Fiduciaries of a relatively small 401(k) plan have fended off an excessive fee suit with a federal judge finding no “meaningful benchmark” against which to assess a fiduciary violation.
The Suit
The suit—filed in August 2022—had alleged that the $285 million 401(k) plan of Greenwood Village, Colorado-based TTEC failed to leverage their size to negotiate better terms with their recordkeeper(s), and included at least one fund with a higher expense ratio than was prudent. Participant-plaintiffs Elijah Carimbocas, Linda Dlhopolsky and Morgan Grant filed suit[i] on behalf of the 27,700 participants in the plan—alleging that between 2016 and 2019, recordkeeper Merrill Lynch charged anywhere from $51 to $59 per participant for their services (versus a going rate of $30–$35 for similar sized plans). A subsequent change to T. Rowe Price only reduced that fee to $45 per participant, according to the suit. At the same time, the suit claimed that TTEC also allowed T. Rowe Price to replace a fund on the plan menu with a proprietary T. Rowe Price Overseas Stock Fund that underperformed the option it replaced.
Ultimately, the plaintiffs here argued (Carimbocas et al. v. TTEC Services Corp. et al., case number 1:22-cv-02188, in the U.S. District Court for the District of Colorado) that TTEC breached its fiduciary duties owed to plan participants by failing to monitor the annual fees being charged by trustees and by failing to negotiate lower fees consistent with prevailing market rates for plans with similar number of participants and assets—and by offering investment funds that charged participants considerably higher fees than the industry average.
Standard(s) of Review
U.S. District Judge Charlotte N. Sweeney began her analysis by noting that under Rule 12(b)(6), a court may dismiss a claim in a complaint for “failure to state a claim upon which relief can be granted”—and that, in order to survive a motion to dismiss, “the plaintiff must allege facts, accepted as true and interpreted in the light most favorable to the plaintiff, to state a claim to relief that is plausible on its face.” She also explained that “a plausible claim is one that allows the court to ‘draw the reasonable inference that the defendant is liable for the misconduct alleged,’” and that “the pleading standard is a liberal one, however, and ‘a well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and that a recovery is very remote and unlikely.’”
In applying those standards, Judge Sweeney turned to the analysis in Matney v. Barriack Gold of N.Am. where she noted that the Tenth Circuit acknowledged that it “has yet to consider a plaintiff’s pleading burden when the breach of the duty of prudence claim under ERISA arises is the specific context . . . that the [plan’s investment committee] acted imprudently by offering higher cost funds and charging higher fees than comparatively cheaper options in the marketplace.” Having said that, she explained that the Tenth Circuit wound up adopting the pleading burden articulated by the Eighth Circuit in Meiners v. Wells Fargo & Company, 898 F.3d 820, 821 (8th Cir. 2018), “particularly its ‘meaningful benchmark’ test.” But Matney was the standard that Judge Sweeney embraced here as the “controlling analysis.”
‘An Inference of Imprudence’
More specifically, Judge Sweeney explained that “Matney stands for the proposition that, ‘to raise an inference of imprudence through price disparity, a plaintiff has the burden to allege a ‘meaningful benchmark’” to which the defendant’s plan can be compared.” Moreover, that “for a comparison to be ‘meaningful’ in the administrative-cost context, the plaintiff must allege facts showing ‘that the recordkeeping services rendered by the chosen comparators are similar to the services offered by the plaintiff’s plan.’” She also cited Matousek v. MidAmerican Energy Company, where she commented that the court rejected the notion that comparison of the defendant’s plan to “industry-wide averages,” such as the generalized figures published in “the 401K Averages Book,” was appropriate, as those “measure the cost of the typical ‘suite of administrative services,’ not anything more.”
She then turned to considering plans that the plaintiffs had positioned as comparators—and quickly found shortcomings in their value as comparisons, due mostly to a lack of specificity with regard to services provided, but also in some cases, differences in assets and/or participant sizes.
‘Meaningful Benchmark’
“Taking all the allegations in the Amended Complaint together, the Court finds that Plaintiffs have failed to adequately identify a ‘meaningful benchmark’ against which to compare the TTEC Plan’s administrative fees,” she concluded. “Working backwards, the Court first finds that Plaintiffs’ allegations regarding the 401(k) Averages Book fail to provide any meaningful benchmark. As Matney makes clear, the 401(k) Averages Book does not provide the ‘like-for-like comparison’ necessary to plausibly allege an excessive fees claim.”
She further explained that “this Court rejects as comparators the various case citations that Plaintiffs point to, as none of those cases present sufficiently meaningful benchmarks to compare to TTEC’s Plan. Putting aside the question of whether pointing to factual allegations discussed in a different case is a sufficient way to plausibly allege the truth of same facts in this case, Plaintiffs’ references to those cases do not reveal the very information that Matney demands to prove the ‘like-for-like comparison’: evidence of ‘similar plans offering the same services for less.’” And she noted that “nothing in Plaintiffs’ citations to those cases, much less in the cases themselves, provide enough information for the Court to find that the plans in question in the cited cases are receiving the same administrative services that the Plan here received from Merrill Lynch or T. Rowe Price.”
