Another federal court has found that plaintiffs failed to allege “sufficient facts from which the Court could plausibly infer” that recordkeeping fees were excessive relative to the services provided, or made imprudent investment decisions.
The plaintiffs here are current and former employees of DENSO International America, Inc. (DENSO), a U.S. subsidiary of a global manufacturer of automotive components. U.S. District Judge Mark A. Goldsmith noted that the suit alleged breach of the duty of prudence and breach of the duty to monitor, and that they based the former on four separate breaches, specifically that the DENSO defendants:
(i) allowed the plan to pay excessive recordkeeping fees to the plan recordkeeper;
(ii) retained a higher cost share class for one fund offered in the plan;
(iii) selected and retained two funds with investment management fees higher than fees for similarly sized plans; and
(iv) selected and retained an underperforming stable value fund in the plan.
As for the latter, Judge Goldsmith said that the plaintiffs “allege that DENSO and its president failed to effectively monitor the committee members in regard to their decisions about recordkeeping fees, investment management fees, and the performance of the stable value fund.”
The Standards
Before turning to the particulars of the case (England et al. v. DENSO International America Inc. et al., case number 2:22-cv-11129, in the U.S. District Court for the Eastern District of Michigan), Judge Goldsmith noted that “the duty of prudence requires plan administrators to select initial investment options with care, to monitor plan investments, and to remove imprudent ones.” Moreover, he cited other cases that explained that “The test for determining whether a fiduciary has satisfied his duty of prudence is whether the fiduciary, at the time [he or she] engaged in the challenged transactions, employed the appropriate methods to investigate the merits of the investment and to structure the investment.”
Finally, he noted that “Thus, in assessing a plan administrator’s prudence, ‘[t]he focus is on each administrator’s real-time decision-making process, not on whether any one investment performed well in hindsight’”—and, to wrap things up, he cited the recent-ish Supreme Court decision in Hughes v. Northwestern that the determination as to whether “plaintiffs have plausibly alleged a violation of the duty of prudence ‘will necessarily be context specific.”
The Case Review
And then, turning to the particulars, Judge Goldsmith turned to Smith v. CommonSpirit Health case. A case that you may remember was not only the first excessive fee case to come to trial following the Supreme Court’s Hughes v. Northwestern decision, it also was one of the first that didn’t simply accept at face value the mere assertion that certain aspects of recordkeeping services fungible, and acknowledged not only that there are rational reasons for selecting active management that may well justify higher fees, but that there are factors beyond plan size that warrant consideration in evaluating the reasonableness of fees.
Judge Goldsmith noted the DENSO fiduciary defendants argued that “an ERISA plaintiff must offer specific details about the nature and scope of the services that the recordkeeper provided, and Plaintiffs offer no specifics about the services that the DENSO plan or any comparator plan received in exchange for the fees they paid.” Further, they had argued that the plaintiffs “try to circumvent this pleading requirement through ‘blanket allegations’ that all mega plans purchase the same menu of recordkeeping services and that Empower does not appear to have provided any unusual services to justify the higher fees”—allegations, they assert, were “unaccompanied by any factual support indicating that the fees were excessive relative to the services they covered.”
Judge Goldsmith then recounted the plaintiffs’ allegations/assertions, basically claiming that “any minor variations in the level and quality of RKA services . . . provided by recordkeepers ha[ve] little to no material impact on the fees charged by recordkeepers,” alongside comparisons of average fees for comparably sized plans, and assertions that “the 5500 forms and 404(a)(5) participant disclosures show that Empower ‘did not provide any services at any higher level that were not also part of the standard package of RKA services provided by all recordkeepers to mega plans.’”
‘Characterized as Conclusory’
However, Judge Goldsmith observed “courts have characterized as conclusory the same allegations that Plaintiffs rely on to support their claim—that mega plans receive nearly identical recordkeeping services and that any difference in services is immaterial to the price of those services—and they have found that these allegations are insufficient to permit the Court to infer that particular recordkeeping fees were excessive compared to the services rendered.” And, he concluded “the same reasoning applies here. Plaintiffs do not set forth facts to support the contention that the RKA services provided to mega plans are generally the same or that, for the 15 comparator plans in the chart, the recordkeepers provided essentially the same services as Empower provided to the DENSO plan. The complaint provides no details regarding the specific types or quality of services that the comparator plans received relative to the DENSO plan.” Judge Goldsmith also expressed skepticism about the comparability of data from the Form 5500s.
And then he noted that, “Even if variations in services have no material impact on recordkeeping fees, Plaintiffs’ comparable plans do not match the DENSO plan relative to the number of participants or asset sizes. Ultimately, he wrote, “The differences between the comparator plans and the DENSO plan ‘raise serious doubt as to the plausibility of how the purported comparator plans are indeed comparable.’”
