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Fiduciaries Fend Off Excessive Fee Claims in 401(k) Suit


A federal judge has held that a participant that wasn’t invested in the funds in question lacked standing to bring suit—and that his claims about excessive recordkeeping fees weren’t specific enough.

Image: Shutterstock.comThe suit—filed less than a year ago in the U.S. District Court for the Middle District of North Carolina by participant-plaintiff Harvey L. Davis—made a series of familiar allegations,[i] primarily that the fiduciary defendants breached their duties under ERISA by “selecting and retaining imprudent share classes and investments for the plan”[ii]—in this case the $2 billion Old Dominion 401(k) Retirement Plan and on behalf of its 24,000+ participants (misdeeds the suit alleged cost participants some $3 million in retirement savings in the $1.9 billion plan). 

The Case

Having outlined the basic fact foundation and history of the case, U.S. District Judge Thomas D. Schroeder noted (Davis v. Old Dominion Freight Line Inc., case number 1:22-cv-00990, in U.S. District Court for the North Carolina Middle District) that while “Davis alleges that he was injured by Old Dominion's mismanagement of the Plan, "paying excessive recordkeeping and administrative costs associated with the Plan and investing in the imprudent investment options offered by the Plan, which are the subject of this lawsuit”—that he “provides no factual allegation of what those costs and investments were.” He continued to comment that, “Instead, on its face, the complaint contains no factual support for the conclusory allegations that he personally invested in any of the imprudent investment options, nor that he suffered any other type of specific financial loss.”

On the other side, Judge Schroeder noted that Old Dominion's motion urges two possible grounds for dismissal: lack of subject matter jurisdiction pursuant to Rule 12(b)(1) or, in the alternative, failure to state a claim pursuant to Rule 12(b)(6). But then quickly—noting that he would outline his analysis—commented that “Davis has not demonstrated Article III standing to bring this case. The court therefore lacks the requisite subject matter jurisdiction to proceed and will dismiss the complaint without prejudice on that ground.”

The Analysis

Schoeder explained that the party seeking to invoke a federal court's jurisdiction has the burden of satisfying Article III's standing requirement—and that, in order to meet that burden, three elements needed to be present: (1) that the plaintiff has suffered an injury in fact that is "concrete and particularized" and "actual or imminent;" (2) that the injury suffered is fairly traceable to the challenged conduct; and (3) that a favorable decision is likely to “redress” the injury. Beyond that, he commented that the Supreme Court "ha[s] consistently stressed that a plaintiff's complaint must establish that he has a 'personal stake' in the alleged dispute, and that the alleged injury suffered is particularized as to him."

Judge Schroeder noted that Old Dominion challenged the court's subject matter jurisdiction on the basis that Davis lacks standing to sue on behalf of the class because he did not suffer an individual injury, and that he failed to assert that he invested in "any of the eleven challenged funds, or even in any actively managed funds." They also commented that Davis did not invest in any of these funds but rather "invested solely in the Plan's stable value funds"—which weren’t at issue here. He went on to comment that “Old Dominion concludes that Davis's individual account "will not fluctuate one cent whether he wins or loses this case," and so he has "no concrete stake in this lawsuit."

Plaintiff Davis responded[iii] that "participants in defined-contribution plans suffer an injury-in-fact sufficient for Article III standing when alleging that a fiduciary's breach has negatively impacted their accounts,” pointing to a recent case where a district court found that plaintiffs had standing when they "allege[d] injury to their individual 401(k) accounts in the form of excessive record-keeping and administrative costs as well as an expensive overall investment menu endured by each Plan participant."  The plaintiff claimed that in that case the court found that "if the plaintiffs' allegations are true, they suffered injury in that their retirement accounts [are] worth less [than] they would have been absent the breach[s]."

Standing Questioned

Judge Schroeder noted that “not only does the complaint not contain ‘detailed allegations’ regarding excessive compensation received by the Plan's recordkeeper as argued by Davis, the terms ‘excessive compensation,’ ‘float compensation,’ ‘direct fee compensation,’ and ‘revenue sharing compensation’ relied on by Davis do not appear at any point in the complaint.” In fact, he commented that “Nowhere, however, does Davis allege that Old Dominion ‘imprudently caused the Plan's recordkeeper . . . to receive millions of dollars of excessive compensation from the Plan’”—and thus he kept his analysis of standing “to the actual contents of the complaint and Davis's responsive arguments that pertain to the complaint's allegations concerning imprudent investments on the Plan menu and excessive fees related to those investments.”

To that end, Judge Schroeder noted that the plaintiff here “asserts that he has standing to sue on behalf of the Plan to seek redress for the injury Old Dominion has caused it in the form of ‘millions of dollars in losses caused by Defendant's fiduciary breach’ and ongoing ‘expos[ure] to harm and continued losses’” and that “he has shown an individual injury ‘because he participated in the Plan and was injured and continues to be injured by Defendant's unlawful conduct.’"

But then, citing Thole v. U.S. Bank, he commented that "There is no ERISA exception to Article III." Judge Schroder noted that the Supreme Court “has rejected the argument that ‘a plaintiff automatically satisfies the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right.’" Citing another case, he commented that “Article III standing requires a concrete injury even in the context of a statutory violation." 

