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Plan Fiduciaries Fend Off Another 401(k) Excessive Fee Suit


Citing a recent Seventh Circuit decision, a federal judge has dismissed yet another 401(k) excessive fee suit.

More specifically, U.S. District Judge Jane Magnus-Stinson granted Eli Lilly’s motion to dismiss the suit with prejudice—at least participant-plaintiff Jennifer Probst's claims against the company, its board of directors, its benefit committee and its fund advisory committee. Probst, a senior sales representative at Eli Lilly, according to the suit, had claimed the defendants breached their fiduciary duty to the $8.2 billion plan by permitting excessive record-keeping fees for the 401(k) plan. Interestingly enough, her proposed class claims were dismissed without prejudice. More on that in a minute.

Judge Magnus-Stinson started (Jennifer M. Probst v. Eli Lilly and Co. et al., case number 1:22-cv-01106, in the U.S. District Court for the Southern District of Indiana) by noting the standards for review of a motion to dismiss as outlined in the case of Albert v. Oshkosh, notably that, “Courts apply a careful, context-sensitive scrutiny of a complaint's allegations to divide the plausible sheep from the meritless goats. Because the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.”

Cautionary Note?

But then noted of the allegations made by Plaintiff Probst—that “only some of which the Court must accept as true at this time”—but then, in a footnote acknowledged, “While the Court is cognizant of its general duty to accept Ms. Probst's allegations as true when considering Lilly's Motion to Dismiss, it is not required to accept legal conclusions or allegations that are conclusory or implausible”—which, of course, means that the court found those aplenty in the suit.

She then turned to outlining both how defined contribution plans work, and the type(s) of services recordkeepers provide—largely just reciting claims/positioning provided by the plaintiff in the suit regarding process/pricing and review. She noted that participant-plaintiff Probst has been a Senior Sales Representative for Eli Lilly in the Wisconsin sales territory since June 10, 2011, a participant in the Plan since May 31, 2016, and that during that participation she invested in two portfolios—the Target Date Portfolio 2040 and the Target Date Portfolio 2055. Moreover, it was noted that she had “participated in several 401(k) plans from other employers and there have been no material differences in the services that she has received.”

Judge Magnus-Stinson noted that the Lilly defendants relied in their motion on the Albert v. Oshkosh, which she noted they argued that “the Seventh Circuit affirmed dismissal of 'a nearly identical claim'”—indeed, a footnote acknowledges that the plaintiff’s counsel in this case (Macey Swanson LLP and Walcheske & Luzi LLC.) also represented the plaintiffs in that other case. The Lilly defendants argued that the plaintiff "makes a series of allegations about the types of services that recordkeepers typically provide, without identifying the specific services that either [the Plan] or the comparator plans actually received,” that she lists standard services that recordkeepers provide, but "does not allege which of the 13 comparator plans received which services or how much of them." 

And then they argued that “generic lists of services are insufficient to state a claim relating to recordkeeping services,” and that in any event relying on the service codes listed on the Form 5500s filed by the comparator plans (which are publicly available) "show a highly variable number of service codes," and, they contend, “contradict Ms. Probst's allegations that all recordkeepers of mega plans, including the Plan, provide the same level and quality of services.” Oh, and they also claimed that “judicially noticeable documents show that the Plan paid substantially less than $77 per participant and the comparator plans paid substantially more than $23-$39 per participant” because the plaintiff included both the Fund Administration Fee and the Plan Administration Fee in her $77 per participant figure, "but Fund Administration Fees are not used to pay the recordkeeper so should not be included when determining recordkeeping fees.” That, and they argued not only that 13 comparator plans “represent a tiny fraction of so-called ‘mega 401(k) plans’”—but that those were “cherry-picked.” You see where this is going…

Judge Magnus-Stinson rejected out of hand the allegation (that has, in fact, been raised in numerous other cases) that Probst's allegation that Lilly did not conduct competitive bidding on a regular basis was sufficient to state a claim for breach of the duty of prudence. “The Seventh Circuit has instructed that there is no such requirement under ERISA,” she explained, citing the Northwestern case.

‘Wholly Conclusory’

The plaintiff put forth about a dozen factors that she alleged distinguished it from the Albert/Oshkosh case—but Judge Magnus-Stinson was unimpressed. She noted that the Albert case requires that a plaintiff set forth allegations showing that the recordkeeping fees were "'excessive relative to the services rendered,'" while "Ms. Probst's attempt to satisfy that directive was to allege that all mega plans receive nearly identical recordkeeping services and that any difference in services was immaterial to the price of those services. These allegations are wholly conclusory and do nothing to identify what specific types of services comparator plans received relative to the Plan,” Magnus-Stinson noted. 

