In the suit, filed in August 2021, participant-plaintiffs alleged that the fiduciaries of the $310 million SeaWorld Parks and Entertainment 401(k) Plan, and the SWBG, LLC 401(k) Plan breached their fiduciary duties of care and loyalty under ERISA by engaging in six categories of misconduct, specifically:
“(1) Offering and maintaining higher cost share classes when identical lower cost class shares were available and could have been offered to participants; (2) Overpaying for covered service providers by paying variable direct and indirect compensation fees through revenue sharing arrangements with the funds offered as investment options under the Plan, which exceeded costs incurred by plans of similar size with similar services; (3) Imprudently choosing and retaining expensive mutual funds while less expensive index funds were available and could have been offered to participants; (4) Selecting conflicted dual registered investment advisors and brokers who were incentivized to choose higher fee mutual funds because they received not only brokerage commissions from funds but insurance commissions for annuity products; (5) Failing to engage in a competitive bidding process by submitting a request for proposal to multiple service providers including recordkeepers, shareholder service, and financial advisers; and (6) Imprudently selecting and maintaining needlessly risky and undiversified stable value options with excessive fees and low crediting rates.”
Dismissal Criteria
In considering the motion to dismiss the suit, Judge Robert S. Huie noted (Coppel v. SeaWorld Parks & Ent., Inc., S.D. Cal., No. 3:21-cv-01430, 1/31/24) that in these cases a complaint “must contain sufficient allegations of underlying facts to give fair notice and to enable the opposing party to defend itself effectively”—and reminded us all that “when reviewing a motion to dismiss under Rule 12(b)(6), courts must assume the truth of all factual allegations and construe them in the light most favorable to the nonmoving party.” That said, he noted that the “court need not take legal conclusions as true ‘merely because they are cast in the form of factual allegations,’ and that ‘conclusory allegations of law and unwarranted inferences are not sufficient to defeat a motion to dismiss.’” Said another way, the court is required to accept the factual allegations of the party not seeking a dismissal, but doesn’t have to do so blindly.
Turning to the issue of applying tests of prudence, and citing precedent, Judge Huie first noted that “the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.” He also commented that, “To state a claim of disloyalty, a plaintiff must allege plausible facts supporting an inference that the defendant acted for the purpose of providing benefits to itself or someone else.”
Share Class Claims
He explained that the SeaWorld defendants had moved to dismiss the suit, at least as it was predicated on share class violations because an “obvious alternative explanation” for Defendants’ decision to select higher cost institutional share classes is that such share classes included revenue sharing, which Defendants could use to offset Plan expenses.” However, Judge Huie noted that that argument was “virtually identical to an argument Defendants asserted in their first motion to dismiss, which the Court rejected.” He went on to remind them that he had previously dismissed that argument as “contrary to Ninth Circuit precedent, and found that Plaintiffs’ share class violation allegations ‘state[d] a claim for breach of the duty of prudence.’ ECF No. 84 at 22–24 (collecting cases)”—and that “the Court’s prior analysis applies here with equal force. Although Plaintiffs have amended their Complaint since, the allegations regarding share class violations remain unchanged.” Judge Huie wrote that while he would take judicial notice of the possibility that the revenue-sharing rationale might apply, he was not prepared to accept that prospect as grounds for dismissal at this stage in the proceedings—and, after some discussion of the various allegations (and responses), explained that “plaintiffs’ share class allegations sufficiently state a claim for breach of the duty of prudence, and denies Defendants’ motion to dismiss as to these allegations.”
Underperformance
Judge Huie noted that the plaintiffs here also allege that the SeaWorld defendants “imprudently selected and maintained certain mutual funds in the Plan, despite their poor performance”—and that the SeaWorld defendants moved to dismiss that claim “because the challenged funds did not underperform their benchmarks in the sustained and material way that infers an imprudent fiduciary process.” Moreover, that the plaintiffs were required to allege “material and persistent underperformance” against an appropriate benchmark in order to state a claim for breach of fiduciary duty.
However, Judge Huie explained that the “material and persistent underperformance” standard “is not the law of the Ninth Circuit. Rather, the phrase comes from a plaintiff’s unsuccessful argument as recited in a district court opinion (Dorman v. Charles Schwab Corp.). The cases cited in support of the SeaWorld defendants’ arguments noted that “poor performance, standing alone, is not sufficient to create a reasonable inference that plan fiduciaries failed to conduct an adequate investigation . . . ERISA requires a plaintiff to plead some other indicia of imprudence.” That said, he went on to explain that those cases “do not hold that allegations of ‘material and persistent underperformance’ are necessary to state a claim for breach of the duty of prudence.”
In fact, Judge Huie explained that the Ninth Circuit reversed a district court that attempted to apply a similar standard, noting that in that case the Ninth Circuit held that “Plaintiffs have [] adequately alleged . . . that defendants imprudently failed to investigate and timely switch to available collective investment trusts, which plaintiffs allege had ‘the same underlying investments and asset allocations as their mutual fund counterparts’ but had better annual returns and a lower net expense ratio.” For that reason, Judge Huie explained that district courts across the Ninth Circuit have denied motions to dismiss claims for breach of the duty of prudence in ERISA cases where the plaintiffs have alleged fund underperformance in addition to some other indicia of imprudence.
