A federal judge has ruled that the comparisons put forth as proof of a fiduciary breach were not “meaningful.”
The suit was filed late last year by plaintiff-participants Malika Riley and Takeeya S. Reliford, by and through their attorneys—Carey & Danis, Edelson Lechtzin LLP, and, Capozzi Adler PC—on behalf of the $930 million Olin Corporation Contributing Employee Ownership Plan, themselves and all others similarly situated, against the plan’s fiduciaries (which include Olin Corporation and the Board of Directors of Olin Corporation during the Class Period and the Olin Corporation Investment Committee and its members) for breaches of their fiduciary duties during the Class Period. More specifically, for (1) failing “to adequately monitor and control the Plan’s recordkeeping costs; (2) failing to objectively and adequately review the Plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost and performance; and (3) maintaining funds in the Plan despite the availability of similar investment options with lower costs and/or superior performance.”
As is routinely done, the Olin plan fiduciaries had filed a motion to dismiss the case for failure to make the case that there had been a breach of their fiduciary duty.
As we’ve noted before in such cases, at this stage of things, the court must accept the allegations made by the party who has not filed the motion to dismiss as true. Here, the point of comparison here on the fees—as it has been in other cases—NEPC’s 2019 Defined Contribution Progress Report, in which the suit claimed that “no plans with between 5,000 and 10,000 participants paid more than $100 in per participant recordkeeping, trust and custody fees,” though it also states as fact that “some authorities have recognized that reasonable rates for large plans typically average around $35 per participant, with costs coming down every day.” And yes, once again in characterizing the fees paid by the Olin plan, the suit described them as “astronomical.”[i]
The plaintiffs here presumed that the plan fiduciaries had not conducted any kind of request for proposal to assess the reasonableness of fees/services because they had: (a) stayed with the same recordkeeper (Voya) over the course of the class period; and (b) “paid the same relative amount in recordkeeping fees.” Moreover, they took issue with the investment options in the plan—and inferred a lack of proper fiduciary oversight based on the outcomes. “Here, the Defendants could not have engaged in a prudent process as it relates to evaluating investment management fees. The Plan would have qualified for the collective trust versions of these funds (which were available since 2012) at all times during the class period, but it wasn’t until 2019 that they moved the investments to the CIT versions of the T. Rowe Price funds,” the suit states.
Now, in keeping with the standards of review, the court (Riley et al. v. Olin Corporation et al., case number 4:21-cv-01328, in the U.S. District Court for the Eastern District of Missouri) accepted as true “the survey’s findings as alleged,” but cautioned that the survey considered the recordkeeping, trust, and custody fees charged by a “limited[ii] sample of investment plans of various types and sizes without spelling out, in any degree of detail, the services the plans received in return,” going on to note that “for this reason the Court need not accept as true Riley and Reliford’s legal conclusion that the survey serves as a meaningful benchmark against which to weigh the investment committee’s actions.”
U.S. District Judge Stephen R. Clark also noted that the plaintiffs “fail to explain how their footnoted argument—that the plan’s recordkeeping costs are ‘clearly unreasonable’ based on ‘some authorities’ opining that large plans typically charge $35 per participant in recordkeeping fees—provides a meaningful comparison.” He went on to write that, “as Defendants point out, Riley and Reliford’s authorities consist of expert opinions proffered by plaintiffs in other cases, an unspecified declaration, and the terms of a settlement agreement reached in another unrelated case.”
As for the plaintiffs’ assertions that the investment committee failed to conduct periodic requests for proposal and to renegotiate “also do not cause the Court to draw an inference that the investment committee acted imprudently.” For starters, “the allegation that the Plan fiduciaries were required to solicit competitive bids on a regular basis has no legal foundation,” Judge Clark commented. “As the Court explained above, the allegations in the complaint do not establish that the investment committee allowed Riley, Reliford, and the other plan participants to pay excessive fees. Thus, having considered the complaint in its totality, the Court concludes that Riley and Reliford do not state a breach-of-fiduciary-duty claim under an excessive-recordkeeping-fees theory.”