And while he explained that “the Fourth Circuit has held that participants in a defined contribution plan[iv] have standing pursuant to ERISA to ‘seek to recover amounts that they claim should have been in their accounts had it not been for alleged fiduciary impropriety,’ even when those participants had ‘cashed out’ their benefits”… he concluded that “Here, Old Dominion has met its burden of showing that Davis was not individually harmed and therefore lacks standing on the face of the complaint to proceed in this case. A review of the records offered by Old Dominion, which may be considered at this stage given the jurisdictional nature of this issue, supports its claim that Davis did not, in fact, invest in any of the challenged funds. Old Dominion has attached Davis's account statements from the years at issue which show that Davis invested in only three funds, none of which was included in the complaint's list of eleven challenged funds.”

In fact, Judge Schroeder commented that “the only injury on which Davis appears to hang his individual standing claim, ‘allowing Empower Financial to collect excessive compensation from Plaintiff,’ is not alleged in the complaint. His complaint also lacks allegations that might indicate unjust compensation resulting from various fee structures attendant to the alleged Plan mismanagement, leaving him with no individual injury on which to rest his claim.”

Judge Schroeder concluded then that “without any plausible allegations indicating that Davis's own retirement account was injured by Old Dominion's alleged breach of fiduciary duty of prudence and failure to adequately monitor other fiduciaries, Davis has not met his burden of showing that he has suffered an injury-in-fact. Thus, he lacks Article III standing to pursue his claim.” 

And granted the motion to dismiss for lack of subject matter jurisdiction, but without prejudice (meaning the plaintiff here can amend the suit and come back again).

What This Means

There is a divergence between the circuits at present as to whether the participant bringing suit actually has to be invested in the funds in question (and thus suffered an injury) or not. 

Beyond that, this particular suit appears to suffer from a lack of focus/specificity. In our original write up on the suit, we noted that there were no allegations specific to the plan until page 16 of the 25-page suit. All of which might be explained by the relative newness of the plaintiff’s representation—and is also perhaps indicative of the multiple filings in a relatively short time period alleging pretty much the same things.

Though it’s also worth noting that, despite the lack of detail, specificity, or applicability of the charges to this particular plaintiff, both the court and plan fiduciaries had to “deal” with the allegations. And with no prejudice in the ruling, may well have to deal with them again. 


[i] The plaintiff here is represented by Wenzel Fenton Cabassa PA (as well as Morgan & Morgan PA, Matthew Norris of Wake Forest, N.C., and Michael McKay of Scottsdale, AZ)—firms that in the previous weeks of 2022 had filed excessive fee suits against Knight-Swift Transportation Holdings, Inc. (October), the NCLC 401(k) Plan (September), Laboratory Corporation of America Holdings Employees’ Retirement Plan (August), as well as Allegiant Travel (October), and Lennar Corp. (October).

[ii] More specifically, and according to the ruling in this case, the plaintiff alleged that Old Dominion breached its fiduciary duties to the Plan by pursuing "high priced investments when the identical investments were available to the Plan at a fraction of the cost,” that those more expensive share classes offered the Plan no "additional services or benefits" such that there was "no good-faith explanation for selecting and retaining the higher-priced and poorly performing share classes." Also challenged was the use of actively managed, rather than those "managed with [a] 'blend' of active [and] passive management techniques" even though the actively managed funds charged more in fees and underperformed the latter funds. The suit also alleged a breach of the "obligation to monitor all other fiduciaries for the Plan," causing the Plan and its participants millions of dollars in losses.

[iii] There was an odd “sidebar” in the opinion regarding a “disparity” between the complaint actually filed with the court and the one the plaintiff cited throughout his most recent briefing—apparently there were “phantom” paragraphs, as Judge Schroeder commented that “Old Dominion's characterization that Davis's subsequent briefing refers to ‘phantom paragraphs’ is apt, as Davis's response to the motion to dismiss oddly and repeatedly cites to paragraphs that [*5] simply do not appear in the complaint on the docket.”

[iv] Judge Schroeder noted that both the Supreme Court and appellate courts have distinguished between defined benefit and defined contribution plans in the context of finding an individual injury that satisfies Article III standing pursuant to ERISA. “With defined benefit plans, the Supreme Court has held that plan participants do not have standing to sue for plan-wide fiduciary mismanagement unless ‘the mismanagement of the plan was so egregious that it substantially increased the risk that the plan . . . would fail’ entirely since ‘retirees receive a fixed payment each month’ that ‘do[es] not fluctuate . . . because of the plan fiduciaries' good or bad investment decisions." He noted that “The same limitation does not apply to defined contribution plans, where ‘fiduciary misconduct need not threaten the solvency of the entire plan to reduce benefits below the amount that participants would otherwise receive." He continued that “participants in defined contribution plans retain an individual equitable interest in the plan and may sue for enforcement of that interest,” and that “while ERISA "does not provide a remedy for individual injuries distinct from plan injuries, [it] does authorize recovery for fiduciary breaches that impair the value of plan assets in a participant's individual account."