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Split Decision for 401(k) Excessive Fee Suit


Auto parts maker GKN North America Services Inc. managed to fend off some, but not all, claims in an excessive fee suit involving its use of Prudential’s GoalMaker product.

The suit began in October 2021 when plaintiffs Jeffrey Parker, Donald B. Losey, and Shelley Weatherford filed[i] on behalf of participants or beneficiaries of retirement plans offered by the defendants (GKN North America Services, Inc., Board of Directors of GKN North America Services, Inc., and the Benefit Committee). In the suit the plaintiffs claim the plan cost "participants millions of dollars" and that the fiduciary defendants’ actions (or lack thereof) constituted a breach of the duties owed to participants under ERISA. 

Motions Made

Following that came a series of motions to dismiss, filings to oppose the motion to dismiss, a reply to the opposition to the motion to dismissthe latter invoking a decision that has been cited by a growing number of these cases—Smith v. CommonSpirit, 37 F.4th 1160 (6th Cir. 2022)—which  Judge Sean F. Cox of the U.S. District Court for the Eastern District of Michigan (who wrote the opinion) said was “highly relevant to the proceedings,” though it was decided after the plaintiffs filed their opposition to the motion—leaving the plaintiffs to file an unopposed motion for leave to file a sur reply to address that case—which was granted on Aug. 11, 2022.

In considering the defendants’ motion to dismiss the suit, Judge Cox noted the standard for review (citing various precedents) that the claim must state sufficient "facts to state a claim to relief that is plausible on its face,” that claims comprised of "labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do,” and that "a claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." All that said, and while Judge Cox noted that the court must accept all well-pleaded factual allegations as true for purposes of a motion to dismiss, he commented that the court is "not bound to accept as true a legal conclusion couched as a factual allegation.” 

Middle Ground(s)?

Before turning to the motion, Judge Cox observed (Parker v. GKN N. Am. Servs. Inc., 2022 BL 301897, E.D. Mich., No. 21-12468, 8/26/22) that courts have begun to define a “middle ground” for when a claim for a breach of prudence is sufficient in relation to investigating and selecting funds; specifically that while a claim could be deemed sufficient when a plaintiff can show that the fund selection process itself favored higher-fee funds, “it is insufficient when plaintiff claims only that other, lower-cost funds were (or are) available in the market.” 

He continued to comment, citing Hughes v. Northwestern, that it was not enough to simply offer a wide variety of kinds of funds as a means of defeating an imprudence claim. “Instead, the plaintiffs must show that an investment was imprudent from the moment it was selected, over time, or clearly unsuitable for the goals of the fund based on ongoing performance. In other words, stating a plausible claim of a breach of imprudence is a temporal issue in which the Plaintiff must point to an action that constituted a breach of the duty of prudence.”

The Analysis

Judge Cox reiterated that the plaintiffs had argued that the fiduciary defendants used a "flawed fiduciary process" when its chosen asset allocation service "GoalMaker resulted in a portfolio dominated by Prudential's preferred high-cost, actively managed funds that performed poorly in comparison to cheaper alternatives." Moreover, that they had shown that their chosen comparator funds are comparable to the challenged funds because they are in the same Morningstar category—and if that weren’t deemed sufficient, they claimed that “this is a fact-intensive inquiry that is not appropriate for resolution on a motion to dismiss." 

For their part, the defendants said the focus of the plaintiffs was (inappropriately) on the results or outcome of the fund rather than the process by which the funds were selected, and—citing the CommonSpirit decision—noted that the existence of lower-priced, better-performing alternatives, without more, is not enough to demonstrate imprudence.” Oh, and if that weren’t enough, they also claim that the comparator funds do not "meaningfully compare" for several reasons—but basically because they used data from outside the period of time in question to compare the results.

Morningstar ‘Starred’

But Judge Cox ruled that, in this case, the plaintiffs made a claim sufficient to survive the motion to dismiss. “While determining if a fiduciary was imprudent from the results of the process alone is not sufficient to make a claim, it can help to show that the plan did not receive sufficient benefits to justify the inclusion of such costly funds going forward.” He continued by noting that the selected comparator funds “were significantly cheaper and consistently outperformed the Plan funds. While the data included information from 2022 which is outside the time period in question, it also covered and focused on data from the years at issue”—all of which he concluded constituted “accurate comparator data.” Moreover, he noted that this was more than a “bare accusation of better, cheaper funds simply existing in the market”—notably that the funds were all within the same Morningstar categories as the funds in the Plan.

