LinkedIn Plaintiffs Mostly Fall Short, But Get Another Shot

The plaintiffs in an excessive fee suit got to have their day in court—but the defendants (mostly) made their case.

The plaintiffs here (In re: LinkedIn ERISA Litigation, case number 5:20-cv-05704, in the U.S. District Court for the Northern District of California) are two former and one current participant of the LinkedIn Corporation 401(k) Profit Sharing Plan and Trust. For the most part the allegations made in the suit (filed in August 2020) are the “usual” suspects—criticisms regarding the use of something other than the lowest priced share class, the choice of active management when suitable passive alternatives were (ostensibly) available, a reliance on mutual funds when (less expensive) collective investment trusts existed—not to mention issues with revenue sharing, claims of improper dealings with the recordkeeper and a general failure to “leverage the size of the Plan to negotiate for lower expense ratios for certain investment options maintained and/or added to the Plan during the Class Period…” Oh, and the plaintiffs here are represented by Capozzi Adler PC[i] and Rosman & Germain LLP.

More specifically, and as U.S. District Judge Edward J. Davila described it, there were two main theories of liability for breach of fiduciary duties: offering imprudent and underperforming investments such as the Freedom Fund Active Suite and AMCAP Fund, and imprudently offering overly expensive investment options with excessive and unreasonable management fees. None of the plaintiffs were personally invested in the Freedom Active Suite or the AMCAP Fund—“In fact, there is no information in the complaint about any of the Plaintiffs’ investments,” Judge Davila wrote. “Accordingly, to the extent Plaintiffs’ claims are based on offering imprudent investment options, Plaintiffs have not demonstrated Article III standing,” he concluded.

Excessive Management Fees

“To the extent Plaintiffs’ claims are based on excessive management fees, Plaintiffs need not plead their individual investment in any particular fund if those management fees were charged to all Plan participants regardless of participants’ specific investments,” he continued. “However, Plaintiffs do not point to any allegations in the complaint that so expressly state. The complaint says only: ‘The Plan pays Plan expenses from Plan assets. Each participant’s account is charged with the amount of distributions taken and an allocation of administrative expenses.’” Judge Davila went on to note that “this allegation does not make clear whether these ‘administrative expenses’ concerns investment management fees paid to a fund manager, recordkeeping expenses paid to the Plan recordkeeper, or some other fees paid to the Plan trustee. Second, assuming that the ‘administrative expenses’ are the same as investment management fees, this allegation does not explain whether a participant is charged these expenses only for the funds they personally invested in, or whether expenses for all funds are paid for by all Plan participants, regardless of each individual participant’s actual investments.” Ultimately, he concluded that “as currently pled, the complaint does not provide facts demonstrating that Plaintiffs have suffered a concrete injury to their accounts that would provide standing to pursue a plan-wide mismanagement theory based on excessive management fees”—and dismissed the complaint for lack of standing.

Judge Davila then turned to the issue of whether the plaintiffs “have alleged sufficient facts to give rise to a reasonable inference that LinkedIn engaged in conduct suggesting a breach of fiduciary duty.” He noted that the suit alleged that the Active and Index Suites “share the same management firm and nearly identical glide paths, and that as TDFs, both families are inherently actively managed—the difference appears to be the degree to which they are actively managed.” This, he concluded was sufficient “at the pleading stage to create the inference that the Index Suite could serve a suitable comparator for the Active Suite.”

‘More Than Mere Underperformance’

He went on to note that the “Plaintiffs have alleged more than mere underperformance during the relevant period. For example, Plaintiffs have alleged facts concerning the 2013/2014 strategy overhaul that created more risk for investors; that investors have been losing confidence in the Active Suite for years, as indicated by an estimated $5.4 billion in capital outflows in 2018 and approximately $16 billion over the prior four years; and that media reports detailing investors’ declining confidence in the Active Suite, such as the 2018 Reuters special report discussing the Active Suite’s ‘history of underperformance, frequent strategy changes and rising risk.’

“Accordingly,” he wrote, “the Court finds that Plaintiffs have adequately stated a claim for breach of prudence based on the inclusion and retention of the Freedom Active Suite.”