In an amended complaint, the participant-plaintiffs here attempted to gloss over differences in the specific services outlined, but Judge Sweeney was having none of that. “…cases like Matousek,” she noted, “upon which the Tenth Circuit relied in Matney, make clear that a plaintiff must ‘identify similar plans offering the same services for less.’” Acknowledging that in Matney the court couched its language in “slightly less categorical terms, stating that the plaintiff must allege ‘that the recordkeeping services rendered by the chosen comparators are similar to the services offered by the plaintiff’s plan’”—Judge Sweeney saw little distinction. “What both cases call for is a close congruence between the services provided by the plaintiff’s plan and any comparator, and differences in the catalog of services provided by each trustee will quickly dissipate the usefulness of the comparator as a benchmark.”
And thus—“because Plaintiffs’ Amended Complaint does not adequately identify a ‘meaningful benchmark’ comparator offering the same services as the TTEC Plan’s trustees at a lower price, Plaintiffs have failed to state a claim for breach of fiduciary duty under ERISA with regard to the administrative and recordkeeping expenses charged to participants”—and Judge Sweeney dismissed the claims that “derive from TTEC’s alleged failure to ‘prudently monitor the Plan’s recordkeeping fees,’ to ‘regularly benchmark the Plan’s recordkeeping fees,’ and to ‘prudently negotiate the Plan’s recordkeeping fees.’”
Single Example, Unspecified Point in Time
As to allegations regarding expense ratios, Judge Sweeney remarked that the plaintiffs had presented “a single example: at an unspecified point in time, the TTEC Plan replaced an existing (unnamed) mutual fund investment option with ‘the T. Rowe Price Overseas Stock Fund,’ even though the unnamed fund that was replaced ‘had substantially outperformed the T. Rowe Price fund in the preceding five-year period and has continued to do so.’” Once again, she turned to Matney and its reliance on the existence of a meaningful benchmark—and found nothing to establish that in the plaintiffs’ suit.
Rather, she explained that their complaint “does not offer any meaningful comparison between the investment objectives, strategies, or risk profiles of the T. Rowe Price Overseas Stock Fund and the unnamed fund it replaced. All that Plaintiffs offer is the fact that the unnamed predecessor fund ‘outperformed’ the T. Rowe Price fund. The simple fact that one fund performed better than another does not suffice to state a claim, as ‘no authority requires a fiduciary to pick the best performing fund.’” She was similarly unimpressed with the attempt to compare that fund’s expense ratio to an average industry expense ratio.[ii]
Judge Sweeney concluded that “because Plaintiffs have not adequately pled any particular breach of fiduciary duty by TTEC with regard to the Plan, the Court further finds that Plaintiffs’ claims alleging collateral breaches of fiduciary duty, such as the duty to monitor other Plan fiduciaries, fails as well. Accordingly, the Court grants TTEC’s Motion to Dismiss in its entirety and dismisses the Amended Complaint without prejudice.” And gave the plaintiffs 14 days to reframe their arguments.
What This Means
We’re often reminded (or find ourselves reminding) that “it’s not just about fees.” And most would agree that what makes a fee for services reasonable (or not) is the services that you get for those fees. That said, for years folks have been describing recordkeeping services as a commodity (including individuals who are leading those enterprises), and plaintiffs attorneys have managed to coast along that argument, frequently describing those services at best as being comparable/identical for plans of a certain size—and at worst as “fungible.”
Well, you can add THIS court to the list of those that demand a certain level of specificity in order to consider whether or not it constitutes a “meaningful” benchmark. It’s clearly a higher threshold for plaintiffs to clear—though it’s not a consistent requirement across all federal court jurisdictions. Still, it seems that plaintiffs should have to do more than simply assert, without more, the notion that all recordkeepers provide the same services—because even when they do, they aren’t provided at the same level.
[i] Plaintiffs were represented by Werman Salas PC and Lieff Cabraser Heimann & Bernstein LLP (the latter a firm that has previously been part of a preemptive “solicitation” (some might call it a “shakedown”) campaign to plan fiduciaries—see https://www.napa-net.org/news-info/daily-news/erisa-litigation-how-low-will-%E2%80%98they%E2%80%99-go).
[ii] She wrote, “Matney rejected the idea that a broad market study like ICI’s provided a meaningful comparator to the expense ratio of a given investment fund, explaining that ‘a comparison to median expense ratios in broad investment strategy categories, without more, does not provide the meaningful benchmark necessary to satisfy a plaintiff’s pleading burden in this context.’”