That said, Judge Cox saw things differently when it came to the allegations about excessive recordkeeping fees. Turning to another case in the Sixth Circuit, he noted that it found an allegation of excessive fees in violation of the duty of prudence to be insufficient when plaintiffs simply pled that the fees were twice as high as their comparators (Forman v. TriHealth, Inc.)—but failed to “allege that: (1) ‘these fees were high in relation to the services the plan provided’ and (2) ‘the fees could not be justified by the plan's strategic goals relative to their selected comparators.’" 

Context Specific Comparison

He explained that a plan fiduciary might prudently choose a fund with a higher expense ratio “due to the skill of that management team, or due to its environmental, social, and governance objectives”—ultimately that “there are a myriad of reasons and considerations that go into a fiduciaries' selection of a particular fund or plan. In other words, bare allegations cannot proceed devoid of further context.” He found similar rationale in the aforementioned CommonSpirit decision where an allegation of excessive recordkeeping fees was found to be insufficient when plaintiff claimed that recordkeeping fees were too high when compared to the industry average. “In other words,” he wrote, “courts require a ‘context-specific,’ or an apples-to-apples comparison of what the fees cover to find a breach of the duty of prudence.”

In contrast, in the case at hand Judge Cox wrote, “Just as the court found in CommonSpirit, to make a claim of excessive recordkeeping fees, must make a context specific comparison,” and that “a comparison of ‘Fee A’ to ‘Fee B’ exclusively considering price is insufficient. A party must state what the fees cover and how they are similar to make a successful context-specific comparison.” He concluded that “…without further context as to what the fees cover, Plaintiffs' claim of excessive recordkeeping fees is insufficient for a claim of a fiduciary's breach of the duty of prudence.”

Regarding claims about violations of ERISA's duty of loyalty Judge Cox reiterated that it required actions to be done solely in the interest of the participants and beneficiaries...for the exclusive purpose of...providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan”—and that that included "avoiding improper transactions with 'parties in interest' or self-dealing." Here the violation alleged was that the fiduciary defendants choice of GoalMaker served Prudential's "interests by funneling participants' retirement savings into Prudential's own overpriced proprietary investment products and into investments that paid kickbacks to Prudential”—and that that result supports "an inference that Defendants acted in a way that favored Prudential over the Plans' participants." 

‘Plausible Inference’

The defendants pushed back claiming that that type of claim "requires factual allegations that support a plausible inference that the fiduciaries acted for the purpose of providing benefits to a third party, and that their motivation was to put their own interests ahead of plan participants." But Judge Cox noted that here the plaintiffs “fail to make any allegations to suggest that the fiduciaries' operative motive was self-dealing or to benefit their own interests (as opposed to the beneficiaries). Rather, they allege that Defendants' choice asset allocation service, Prudential, was acting in its own interest. But the actions of the asset allocation service are not at issue here. The question is whether Defendants, as fiduciaries, acted for the purpose of benefitting the third party or themselves. Without the required allegations of fiduciary self-dealing, it is not reasonable for the Court to find a breach of fiduciary duty under the duty of loyalty theory.” 

The final claim—a failure to monitor—well, Judge Cox noted that, “unlike the fiduciary duties of prudence and loyalty, most courts treat a duty to monitor claim as deriving from a successful claim of a breach of fiduciary duty”—and that, “if a breach of fiduciary duty claim survives so too does the claim for failure to monitor.” And, having found Plaintiffs' allegations for breach of the fiduciary duty of prudence to be sufficient—well, he left standing for trial the claim for failure to monitor.

To recap, Judge Cox found that the plaintiffs made a claim of the violation of the fiduciary duty of prudence sufficient to survive a motion to dismiss, specifically on the grounds that Defendants failed to investigate and select lower-cost alternatives and by retaining imprudent plan investments—but not on the grounds that Defendants charged excessive recordkeeping fees.

What This Means

Once again, the “middle ground” staked out in CommonSpirit was cited as enumerating a new, and arguably higher, threshold for these suits to survive a motion to dismiss. Considering not only the plethora of these suits, but what in many cases seems to be only the most cursory (and sometimes questionable) facts supporting these allegations—it’s encouraging to see some semblance of reason. 

While it seems self-evident that the only way to know if a fee is reasonable is to understand/appreciate the services received for that fee—it’s heartening to hear that sentiment echoed from the bench—with growing consistency.


[i] The plaintiffs here were represented by Berger Montague PC, Edelson Lechtzin LLP, and Fink Bressack PLLC.