A federal magistrate judge has—again—recommended tossing an excessive fee suit against a $4 billion 401(k) plan—this time with prejudice.
While the recommendation still requires the signoff of a district judge, U.S. Magistrate Judge Stephen C. Dries—who considered the case last November and recommended dismissal at that time—basically (again) recommended granting Nestle’s—the $4 billion plan in question—motion to dismiss made in December 2020.
The History
Now, as it’s been awhile, the suit (Guyes et al. v. Nestle USA Inc. et al.) was brought in the U.S. District Court for the Eastern District of Wisconsin in October 2020 by Walcheske & Luzi, LLC on behalf of Lorie M. Guyes—a participant in the plan until April 2020—“individually and as representative of a Class of Participants and Beneficiaries on behalf of the Nestle 401(k) Savings Plan.” As other excessive fee suits have alleged, this one alleges that, “after an inquiry reasonable under the circumstances,” the defendants breached their fiduciary duties by “…among other things: (1) authorizing the Plan to pay unreasonably high fees for recordkeeping and administration (RK&A); (2) authorizing the Plan to pay unreasonably high fees for managed account services; and (3) engaging in self-dealing with regard to administration of the Plan.”
Back in November, a 19-page recommendation (Guyes v. Nestle USA Inc et al., case number 1:20-cv-01560, in the U.S. District Court for the Eastern District of Wisconsin) made relatively quick work in dismissing most of the plaintiff’s claims. Citing the Albert v. Oshkosh decision, he explained that “the complaint in this case does not provide the necessary context to support a plausible recordkeeping claim.” Rather, he noted that “the complaint alleges in conclusory fashion that the recordkeeping fees were excessive relative to the recordkeeping services received.” Commenting that the complaint describes some of the services offered by recordkeepers—maintaining plan records, tracking participant account balances and investment elections, transaction processing, call center support, participant communications, and trust and custody services—and alleges that the defendants “received a standard package of [recordkeeping] services”—he noted that “the complaint does not contain any allegations concerning the specific services performed by the comparator plans’ recordkeepers or any allegations supporting a plausible inference that the plan paid more for equivalent services.”
Amended Complaints
In view of that recommendation, but with some new precedents to consider, Judge Dries comes to a similar conclusion this time, but with some different logic in a 13-page assessment (Guyes v. Nestle USA Inc. et al., case number 1:20-cv-01560, in the U.S. District Court for the Eastern District of Wisconsin). Judge Dries explains that the plaintiff in the case “compares publicly available data for the Nestle plan with thirteen allegedly comparable plans that are supposedly prudent when it comes to recordkeeping fees”—plans that had between about 13,000 to 83,000 participants, had total assets ranging from about $350 million to $17 billion—and which paid a total annual recordkeeping fee of $20 to $35 per plan participant, while Nestle had about 40,000 participants, and was alleged to pay $60/participant. However, based on the comparator plans cited, the plaintiff holds out a fee of $28/participant as reasonable.
The Nestle defendants, once again, turned to Albert v. Oshgosh,[i] but Judge Dries noted that since then, Hughes v. Northwestern University (referred to as Hughes II) had been decided by the United States Supreme Court, with a decision that emphasized the need for a contextual reference for these type allegations. He wrote that Hughes II—“applying a newly formulated pleading standard” reversed excessive fee claims, distinguishing that case from Albert in noting that the complaint alleged that recordkeeping services for all “jumbo plans . . . are fungible and that the market for them is highly competitive.” He continued, “In other words, unlike the plaintiffs in Albert, the plaintiffs in Hughes II provided the required context to allege that their plan’s recordkeeping fees ‘were excessive relative to the recordkeeping services rendered.’”
‘Plausible’ Allegations
Dries noted that in the amended complaint here, the plaintiff had specifically alleged that services provided to all plans in the mega market were fungible, or so much so that Nestle could have negotiated for a lower fee for those services. But then—and “Contrary to Nestle’s suggestion,” Dries said that the plaintiff did not need to describe the specific recordkeeping and administrative services received by the Nestle plan and the comparator plans. Dries continued to explain that “In Hughes II, the Seventh Circuit clarified that level of specificity is not required at the pleading stage. The complaint in Hughes II alleged that there were ‘numerous recordkeepers in the marketplace who [were] equally capable of providing a high level of service to large defined contribution plans like the Plans’”—and that court’s determination Dries said “…suggested that the quality or type of recordkeeping services provided by other recordkeepers was comparable to that of the plan’s recordkeepers.”
“Pleading that recordkeeping fees were too high, however, is not sufficient to state an ERISA duty-of-prudence claim,” Dries noted. “Rather [citing Hughes II], the plaintiff must ‘plead[] sufficient facts to render it plausible that [the plan] incurred unreasonable recordkeeping fees.’” He commented that, “Unlike the factual allegations in Hughes II, the alleged facts in this case do not render it plausible that the proposed alternative fee—here $28 per participant—was a reasonable recordkeeping fee.”
Dries then basically commented that while the plaintiff arrived at the $28/participant figure from a trend line based on the fees paid by 13 other plans (again, assuming that recordkeeping services essentially are the same for all “mega” 401(k) plans)—he noted just how much difference there was between Nestle and the 13 comparator plans. Dries explained that “the so-called comparators vary significantly in size”—and that “because the plans are not similarly sized, Guyes’ trend line cannot be used to derive a reasonable fee, and she therefore has no basis to allege that the plan’s recordkeeping fees were excessive relative to the services rendered.”
(Not) Apples to Apples
“Guyes more or less concedes that she has not made an apples-to-apples comparison,” Dries concludes. “She says that she calculated the fees of the thirteen comparator plans using the Form 5500 for each plan. However, for the Nestle plan, she used the Form 5500 for Nestle in the USA Savings Trust—that is, a master trust that covers multiple defined contribution plans (including the Nestle plan). As Nestle correctly points out, Guyes “does not say how (if at all) she determined what portion of the fees disclosed in the Form 5500 for the Master Trust were allocated to the [Nestle] Plan.” Moreover, since the Nestle plan was part of a master trust, it “significantly differentiates that plan from the comparator plans. Without the comparison to fees paid by other plans, Guyes simply alleges in conclusory fashion that the Nestle plan paid too much for the same quality of services and failed to regularly solicit competitive bids for recordkeeping fees. Those allegations, however, are not enough to cross the line from possibility to plausibility,” Dries concluded.
As for the duty to monitor claims, Dries noted that those were derivative of the claims raised above, and as they were being dismissed (or at least that was the recommendation), he recommended that these claims be dismissed as well.
In concluding his analysis, Judge Dries notes that the plaintiff did not respond to an argument by Nestle that the suit be dismissed with prejudice—and that “because Guyes has already amended her complaint once, and because she has not requested leave to amend again, I recommend that this action be dismissed with prejudice.”
Now we’ll see what the presiding judge makes of the recommendation.
[i] Judge William C. Griesbach—who was the judge in the Oshkosh case—dismissed the lawsuits against both Prevea (Nohara v. Prevea Clinic, Inc., 2022 BL 406225, E.D. Wis., No. 2:20-cv-01079, 11/14/22) and ThedaCare—but left the door open for the plaintiffs in those cases to file amended complaints. In doing so, Judge Griesbach followed the recommendations of the same Magistrate Judge Stephen C. Dries, who also made the recommendations above.