In sum, “Plaintiffs present conclusory allegations regarding the similarity in services for mega plans, no facts concerning the actual services that the fees for the DENSO plan or the 15 comparator plans covered, and comparator plans that differ in number of participants and asset sizes. Therefore, they do not set forth facts “relevant to determining whether a fee is excessive under the circumstances”—and therefore Judge Goldsmith said, “the Court cannot draw a plausible inference of imprudence on the recordkeeping claim, and Defendants are entitled to dismissal of the claim.”
Higher Cost Share Class Fund
Another recent case—Albert v. Oshkosh—came to the fore next, as Judge Goldsmith noted that “Plaintiffs in this case present the same argument as the unsuccessful plaintiffs in Albert and subsequent cases relying on Albert: that the plan should have purchased higher-cost share classes of certain funds that had greater revenue sharing credit, which would offset that higher cost to make the net expense lower. The Court agrees with the court in Albert that, because a prudent ERISA fiduciary might choose an investment option based on revenue sharing but is not required to do so, and because there is not necessarily a one-to-one correlation such that revenue sharing always redounds to investors’ benefit, Plaintiffs have not set forth sufficient facts to make their claim plausible.” And, once again, Judge Goldsmith wrote that “Plaintiffs do not provide a sufficient basis for distinguishing their claim from the claims at issue in the Albert line of cases.”
Plaintiffs here allege that it was imprudent for Defendants to select a less expensive share class for one of the funds in the plan and that Defendants should have offered a more expensive share class to take advantage of potential revenue sharing,” Goldsmith continued—and didn’t see the connection, and dismissed that claim as well.
Funds with Higher Investment Management Fees
Judge Goldsmith noted that “the Sixth Circuit has explained that “[p]lan administrators . . . have considerable discretion in choosing their offerings and do not have to pick the lowest-cost fund of a certain type where the long-run performance of another fund had the reasonable prospect of surpassing it.” He went on to comment that “Disappointing performance in the near term and higher costs do not by themselves show deficient decision-making, especially when we account for competing explanations and other common sense aspects of long-term investments.”
Similarly, he explained that “Plaintiffs have not stated a plausible claim that Defendants were imprudent by failing to consider and select lower-cost alternatives. As in Forman, they compare the investment management fees for two funds in the plan to ‘available alternatives in the same investment style’ that charged lower fees.” He continued to comment that “they do not set forth facts related to the distinct goals and distinct strategies of the investment options or offer any content that indicates that the available alternatives were otherwise equivalent to the selected funds. They do not present facts on the different aims, risks, or potential rewards of the funds and the alternatives. And unlike in Forman, Plaintiffs offer no allegations about the performance of the alternatives. They do not allege that either fund in the plan underperformed its benchmark or that the allegedly prudent alternatives performed better. They have, therefore, not provided a sound basis for comparison.”
Instead, he commented that “Plaintiffs have pointed only to alternative funds with lower costs that existed during the class period, but higher costs alone do not raise the inference that Defendants were imprudent by selecting or retaining the two allegedly higher-cost funds.” And, dismissing this claim as well, Judge Goldsmith noted that “Plaintiffs here, conversely, set forth no facts on the performance of the comparator funds or the potential risks and rewards of the funds.”
Underperforming Stable Value Fund
Citing a number of precedents that echoed the sentiments above, Judge Goldsmith noted “Merely pointing to another investment that has performed better in a five-year snapshot of the lifespan of a fund that is supposed to grow for fifty years does not suffice to plausibly plead an imprudent decision—largely a process-based inquiry—that breaches a fiduciary duty.”
Instead, “Here, as Defendants note, Plaintiffs focus only on the first two years of performance for a fund that is supposed to grow for several decades. They set forth only an after-the-fact performance gap between a benchmark comparator within a narrow window of time. The two-year snapshot of underperformance is insufficient to plausibly plead that the investment should never have been selected, became imprudent over time, or was otherwise unsuitable for the goals of the fund.” And dismissed these claims as well.
Breach of Fiduciary Duty to Monitor
Having dismissed the fiduciary breach claims, Judge Goldsmith wrote “plaintiffs have failed to state plausible claims for breach of the duty of prudence, and, therefore, the Court dismisses their claims for breach of the duty to monitor.”
What This Means
Just about the time you think the pendulum has swung back toward a less demanding standard for determining facts sufficient to establish a “plausible” case, another emerges that relies on the more demanding standard found in CommonSpirit and Albert/Oshkosh. So, for those keeping score… well, it’s a good reminder that where you bring suit may matter as much as what you bring suit about.
