An excessive fee suit that had embroiled both a plan sponsor and the provider of a target-date fund series chosen by the plan has come to a conclusion.
The original suit, filed in the U.S. District Court for the Middle District of Tennessee in 2019, was brought by Becky Kirk, Perry Ayoob and Dawn Karzenoski on behalf of the CHS/Community Health Systems, Inc. Retirement Savings Plan, which, as of Dec. 31, 2017, had $3.2 billion in assets and about 112,700 active participants.
Kirk, a New Mexico resident, Ayoob, a West Virginia resident, and Karzenoski, a resident of Pennsylvania, are all former participants in the plan who invested in the Principal Retirement Target 2025 separate account (Kirk) or the Principal Retirement Target 2045 separate account (Ayoob and Karzenoski). According to the suit, each claims that they have “been injured by Defendants’ unlawful conduct,” and that “had Defendants prudently and loyally managed the Plan’s investments and the Principal separate accounts,” each “would have had more assets” in their plan account at the time it was distributed. Moreover, that “Principal has been unjustly enriched as a result” of the investment in the Principal separate accounts.
Partial Settlement
The parties reached a partial settlement in December 2020, which included the plan sponsor/fiduciary CHS would pay a gross settlement amount of $580,000 into a common fund for the benefit of Settlement Class Members who invested in the “standalone Principal index funds in the Plan,” specifically the Principal Large Cap S&P 500 Index fund, Principal MidCap S&P 400 Index fund, and Principal SmallCap S&P 600 Index. The settlement agreement characterized this sum as “a fair and reasonable recovery that represents approximately 50% of the damages (and 94% of the excess fees) that Plaintiffs calculate to be associated with those standalone funds that were the focus of Plaintiffs’ claim against the CHS/Defendants.”
Moreover, “as an additional benefit under the Settlement, the CHS/Defendants have agreed to pay $127,642.47 toward settlement administration expenses, representing the portion of the administrative expenses associated with Settlement Class members who invested only in the TDSAs.” None of which, interestingly enough, was “muted” by any fees or recovery of costs by the plaintiffs’ attorneys.
Current Case
By selecting proprietary investments, the plaintiffs alleged that Principal did not consider alternative index funds available in the marketplace and instead chose to use its own proprietary index funds, and that, according to Chief Judge Stephanie M. Rose of the U.S. District Court for the Southern District of Iowa, this decision “contravened Principal’s fiduciary duties because it was both imprudent and disloyal”—the proprietary index funds “charged fees that were far higher than the fees charged by more competitive options,” and “the funds had larger tracking errors.”
After reciting the standards for review in a motion to dismiss (as we’ve seen in numerous other cases, those include the failure to state a plausible claim (not mere speculation) upon which relief can be granted, while making “all reasonable inferences” in favor of the party not seeking to dismiss), Judge Rose noted (Kirk v. Principal Life Ins. Co., S.D. Iowa, No. 4:21-cv-00134, 3/28/22) that the plaintiffs’ here made two primary claims:
- Principal retained proprietary index funds in the Separate Accounts that were more expensive and performed more poorly than marketplace alternatives; and
- even among their proprietary index funds, Principal selected versions of mutual funds that charged a higher fee than other options such as separate accounts or collective investment trusts, and that Principal used share classes of some funds that were more expensive than other share classes contained in the same fund.
For their part, the Principal defendants moved to dismiss the Complaint for failure to state a claim, arguing that the plaintiffs hadn’t argued that the total fee was excessive, that they were not acting as fiduciaries when selecting the challenged funds; and that the plaintiffs lacked standing to challenge most of the funds identified in the Complaint.
She noted that Principal had argued that it negotiated both the funds and pricing with the plan sponsor/named fiduciary ahead of them contracting with Principal, and that those discussions had been at arm’s length. While the plaintiffs here argued that Principal breached its fiduciary duties “not during its contract negotiations with CHS, but by exercising its discretion as an investment fiduciary to maintain certain investments in the Separate Accounts after the contract was finalized,” pointing to language in the contract that said Principal “acknowledge[s] that we are a fiduciary for this exclusive purpose of managing the assets of such Separate Accounts within the meaning of ERISA.”
Fiduciary Finding
However, Judge Rose commented that “Principal was not acting as a fiduciary when it negotiated at arms-length with CHS. Under Plaintiffs’ theory, Principal was violating its fiduciary duties immediately after the Plan’s inception simply by retaining the investments agreed to by CHS.” However, she concluded that “It is clear that Principal did not have a duty to lower fees and change the investments to which the plan sponsor, CHS, agreed. The Eighth Circuit and other Circuit courts have found that Principal did not have a fiduciary duty in this context.”
Judge Rose did conclude, however, that the plaintiffs had alleged with sufficient detail that the underlying investments had excessive fees[i]—but, as she explained, “the issue of whether Plaintiffs have stated a claim for excessive fees based on the underlying investments is distinct from whether Principal had a fiduciary duty to lower those fees.”
“Principal did not violate any fiduciary duties by simply retaining specific investments that were expressly agreed to by the plan sponsor and fiduciary, CHS. This means Plaintiffs cannot state a claim for breach of fiduciary duty based on these investments,” she concluded, dismissing the case.
What This Means
The case provides an interesting illustration as to the role of a fiduciary to the plan, and the role of a fiduciary, generally. As is noted in this ruling, “a person may be an ERISA fiduciary with respect to certain matters but not others, for he has that status only ‘to the extent’ that he has or exercises the described authority or responsibility.” And, ultimately, that “establishing a breach of fiduciary duty under ERISA requires a plaintiff to show: (1) defendant was a fiduciary of the plan; (2) defendant was acting in a fiduciary capacity for the act complained of; and (3) defendant breached a fiduciary duty.”
[i] “Not only does the Complaint allege that between one-third and one-half of the Plan’s assets were invested in excessively costly index funds, but it also alleges the fees were between 3 and 15 times more expensive.” These statistical inferences are “sufficient factual allegations to show that [they are] not merely engaged in a fishing expedition or strike suit,” she concluded.
