough, Dow concluded that, “If anything, these allegations suggest that Defendants did have a prudent process, because they removed or modified a majority of the funds.

“Defendants’ failure to offer every index fund under the sun is not, in and of itself, imprudent, so long as the Plan offers a mix of investments and there are no other indicia of a flawed process. Here, the Plan offers an acceptable mix of options, with expense ratios that range from 0.04% to 1.06%.

“Perhaps an imaginative reader could spin a speculative yarn as to Defendants’ imprudence, but that is not the standard at a Rule 12(b)(6) motion to dismiss,” he concluded.

All that said, Judge Dow did push back on one aspect of the defendants’ case—their move to dismiss the case “with prejudice,[ii]” a motion that Dow classified as “overkill.” He went on to note that “although Seventh Circuit precedent dictates that some of Plaintiff’s allegations are insufficient to state a claim for breach of fiduciary duty on their own, Rule 15 and circuit precedent counsel in favor of allowing an amended pleading here, as it is by no means clear that amendment would be futile.”

Judge Dow gave the plaintiff until July 28, 2020 to file an amended complaint “consistent with this opinion,” noting that if they failed to do so, the Court will convert the dismissal to “with prejudice” and "enter a final judgment under Federal Rule of Civil Procedure 58.” If an amended complaint was filed, he gave the defendants until Aug. 25, 2020 “to answer or otherwise plead…”

What This Means

A dismissal without a full adjudication generally tells us more about the quality of the arguments (at least as viewed by the judge) than the merits of the case. While the Seventh Circuit has tended to be a defendant-friendly venue for these cases, the lesson here would seem to be the importance of precedent.

[i]Judge Dow cited the reference by the defendants to the case of Divane v. Northwestern University being “uncannily similar” to the arguments here, going on to write that “according to Defendant, Divaneis one in a line of Seventh Circuit cases preventing courts from paternalistically interfering with Plans’ slates of funds so long as the fiduciaries don’t engage in self-dealing and offer a comprehensive-enough menu of options.”

[ii]A case that is dismissed with prejudice is one that is dismissed permanently, one that can't be brought back to court. A case dismissed without prejudice means—well, you can clean up your arguments, and try it again.