Plan fiduciaries found a friendly judicial ear in their motion to dismiss an excessive fee suit—aided by what appears to have been a weak case by the plaintiffs.
The suit—filed late last year against fiduciaries of Trader Joe’s Company Retirement Plan by plaintiffs Nicolas R. Marks and Lorri Bowling (both ex-participants—a point that will matter later) for allegedly “breaching its ERISA fiduciary duties in the management, operation and administration of the Plan.” Once again, we’re talking about a large plan ($1,629,409,314 as of Dec. 31, 2018, and some 46,600 participants), one that the plaintiffs argue had “tremendous bargaining power to demand low-cost administrative and investment management services and well-performing, low cost investment funds,” but instead “chose inappropriate, higher cost mutual fund share classes and caused the Plan to pay unreasonable and excessive fees for recordkeeping and other administrative services.”
Presented with a motion to dismiss the case, Marks v. Trader Joe’s Co. (C.D. Cal., No. 2:19-cv-10942, 4/27/20), Judge Percy Anderson of the U.S. District Court for the Central District of California outlined five key allegations made by the plaintiffs:
- paying Capital Research unreasonable recordkeeping fees;
- failing to seek competitive bids every three years;
- choosing higher cost mutual fund share classes;
- allowing Capital Research to collect and invest excessive fees before giving them back to the Plan; and
- failing to adequately monitor Committee members.
Allegation by allegation, here’s how he ruled.
Allegation #1—Excessive RK fees
The plaintiffs first alleged that Trader Joe’s “breached its fiduciary duty ... by paying excessive recordkeeping fees to the Plan’s recordkeeper by failing to limit Capital Research’s asset-based fees to a reasonable amount.” Now, the plaintiffs had alleged that they needed discovery “to identify exactly how much Capital Research is collecting,” but estimated that “[o]ver the past six years, the Plan paid [Capital Research]recordkeeping fees in the amount of roughly $140 per participant,” whereas they argued that a “reasonable recordkeeping fee for the Plan is $40 per participant.”
“It is Plaintiffs’ obligation to plead facts that create more than a ‘sheer possibility that [the Plan fiduciaries] ha[ve] acted unlawfully’ to make a plausible claim for relief and to survive a motion to dismiss.” Judge Anderson wrote, citing White v. Chevron Corp. He then went on to note that “Plaintiffs’ guess that the Plan pays $140 per participant for recordkeeping fees has ‘no factual basis,’ and Plaintiffs admit they do not actually know how much the recordkeeping fees are.” Explaining that, “In the absence of any facts pertaining to the alleged unreasonable fee, all that remains is Plaintiffs’ conclusory assertion that fees under a revenue-sharing arrangement are necessarily excessive and unreasonable.” He then dismissed that claim as “…insufficient to survive a motion to dismiss.”
Allegation #2—Failing to put recordkeeping services out to bid every 3 years
Citing cases which concluded that “[T]he allegation that the Plan fiduciaries were required to solicit competitive bids on a regular basis [alone] has no legal foundation,” and that “[N]othing in ERISA compels periodic competitive bidding,” Judge Anderson noted that “Here, Plaintiffs do not allege any facts suggesting a competitive bid would have benefitted the Plan or the Plan participants,” as Plaintiffs “do not allege any facts from which one could infer that the same services were available for less on the market.”
Rather, he noted, “Plaintiffs’ Complaint simply recites legal conclusions, and does not allege any facts suggesting that the Plan fiduciaries could have obtained less-expensive recordkeeping services elsewhere through competitive bidding.” Further, “there are no facts alleged showing that the Plan fiduciaries failed to consider putting the fee structure out for competitive bidding or failed to negotiate a reasonable fee structure” with Capital Research. Judge Anderson then concluded that “these allegations are insufficient to survive a motion to dismiss.”
Allegation #3—Inappropriate higher cost mutual fund share classes
“Plaintiffs allege Trader Joe’s chose higher cost ‘Investor class shares’ of mutual funds, instead of ‘Institutional share classes’ that had a lower operating cost,” Judge Anderson noted.
“[A]mple authority holds that merely alleging that a plan offered retail rather than institutional share classes is insufficient to carry a claim for fiduciary breach,” Judge Anderson again cited from White v. Chevron Corp., and then turned to Hecker v. Deere & Co. to comment that “[C]ourts have dismissed claims that fiduciaries are required to offer institutional over retail-class funds, or are required to offer a particular mix of investment vehicles, as well as claims that fiduciaries were imprudent in failing to offer cheaper funds.” And, if that weren’t sufficient, he also cited text from the Heckerdecision that “[N]othing in ERISA requires [a] fiduciary to scour the market to find and offer the cheapest possible fund (which might, of course, be plagued by other problems).”
