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Salesforce Plaintiffs Appeal Excessive Fee Loss


It’s said that, if at first you don’t succeed, try, try again… and so the plaintiffs in a 401(k) excessive fee suit, rebuffed twice by the district court, plan to appeal the latest decision to a higher court.

In a suit filed at the onset of the COVID-19 pandemic, Tim Davis, Gregor Miguel, and Amanda Bredlow—participants in the $2 billion 401(k) plan of CRM provider (and now DJIA component) Salesforce—made a series of allegations common to excessive fee suits: that the plan fiduciaries “breached their fiduciary duty of prudence by selecting and retaining investment options with high costs relative to other, comparable investments,” that the “Committee Defendants breached their fiduciary duty of loyalty, in that some of the funds’ ‘investment managers own a portion of [Salesforce],’” and that the Board, Benioff, and Salesforce breached their fiduciary monitoring duty by failing to adequately monitor the Committee Defendants. 

The suit was dismissed last October by U.S. District Judge Maxine M. Chesney, who gave the plaintiffs leave to amend their claims—only to dismiss them again last month (Davis v., Inc., 2021 BL 138735, N.D. Cal., No. 3:20-cv-01753, 4/15/21). The plaintiffs here are represented by Capozzi Adler PC and Rosman & Germain LLP.

Second Attempt

In that failed attempt, the plaintiffs attempted to build on their allegations that the plan fiduciaries were imprudent in retaining 11 actively managed funds with expense ratios that were higher than the ICI Median Fee and ICI Average Fee for “comparable investments found in similarly-sized plans.” Judge Chesney acknowledged the plaintiffs had added comparisons of expense ratios of actively managed funds offered in the Plan to the ICI Average Fee, but found those comparisons “insufficient to support an imprudence claim, as the ICI Average Fee, like the ICI Median Fee, reflects the fees of both passively and actively managed funds.”

As for the allegation that the Salesforce defendants were imprudent in failing to substitute the lowest-cost share class for the 11 actively managed mutual funds offered in the plan, Judge Chesney said that this time around, “plaintiffs’ allegations remain essentially the same as the allegations previously found deficient by the Court.” And, once again, Judge Chesney noted that simply offering higher cost shares than might be available was, without more, insufficient to state a claim.

Active Versus Passive

With regard to the question of active versus passive options, Judge Chesney had previously noted that the latter wasn’t a sufficient benchmark for the former. This time around, she noted that the plaintiffs had added a number of allegations, specifically:

  1. a number of “statistics bear out the vast underperformance of actively managed funds over passively managed funds over different stretches of 5 to 10 year periods beginning in 2008”; 
  2. JPMorgan offered, at all relevant times, “a target date blend series that had some passive funds underlying it and had an overall lower cost structure” as well as higher returns “than the purely actively managed SmartRetirement counterparts”; and 
  3. “[d]efendants’ actions in overwhelmingly favoring actively managed funds[] plausibly show that they failed to consider the pros and cons of offering actively managed investments vs. passively managed investments.” 

That said, she remained adamant on the point that “passively managed funds are not meaningful benchmarks for actively managed funds given their essential differences,” going so far as to cite a 2018 decision in which the court noted: “[c]omparing apples and oranges is not a way to show that one is better or worse than the other.”

Collective Investment Trusts

Regarding the lack of offering collective investment trusts, Judge Chesney previously dismissed the plaintiffs’ imprudence claim to the extent such claim was based on a comparison of mutual funds with collective trusts—specifically holding that “plans are under no duty to offer alternatives to mutual funds” and, given that the “essential features” of collective trusts and mutual funds differ “so significantly,” it is “inappropriate to compare [such] distinct investment vehicles solely by cost.” 

This go-round, the plaintiffs added allegations that: 

  1. the Plan, in 2019, replaced the nine JPMorgan SmartRetirement funds with “JPMorgan target date CITs,” which had, according to plaintiffs, “the same underlying investments and asset allocations as their mutual fund counterparts” but had “better annual returns” and “a lower net expense ratio than the mutual funds”; and 
  2. the delay in making such replacement “cost Plan participants millions of dollars.” 

However, Judge Chesney continued to be unpersuaded of the legitimacy of the comparison, but stated that, even if one were to embrace that comparison that “the periods during which the JPMorgan SmartRetirement funds are alleged to have underperformed relative to the JPMorgan CITs are not of sufficient length to support an inference of imprudence,” nor was the “degree of alleged underperformance substantial enough to support such an inference.” The plaintiffs’ attempt to draw a connection with the plan’s investment policy statement to create an obligation to “other materially similar funds” was summarily rejected as well.

And thus, having fallen short of correcting the deficiencies in the first filing, Judge Chesney dismissed this one as well—as she did a second claim for relief based on an allegation that the plan fiduciaries breached their duty by failing to monitor the committee, its actions and members, she once again dismissed the claims.

What’s Next

However, the plaintiffs have now filed a notice of appeal (Davis v., Inc., N.D. Cal., No. 3:20-cv-01753, notice of appeal 5/14/21) with the U.S. Court of Appeals for the Ninth Circuit—the same court currently considering a similar appeal filed by participants of Trader Joe’s 401(k).