However, he cited as “sparse” the plaintiffs’ allegations concerning the AMCAP Fund which criticized: (1) its poor performance compared to its index benchmark; and (2) its expense ratio. “With respect to the expense ratio, the complaint says only that the expense ratios were 69 basis points (0.69%) and 34 basis points (0.34%) for the R4 and R6 shares, respectively,” he wrote. 

‘Barebones Allegations’

“There are no other facts that contextualize those expense ratios—in sharp contrast to other allegations elsewhere in the complaint,” Judge Davila noted. “These barebones allegations concerning the AMCAP Fund’s expense ratios do not create a plausible inference of excessive expense ratios. Plaintiffs have therefore pled nothing more than the conclusory underperformance of an actively managed fund as compared to a market index benchmark, which is insufficient on its own to state a claim for breach of prudence.” And thus, he concluded that “the Court cannot reasonably infer from these allegations that LinkedIn acted imprudently in selecting and retaining the AMCAP Fund.

“In other words,” he wrote, “Plaintiffs may have stated a claim for a breach of prudence based on the Freedom Active Suite, but that does not free them from the requirement of pleading sufficient facts to state a plausible claim for a breach of prudence based on the AMCAP Fund.”

As for the implications of whether a switch to the institutional share class in 2018 was, as the plaintiffs alleged, a “tacit admission” indicative of a breach of prudence. Judge Davila was not persuaded, commenting that it was “…equally likely that the 2018 switch demonstrates that LinkedIn was, in fact, fulfilling its fiduciary duty to monitor and remove imprudent options from the Plan, and Plaintiffs have therefore not nudged their claims across the line from conceivable to plausible.” And thus, he concluded that the plaintiffs “have not alleged sufficient facts from which a claim for breach of prudence based on a failure to offer the American Beacon Small Cap Value institutional share class instead of the investor share class may be inferred.” 

Disloyalty Claims

The plaintiffs also argued that “the circumstantial facts alleged in the Complaint also support a disloyalty claim because the Plan’s service provider, Fidelity, is directly affiliated with the Active Suite and other investment options, so the retention of those funds despite their issues can be plausibly traced to disloyal conduct.” Judge Davila found “multiple problems with this argument”: no facts in the complaint that explain how the Plan trustee, Fidelity Trust, and the provider of the Freedom Active Suite, Fidelity Research, are connected, such that the former benefits from management fees paid to the latter, and secondly, “…assuming that Fidelity Trust benefits from management fees paid to Fidelity Research, there are no facts in the complaint that would suggest that LinkedIn acted with an eye toward these Fidelity entities’ interests instead of Plan participants’ interests, aside from the fact that the Plan included the Freedom Active Suite among other investment options. Although the complaint explains how Fidelity Research benefits from retention of the Active Suite, it does not provide facts from which it may be inferred that LinkedIn selected funds or charged fees to benefit themselves or Fidelity Research.” That said, Judge Davila concluded that the Plaintiffs have adequately pled a claim for breaches of the duties of prudence and loyalty based on the Freedom Fidelity Active Suite allegations only.

Now, while the plaintiffs may not have managed to be fully persuasive—or as Judge Davila described the situation, “the Court cannot say that the defects described above cannot possibly be cured by the allegation of other facts,” he gave the plaintiffs another chance—“leave to amend to add facts that would establish standing”—that would “support their theories of a breach of the duty of prudence based on the AMCAP Fund’s underperformance, the American Beacon Small Cap Value share class, and excessive management fees, as well as a breach of the duty of loyalty based on recordkeeping fees paid to Fidelity entities.”

In sum, while the plaintiffs mostly came up short, they’ll get another shot at making their case—by December 16.

What This Means

Not much, though the perspectives on the sufficiency (or lack thereof) of their allegations bear noting. This was one of a series of filings in which the allegations are largely copied from one suit to another, rich on familiar allegations, but noticeably short on specifics, as Judge Davila commented repeatedly. These suits have had difficulty getting past the summary judgment phase as a result. Whether this one will or not remains to be seen.