A federal judge has tossed a suit brought by participants in PNC Financial Services Group’s 401(k)—for failure to make their case.
The suit—brought by former participants Henrena Johnson and Barbara Demps—alleged that fiduciaries of the $5.7 billion, 6,600 participant plan “caused the Plan to pay out excessive administrative and recordkeeping fees,” and also “caused the Plan to compensate PNC Financial Services, at an average of over $235,000 per year from 2014 to 2018, purportedly for ‘certain administrative services’ performed as the Plan Administrator.”
More specifically, the plaintiffs here (Johnson v. PNC Fin. Servs. Grp., Inc., W.D. Pa., No. 2:20-cv-01493, 8/3/21) “assert that Plan participants paid, on average, a per-year administrative fee which rose from about $85 to about $90 from 2014–2018,” while “recordkeeping fees, paid to Alight Solutions LLC (formerly Hewitt Associates LLC), the Plan’s recordkeeper, which account for the majority of the total administrative fee, in general fell from about $57 to $51 over the same period.”
The Case
In outlining the case made by the plaintiffs, Judge Christy Criswell Wiegand of the U.S. District Court for the Western District of Pennsylvania noted their citation of data from The 401k Averages Book and their assertion that “much smaller plans—with just 100 participants and $5 million in assets—pay, on average, only $35 per participant, per year, in recordkeeping fees.” Then she noted that “Plaintiffs contend, without any supporting reference in the Complaint, that the Plan should have been able to negotiate a recordkeeping fee of no more than $14 to $21 per participant, based upon the amount comparable plans were paying for the same or similar services during the relevant period.”
More to the point, she commented: “Plaintiffs assert, therefore, that Defendants failed to engage in virtually [any] examination, comparison, or benchmarking of the recordkeeping and administrative fees of the Plan to those of other similarly sized defined contribution plans, or were complicit in paying grossly excessive fees,” and, had they done so, “Defendants would have known that the Plan was compensating its service providers at levels inappropriate for its size and scale.”
‘Summary’ Judgments
As we’ve seen before in motions to dismiss a claim, “the court accepts as true a complaint’s factual allegations and views them in the light most favorable to the plaintiff,” and “although a complaint need not contain detailed factual allegations to survive a motion to dismiss, it cannot rest on mere labels and conclusions.”
Judge Wiegand then proceeded to outline the three-step process that the U.S. Court of Appeals for the Third Circuit has established for district courts to follow in analyzing this type motion. First, the court must “tak[e] note of the elements a plaintiff must plead to state a claim.” Second, the court should identify allegations that, “because they are no more than conclusions, are not entitled to the assumption of truth.” Finally, “where there are well-pleaded allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement for relief.
“Accepted as true, Plaintiffs’ allegations stop short of crossing the threshold from possible to probable,” Judge Wiegand continued. “Plaintiffs contend that imprudence can be inferred from the comparison between the direct recordkeeping and administrative costs of smaller plans with the record keeping and administrative fees Plan participants pay. However, the Complaint notes that ‘The Plan pay[s] these [recordkeeping and administrative] expenses out of Plan assets, either directly from participant accounts or indirectly through revenue sharing.’”
She then cited a point made by the defendants—that the $35 figure “accounts for only direct recordkeeping fees; when revenue sharing (i.e., indirect fees) is included, smaller plans pay much more according to The 401k Averages Book.” She then commented that “the asserted $14 to $21 average recordkeeping fee Defendants allegedly should have been able to obtain, which Plaintiffs state comes from Moitoso, 451 F.Supp.3d at 214, is premised on unspecified recordkeeping services provided by Fidelity to other plans of over $1,000,000,000 in assets where Fidelity is the recordkeeper without any comparison to the services provided to the Plan by Alight.”
Possible, Not Plausible?
She went on to acknowledge that “…while a high fee may reflect imprudence even if the fee falls year-over-year, the fact that the Plan’s recordkeeping fees trend downward for the period at issue points in the direction of prudence rather than imprudence. Thus, without additional detail about the Plan’s fee structure and the services received in exchange for those fees, Plaintiffs’ allegations raise the possibility that Defendants acted imprudently, but stop short of stating a plausible claim for breach of fiduciary duty. Accordingly, the portion of Count I that asserts a claim for breach of the duty of prudence will be dismissed.”
At that point, all of the plaintiffs’ arguments basically unwound. As Judge Wiegand noted, “Importantly, [t]o state a loyalty-based claim under ERISA ... a plaintiff must do more than simply recast purported breaches of the duty of prudence as disloyal acts.” Moreover, she explained that “[T]he duty of loyalty is grounded in the motivation driving a fiduciary’s conduct, and liability will not lie where a fiduciary’s decisions were motivated by what is best for the [plan], even if those decisions also incidentally benefit the fiduciary.” Thus, for example, a plaintiff must do more than “identify a potential conflict of interest from the defendant’s investment in its own proprietary funds, as a plan sponsor may invest all plan assets with a single company … and may invest in funds it controls as long as it abides with the specific exemptions governing self-dealing.”
She concluded the plaintiffs had failed to state a claim that Defendants breached their fiduciary duties under ERISA, and “consequently have also failed to state claims for either failure to monitor fiduciaries and co-fiduciary breaches” (Count II) or “in the alternative, liability for participation in the breach of fiduciary duty” (Count III).”
All that said, she concluded that “Plaintiffs have requested leave to amend in the event of dismissal, noting that they stand ready to add further allegations … should the Court require further amplification of Plaintiffs’ claims.” Since the law provides that permission to amend should be “freely given when justice so requires,” she granted the plaintiffs an opportunity to file an amended complaint.
What This Means
It is not unusual in this type litigation for plaintiffs to simply hold out pricing for plans deemed to be of comparable size, point out the contrast between what those figures and the defendants’ participants paid, and consider the mere fact that there is a differential to be proof of fiduciary breach. As the judge pointed out in this case, however, there’s more to the costs of running a plan than sheer size—and if that’s a nuance some courts miss, this one didn’t.