As with the other allegations, Anderson said that here “the Court finds Plaintiffs have alleged no specific facts to suggest Trader Joe’s breached its fiduciary duty of prudence by allegedly failing to offer institutional class shares as opposed to investor class shares. All Plaintiffs have done is offer a hypothetical scenario suggesting an investor class share in a mutual fund ‘may’ in general charge an annual expense ratio higher than an institutional class share in the same fund. Plaintiffs have failed to make any specific allegations as to, for example, whether the investor class share offered by Trader Joe’s actually did cost more than an institutional class share in the same fund, or whether the investor class share offered other benefits that may have offset any additional cost.” And held that “these allegations are insufficient to survive a motion to dismiss.”
Allegation #4—Allowing Capital Research (RK) to keep and invest fees before returning to the plan
The plaintiffs had argued that, “[i]n what is tantamount to an admission of excessive fees and a breach of the duty of prudence, at the end of each fiscal year, Capital Research returns a portion of the excessive fees that it has been collecting,” arguing that the money should have been invested in participant accounts. Instead, the plaintiffs argued that “Capital Research collects excessive fees on a monthly basis, invests the excessive fees for its own benefit, makes money for itself by investing Plan participants’ retirement savings, and finally returns a portion of the excessive fees to the Plan at the end of the fiscal year.”
But once again, Judge Anderson noted that, “Plaintiffs do not allege any facts to support this conclusory allegation that Capital Research’s repayment of money to Plan participants demonstrates an ‘admission of excessive fees’ and in turn a breach of the duty of prudence. Plaintiffs’ bare recitation of legal conclusions is insufficient to survive a motion to dismiss.”
Allegation #5—Failing to monitor committee members
Plaintiffs allege Trader Joe’s “breached its fiduciary monitoring duties by, among other things: (a) failing to monitor its appointees’ fiduciary process, which would have alerted any prudent fiduciary to the potential breach because of the excessive recordkeeping fees in violation of ERISA; and(b) failing to remove [Committee] appointees whose performance was inadequate in that they continued to make imprudent decisions all to the detriment of Plan participants’ retirement savings.”
Here Judge Anderson noted that the Trader Joe’s defendants argue “that this cause of action fails because it is derivative of the other claims, none of which pled facts sufficient to state a plausible claim.” And, just as succinctly as he had concluded on the other points, he wrote that Trader Joe’s is “correct in referring to this claim as ‘derivative,’ as the claim as pled is wholly dependent on the breaches of duty previously alleged.”
“Thus,” he concluded, “because Plaintiffs have failed to plead sufficient facts as to their other allegations, they cannot maintain a claim that [Trader Joe’s] failed to monitor the fiduciaries.” And therefore, “Because the breach of fiduciary duty cause of action fails to state a claim, this cause of action does as well.”
One More Thing
Now, as if that weren’t enough, Judge Anderson noted that Trader Joe’s had argued that the Plaintiffs here lacked standing to seek injunctive relief “because they are former Plan participants” (told you it would come back). Citing another case (Urakhchin v. Allianz Asset Management of America, L.P.), Anderson concluded that, “Former Plan participants do not have standing to seek injunctive relief because they are not ‘realistically threatened’ by [a defendant’s] future breaches of fiduciary duties.”
Judge Anderson wrapped up his decision by saying that “for all of the foregoing reasons, Trader Joe’s Motion to Dismiss is granted.” However, he noted that “the Court cannot conclude at this point that any amendment would be futile,” and therefore gave the plaintiffs two weeks to amend their suit. Failing that, the case will be dismissed.
What This Means
In an era where it’s not unusual for excessive fee litigation to entail more than 100 pages of allegations, citations and examples (why do you think these summaries are so long?), the original filing here was a mere 18 pages, widely spaced. While quantity doesn’t necessarily equate to quality, the brevity of the filing was unusual in this arena.
That said, and while the claims were very much in line with the types of charges routinely laid at the feet of allegedly imprudent plan fiduciaries, Judge Anderson clearly wanted more than a mere allegation of impropriety, and apparently wasn’t willing to green light a discovery process to turn up more substantial evidence of actual wrong doing without more.
Of course, it’s a dismissal based on an (apparently) inadequate case—and while that certainly counts as a “win,” it’s not a full adjudication of the issues raised. We’ll have to wait to see if the plaintiffs here take steps to shore up their case.