More than that, the judge commented that “Ms. Probst's allegations that any difference in services provided does not affect the price of the services is not plausible. Indeed, her own chart indicates that the 13 comparator plans paid between $23 to $39 per participant, reflecting that there is some variation in price,” she wrote. She also noted that table labelling notwithstanding “the Comparator Table shows that the comparator plans are not all similar in size to the Plan, nor do they have similar assets.”

And then, “even assuming Ms. Probst's allegations are not conclusory and are plausible, the information Ms. Probst relies upon to support those allegations contradicts her broad and sweeping statements,” Judge Magnus-Stinson wrote. Turning to the Form 5500’s that the plaintiff “heavily” relied upon in her service assumptions, the judge noted that “none of the Form 5500s for the 13 comparator plans reflect this combination of services provided by the recordkeeper.” She then rejected the arguments “that any difference in services provided is irrelevant because the comparator plans were ‘receiving at the least [the] same services as [the Plan],’” as well as the notion that "there is no exact science as to how plan administrators determine what service codes to use, and the Form 5500 instructions do not specify." Rather, she commented that “only one comparator plan—the Kindred 401(k) Plan—was receiving the same services as the Plan, along with others.”

Form 5500 Shortfalls 

“And without wading too far into the weeds of the Form 5500s,” Judge Magnus-Stinson observed, “it is obvious that relying on the Form 5500s as the source for the comparator plan information is problematic for numerous reasons. For example, the comparator plans received services other than recordkeeping, but all services are lumped into one sum so the total amount paid to the recordkeeper divided by the number of plan participants may not be an accurate representation of what the comparator plan paid for recordkeeping.” 

All in all, Judge Magnus-Stinson determined that “Ms. Probst's allegations are conclusory and do not state a plausible claim for breach of the duty of prudence.”

Regarding the claims regarding a prohibited transaction, Judge Magnus-Stinson noted that “Ms. Probst does not allege what types of services Lilly employees provided to the Plan, so she has not plausibly alleged that they were duplicative of the services provided by Alight or that they did not provide any value to the Plan.” Perhaps more significantly, she wrote that “the Court is disturbed by Ms. Probst's statement that ‘it is impossible to know without discovery’ whether Lilly paid itself for administrative services already provided by Alight.” She continued, “this statement shows that Ms. Probst's allegations are based on speculation and because they do not 'raise a right to relief above the speculative level,'" Twombly, 550 U.S. at 545, they do not state a viable claim for prohibited transactions/breach of the duty of loyalty”—and granted the motion to dismiss these claims.

And “Because the Court has found that Ms. Probst has not stated claims for breach of the duty of prudence or prohibited transactions/breach of the duty of loyalty, her failure to monitor claim also fails,” Judge Magnus-Stinson wrote—and dismissed the failure to monitor claim as well.

Now, the claims were all dismissed with prejudice—basically meaning that they can’t be amended/refiled. However, the claims representing a class of participants was dismissed without prejudice, explaining that “because Ms. Probst does not have viable individual claims, she is not an adequate class representative.”

What This Means

Once again, the Albert v. Oshkosh decision set a standard for plausibility that what were seen as mere conclusory allegations by the court could not overcome. What is beginning to emerge is a cognizance by the judiciary that there’s more underneath the informational aspects of documents like the Form 5500 (not to mention certain industry surveys of comparability) that meets the eye. And that bodes well for plan fiduciaries (as long as THEY are aware of the realities underlying those figures, anyway).

P.S., While not central to the case or the ruling, I found this footnote reference by Judge Magnus-Stinson humorous (and slightly ironic): “The Court notes Ms. Probst's (and to a lesser extent, Lilly's) practice of including lengthy footnotes which contain argument. The use of lengthy footnotes could be construed as a party's attempt to circumvent the Court's page limits for briefs. Moreover, lengthy footnotes are cumbersome and difficult for the Court to review. For future reference, the Court directs all counsel to page 4 of the Court's revised Practices and Procedures, available on the Court's website, which provides as follows: 'The Court does not deem information contained in footnotes as argument. Accordingly, counsel should include all argument in the body of the brief.'"    



All comments
Steff Chalk
7 months 1 week ago
Excellent summary (again) Nevin. Just trying to discern if your post script is really a thinly veiled footnote*
Nevin Adams
7 months 1 week ago
Well, a good footnote really needs an anchor in the main piece, and funny (ironically) apropos as I found the comment, I couldn't really find a legitimate anchor. So, I went with a postscript. I hope Judge Magnus-Stinson would approve (but suspect she'd see it as you did!)