“An exceptionally careful and well-informed” process has helped a plan fiduciary get most of the claims in an excessive fee suit dismissed before trial.
The suit, filed in January 2016 in the District of Colorado by the law firm of Schlichter Bogard & Denton, alleged that Oracle allowed the plan recordkeeper Fidelity to be paid between $68 to $140 per participant rather than what the plaintiffs said would be a reasonable per head fee of $25 for a plan the size of Oracle’s. According to the complaint, the plan’s participant count increased from 38,000 in 2009 to about 60,000 today, and over that same time period, the plan’s assets increased from $3.6 billion to more than $11 billion.
The suit also claimed that the plan, which had Fidelity as its recordkeeper since 1993, had not been put out for bid on those services in a quarter century, and that the plan provided “at least 3 imprudent investment options,” which it says “consistently underperformed their designated benchmarks, consistently underperformed the majority of other funds of the same investment style, charged excessive fees, and paid revenue sharing to Fidelity far beyond a reasonable rate for the services provided.”
Judgment, Summary
However, Judge Robert E. Blackburn of the U.S. District Court for the District of Colorado, in reviewing the defendants’ claim for summary judgment, noted that “the Committee both monitors the fees paid to Fidelity (the designated recordkeeper and trustee), and “guides the selection, monitoring, and removal and replacement of Plan investments” – “decisions,” the ruling notes, “are informed by an Investment Policy Statement (“IPS”) and assisted by an independent consultant, Mercer Investment Counseling, which assists the Committee in monitoring and managing the Plan’s investment options and costs”.
“No reasonable jury could find anything imprudent in this decisionmaking process,” Blackburn said in his March 1 order granting Oracle partial summary judgment. “If anything, it seems exceptionally careful and well-informed.”
Time “Line”
A little more than a year ago, in certifying the suit as a class action, Judge Blackburn noted that he had defined all three subclasses to have commenced on January 1, 2009, albeit at that time “noting it was premature to determine at that juncture whether plaintiffs could establish facts sufficient to toll limitations.” However, he now concluded that, the plaintiffs having “failed to adduce sufficient evidence in that regard,” any claim based on conduct occurring before January 22, 2010 (six years beyond the filing of the suit) was “timebarred.”
In response to plaintiff arguments that the plan’s 2009 Form 5500 didn’t reveal how much Fidelity was paid, and that the plan’s 2012 participant fee disclosure misrepresented the fees, Judge Blackburn concluded that “neither argument has traction.” He pointed to other parts of the former that “substantiates the amount of “eligible indirect compensation,” including revenue-sharing, paid to Fidelity,” obviating the plaintiffs’ claim of concealment – particularly since the named plaintiffs acknowledged they never saw the form (and thus could not have been misled). Blackburn also dismissed the impact of the participant disclosure, noting that the plaintiffs were reading the statement about administrative fees “out of context,” and pointing to other parts of the disclosure that detailed expense ratios of the funds in the plan. “Plainly these matters are not concealed,” Blackburn commented.
With regard to the claim that the defendants failed to monitor the recordkeeping fees, specifically that “allowing Fidelity to recoup recordkeeping fees based on a percentage of the Plan’s assets, rather than on a fixed per-participant amount, resulted in unwarranted and excessive increases to Fidelity’s compensation as the Plan grew in size, without a corresponding increase in the services rendered,” Judge Blackburn found those allegations “untenable.” Blackburn went on to note that the plan committee, “together with representatives of Mercer and Fidelity and outside counsel” met at least quarterly. He explained that quarterly reports were produced for those meetings, and that those reports included the expense ratios for each fund in the plan, as well as the administrative fees paid, both in total, and on a per-participant basis.” Moreover, Fidelity had itself provided benchmarking data in 2009, 2010, 2013 and 2016 showing the per-participant recordkeeping fees and how the total administrative fees paid by the plan compared to those paid to comparable Fidelity clients, as well as other comparisons the plan made with other benchmarking surveys.
Consider Actions
“Plaintiffs argue these actions were insufficient because there is, they claim, little evidence that the Committee ever specifically considered the fees paid to Fidelity on a per-participant basis or requested Mercer perform an analysis of the reasonableness of Fidelity’s recordkeeping fees on a per-participant basis,” Blackburn wrote. “Plaintiffs apparently divine this fact from the absence of a specific mention of these issues or documents in the minutes of the Committee’s meetings. However, they ignore testimony to the effect that such information, in fact, was reviewed at every quarterly meeting, with no expectation that such review necessarily would be reflected in the minutes.” To Judge Blackburn’s eyes, it was “… abundantly clear the Committee regularly did consider information regarding the Plan’s recordkeeping costs as a percentage of total costs, a figure which declined during every year of the class period,” he wrote, going on to note that “not coincidentally, the per-participant costs also decreased significantly during this time.”