Specific Statements
Here, Judge Huie noted that the suit “includes allegations that all four challenged funds underperformed compared to at least one meaningful benchmark at some point during the time they were included in the Plan within the limitations period,” as well as “other indicia of imprudence.” He explained that the “operative Complaint alleges Defendants imprudently investigated and selected the four challenged funds, given that each of them underperformed at least one comparable fund prior to their inclusion in the Plan.” Beyond that, Judge Huie noted that the plaintiffs here also claimed that the defendants selected higher cost share classes for nearly 90% of the mutual funds offered in the Plan, “which did not perform as well as lower cost share classes ‘of those exact same mutual funds with the same attributes[,]’ but instead benefitted the Plan’s recordkeeper and other service providers through revenue sharing payments for unreasonably excessive asset-based fees.” Beyond that, he further explained that the plaintiffs had alleged that “defendants imprudently selected and maintained undiversified SVF options offered by the Plan’s recordkeepers, despite their higher fees and lower crediting rates compared to substantially similar investment options, by failing to competitively bid and negotiate with providers who were not also the Plan’s recordkeepers.” Also cited were arguments by the plaintiffs that “defendants imprudently selected and monitored the Plan’s service providers by failing to competitively bid the Plan’s service providers, failing to negotiate lower fees, and paying unreasonably excessive fees compared to similar sized plans.”
“Finally,” Judge Huie wrote, “Plaintiffs allege Defendants were aware—or should have been aware—of the imprudence of their actions and omissions. Taken together, Plaintiffs’ allegations sufficiently state a claim for breach of the duty of prudence. Although Defendants may ultimately demonstrate that they did not act imprudently, Plaintiffs have satisfied their burden at this stage of the litigation by alleging facts from which the Court can reasonably infer that Defendants’ decision-making process was flawed.”
Stable Value
Judge Huie noted that “the Court previously declined to analyze whether the comparator funds Plaintiffs provided to support their underperformance claim regarding the MassMutual SAGIC SVF were meaningful benchmarks, because the Court determined that Plaintiffs adequately asserted separate allegations that MassMutual charged excessive fees as the SVF’s provider.” Now the plaintiffs amended their initial suit to “include additional underperformance and excessive fee allegations”—and he explained that the defendants chose to reassert their arguments.
He explained that when alleging that MassMutual’s SAGIC SVF underperformed by providing the Plan unreasonably low crediting rates, the Complaint provides a table comparing the crediting rate of the Plan’s SAGIC SVF “to the crediting rate of the same general account products offered by MassMutual to other plans” —but noted that MassMutual’s SAGIC SVF is a “separate account” in contrast to general account products (“the riskiest type of stable value fund and consequently must offer the highest credit rates”).
Judge Huie commented that the plaintiffs’ suit provided two additional benchmarks, but that “they are also too deficient to serve as meaningful benchmarks.” The bottom line? “The operative Complaint does not include any factual allegations from which the Court can infer that the TIAA fund or the products MassMutual provided other clients can serve as meaningful benchmarks, such as what the investment vehicles are, what their investment purposes are, or how they are managed.”
“Given that none of the comparator funds Plaintiffs offer include sufficient allegations to plead a meaningful benchmark, the Court concludes that Plaintiffs fail to state a claim for imprudent retention of the MassMutual SAGIC SVF based on underperformance.” However—that turns out to not be the only basis for complaint. “Plaintiffs also allege Defendants acted imprudently by failing to competitively bid SVF providers, failing to monitor the costs and performance of the SAGIC SVF using the appropriate benchmarks, allowing MassMutual to keep excessive ‘spread fees,’ and failing to diversify the SAGIC SVF”—elements that Judge Huie commented had previously been determined to state a claim for excessive fees. While the defendants argued that “Plaintiffs allege no facts showing how the SAGIC [] w[as] insufficiently diverse[,]” and “there are no facts to infer that a prudent fiduciary should have tried to change funds,” Judge Huie disagreed—and declined to dismiss Plaintiffs’ claim as to the MassMutual SAGIC SVF because Plaintiffs’ other theories of liability remain operative.”
As for the Prudential GIF General Account SVF, Judge Huie concluded that the Complaint failed to adequately allege that one comparator (CIGNA) was a meaningful benchmark, but did with regard to a TIAA-CREF fund is an appropriate benchmark—and thus, denied the motion to dismiss on that basis.
Excessive Advisory Fees
Commenting that while “some courts at this stage have opted to analyze whether plaintiffs have offered a proper ‘apples to apples’ comparison for complaints of excessive fees,” Judge Huie explained that that was not required in the Ninth Circuit. “It is sufficient at this stage that Plaintiffs allege specific facts supporting their claims that the Plan’s fees and Total Plan Cost were excessive for its size.” He also concluded that the SeaWorld defendants arguments about having renegotiated a better advisory fee “arguably supports Plaintiffs’ argument that Alliant’s fees of $163,440 in 2014 should have been negotiated down sooner.” Ultimately, “when viewed in the light most favorable to Plaintiffs, the Court can infer from these facts that Starwood’s recordkeeping and administrative fees were excessive prior to 2015 and are still excessive.”
And—having found no reason to dismiss all these claims at this stage, Judge Huie found no reason to dismiss claims for a failure to monitor the fiduciary defendants.
What This Means
We’ve seen—and commented previously—that the standards applied in assessing whether a plausible claim has been made sufficient to dismiss an excessive fee suit are—well, different—depending on the federal district court in which those claims are being asserted. Here the court found that the allegations were sufficient on their face, looking at things in the light most favorable to the party that was NOT trying to dismiss the case.
Stay tuned.