With regard to claims about excessive investment management fees, the suit had referred to ICI (Investment Company Institute) median and ICI averages to support this claim. But “a complaint cannot simply make a bare allegation that costs are too high, or returns are too low. Rather, it ‘must provide a sound basis for comparison—a meaningful benchmark.’” Here again, Judge Clark found that “the ICI data fails as such a benchmark. The ICI data on which Riley and Reliford rely apparently considers the plan size and the high-level ‘investment style’ of each fund (for example, a target date fund, a domestic equity fund, or an index fund), but this does not suffice. The Eighth Circuit requires the Court to thoroughly compare challenged funds and putative benchmark funds with regard to fund holdings, investment style, and strategy—and neither the Plaintiffs nor the ICI data provide any of this required information.” The bottom line, Judge Clark noted, is that while his assessment at this stage requires him to accept the data as factual, he was not require to consider that the benchmarks proffered were “meaningful.”
As for comparisons with collective investment trusts (CITs), Judge Clark wrote: “Without more, courts routinely find that collective trusts are not meaningful comparators to mutual funds because collective trusts are subject to unique regulatory and transparency features that make a meaningful comparison impossible.”
And then there were the allegations regarding a specific fund—the Eaton Vance Small/Mid Cap Fund—which was said to have underperformed during the period. Judge Clark commented that, “But, of course, allegations that costs are too high, or returns are too low fail to support an inference of misconduct. Moreover, “[a] prudently made decision is not actionable ... even if it leads to a bad outcome.”
Ultimately then, having found no claims regarding a breach to be sufficient, Judge Clark also found no merit in the claims regarding the Olin board’s[iii] failure to monitor the plan fiduciaries.
“For the foregoing reasons, the complaint fails to state a claim,” Judge Clark wrote, and “thus, the Court grants the Defendants’ motion to dismiss, dismisses the complaint without prejudice, and denies Riley and Reliford’s informal request for leave to amend their complaint.”
What This Means
It’s refreshing to see a judge acknowledge that the determination of “reasonable” fees is more than a simple allegation that plan size creates a comparable benchmark for services rendered for those fees. In that regard, Judge Clark appears to “get it” in a way that other courts have not—or perhaps they are simply more willing to accept benchmarks proffered by plaintiffs as sufficient at the dismissal stage. Regardless, the points raised in this case seem to have merit—and, if adopted by other courts—might slow what seems to be a relentless volume of random, cursory allegations that seem more focused on obtaining a settlement than a judgment.
[i] Beyond these cases, it’s not the first time the Capozzi Adler firm has affixed the “astronomical” label to 401(k) fees—having previously done so in suits involving the $1.5 billion Baptist Health South Florida, Inc. 403(b) Employee Retirement Plan, the $1.2 billion 401(k) plan of the American Red Cross, the $700 million Pharmaceutical Product Development, LLC Retirement Savings Plan, the $2 billion plan of Cerner Corp and more recently the $6 billion 401(k) plan of KPMG. And it’s not the only litigation firm to do so.
[ii] Specifically, the survey covered a mere 121 plans. More than that, Judge Clark noted that “courts throughout the country routinely reject the 2019 NEPC survey—among others—as a sound basis for comparison because it lacks in detail.” That apparently hasn’t kept it from being cited in a number of these cases.
[iii] As always, it’s worth remembering that—as the suit states—“…the Board and each of its members during the Class Period is or was a fiduciary of the Plan within the meaning of ERISA Section 3(21)(A), 29 U.S.C. § 1002(21)(A), because each exercised discretionary authority over management or disposition of Plan assets and because each exercised discretionary authority to appoint and/or monitor the other fiduciaries, which had control over Plan management and/or authority or control over management or disposition of Plan assets.”