As for the plaintiffs’ claims that there was no negotiation of fees, Judge Blackburn said those claims “…appear to be based on an amorphous, but artificially narrow conception of what “negotiation” must look like,” noting that in 2011, Oracle received an annual expense reimbursement credit of nearly a quarter million dollars to offset administrative costs, and that the following year the plan and Fidelity “replaced that program with a revenue credit program under which it paid the Plan $4.4 million as a revenue credit and agreed that in the future excess revenues would be credited back to participant accounts on a pro rata basis,” at the same time agreeing to a per-participant fee target of $30.
Credits “Call”
Blackburn went on to cite additional credits under the program of some $8.9 million up through 2017, along with “other fee waivers and cost reductions from Fidelity during the class period.” Even then, Blackburn notes that “to get beyond summary judgment, plaintiffs would have to adduce facts demonstrating that Fidelity’s recordkeeping fees were unreasonable compared to what was available in the market, leading the Plan to suffer compensable losses.”
However, Judge Blackburn said they did not do this because their “evidence as to the purported unreasonableness of Fidelity’s recordkeeping fees is premised on the expert opinion of Michael Geist, who generated a table of what he claimed to be reasonable per-participant recordkeeping fees for each year of the class period, to which he compared the fees paid by the Plan.” But since Geist “failed to disclose the methodology by which he derived these allegedly more reasonable recordkeeping fees, the court struck these opinions” in a hearing in January. And, lacking that, Judge Blackburn determined that there was “no evidence to suggest that defendants’ alleged lack of prudence caused losses to the Plan. Absent such proof, these aspects of plaintiffs’ breach of fiduciary duty claim would fail even if the evidence substantiated an actual lack of prudence on defendants’ part, which it does not.”
As for failing to put the recordkeeping services out to bid, plaintiff expert Geist testified that that “prudent fiduciaries typically solicit” RFPs at least once every three years. Judge Blackburn wasn’t persuaded, however, writing “While Mr. Geist’s opinion is some evidence that prudence requires regular resort to an RFP, it seems somewhat myopic,” proceeding to cite case law (including the recent Sweda v. University of Pennsylvania and the less recent Hecker case) in noting that “nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund.”
Even then, and “assuming arguendo Mr. Geist’s opinion on this matter is sufficient to create a genuine dispute of material fact as to liability, without his further opinion that less costly alternatives were available, plaintiffs have no evidence that the Plan could have paid less for recordkeeping services than it did, and therefore that it suffered compensable losses,” Blackburn wrote, concluding that with an evidence of damages, this claim also came up short.
Burden of Proof
As for the assertion that the Committee never solicited or received an opinion that Fidelity’s fees were reasonable, Blackburn said it “misapprehends the burden of proof,” and also dismissed this claim, noting that the “Tenth Circuit has made abundantly clear that the plaintiff in an ERISA breach of fiduciary duty suit “assume[s] the burden of proof on each element of its claim.” In an interesting side note, that issue - who bears the burden of proof in such cases is at the heart of a petition for a hearing by the United States Supreme Court.
Dispensing with claims of a breach of their duty of loyalty (allegedly evidenced by allowing the plan to pay excessive fees to Fidelity, who happened to be a customer of Oracle), Judge Blackburn noted that a conflict of interest is not a per se breach, but required a showing of “actual disloyal conduct,” here meaning a failure to obtain a lower recordkeeping fee, which he had already rejected as a claim.
As to implications that there was any type of quid pro quo on services, Judge Blackburn noted that there was “absolutely no evidence of any directives, suspect or otherwise, flowing back from the sales team or senior management to the Plan. At best, plaintiffs can say only that Committee members were “aware” of Oracle and Fidelity’s business relationship,” characterizing an attempt to draw any further inference would be “nothing more than rank speculation.”
Holdings Holding
As noted above, the suit also specifically challenged the retention of three funds; the Artisan Small Cap Value Fund, the PIMCO Inflation Response Multi-Asset Fund and the TCM Small-Mid Cap Growth Fund.
With regard to the PIMCO fund, since no named class representative invested in that fund, Judge Blackburn dismissed the claim. As to the other two funds, Judge Blackburn noted that “…although defendants have presented voluminous and arguably compelling evidence suggesting they undertook thorough, informed, and reasonable approaches in deciding both whether to invest in these funds initially and whether and when to divest once they began to underperform, the expert opinions of Gerald Buetow are to the contrary. Defendants have not challenged these opinions, and they are sufficient to create genuine disputes of material fact for trial.”
On the other hand, regarding the TCM fund, Judge Blackburn noted that the alleged breach was the inclusion of the fund in the plan, a decision consummated in November 2009, outside of ERISA’s statute of limitations. However, he noted that the “allegedly imprudent decision to retain the TCM Fund despite its poor performance implicates events which occurred after the limitations accrual date,” and that claim “remains viable.”
All in all, Judge Blackburn left for trial (1) the allegedly imprudent investment in the Artisan Fund, (2) the allegedly imprudent retention of the TCM Fund and (3) the alleged failure to monitor the breach of fiduciary duty in the retention of these two allegedly imprudent investments.
All other claims in the suit were dismissed with prejudice.
The case is Troudt v. Oracle Corp., D. Colo., No. 1:16-cv-00175-REB-SKC, 3/1/19.
