Excessive Fee Claims Rejected in Capital Group Case

Capital Group has prevailed in an excessive fee suit brought by a participant in the money manager’s 401(k) plan, with the judge noting that “fiduciaries need not choose the cheapest fees available to the exclusion of other considerations.”

This suit, brought by D’Ann Patterson against Capital Group on behalf of herself and the 7,000+ participants and beneficiaries of the $3 billion plan, alleged that “during the Relevant Period, between 94.7% and 97.8% of all investment options offered by the Plan were unduly expensive Capital Group-affiliated investment options,” and that these investment options were not selected and retained as a result of an impartial or prudent process, but (according to the suit) “were instead selected and retained by the Committee because Capital Group and its subsidiaries benefited financially from their inclusion in the Plan.”

In evaluating the claims, Judge Dale S. Fischer of the U.S. District Court for the Central District of California noted that in its first and second claims, the suit alleges that during the relevant period, the plan offered between 38 and 46 investment options, and that more than 90% of those options were “unduly expensive Capital Group-affiliated investment options.” And moreover that the plan committee “selected and retained the more expensive R5 share class of the Capital Group-affiliated investment options … for a number of years,” despite the availability of the less expensive R6 share class.” Additionally, Patterson claimed that she had no “knowledge of all material facts … necessary to understand that Defendants engaged in unlawful conduct in violation of ERISA,” an assertion that had an impact on the tolling of the statute of limitations that might apply to the claims she made.

SOL ‘Searching’?

Indeed, defendant Capital Group said the lawsuit was filed too late because the employees were on notice of the plan fees more than three years before they sued, in the form of “regular fee disclosure statements that made her aware of the allegedly expensive fees.” However, citing the 9th Circuit’s decision in Tibble v. Edison, Judge Fischer noted that “such disclosures were “evidence of the wrong type of knowledge” for a claim alleging the defendant made an imprudent investment. Fischer went on to determine that the plaintiff “…did not have actual knowledge of Defendants’ process for selecting and retaining the investment options,” that therefore “each new breach by Defendants begins a new limitations period,” and that as a consequence, those claims were not barred by timing.

As for the third and fourth claims – that duties of prudence were violated by the inclusion of funds with excessive fees – Judge Fischer wrote: “It may not be necessary for Plaintiff to allege that the challenged funds underperformed, but Plaintiff must at least allege facts that plausibly suggest the fees were unjustified.” Judge Fischer went on to explain that the fact that the defendants “could” have chosen funds with lower fees, that “similar” Vanguard funds charged lower fees, or that “all or most of the challenged funds were Defendants’ own financial products are insufficient, when viewed in context, to create a plausible inference of wrongdoing.” Judge Fischer then wrote that “the fees alleged here are not so obviously excessive as to meet the plausibility test standing alone,” going on to observe that “unquestionably, fiduciaries need not choose the cheapest fees available to the exclusion of other considerations.”

As for the decision to use R5 shares rather than the less expensive R6 variety, Judge Fischer noted that “fiduciaries are required to consider factors beyond price when choosing investment options,” and in dismissing the claims, wrote that “plaintiff’s allegations do not “nudge [her claims] across the line from conceivable to plausible.”

Judge Fischer went on to note that the other claims were “derivative,” specifically that the claims that the Board failed to monitor the fiduciaries of the Plan, that “certain Defendants” were alleged to be liable as co-fiduciaries or non-fiduciaries who have participated in the alleged fiduciary breaches, and a claim for attorneys’ fees, were predicated on a finding that the plaintiffs successfully made their case. Having failed, in the court’s determination to do so, those claims were dismissed as well.

Judge Fisher concluded by noting that an amended complaint (if one is to be submitted) must be filed and served no later than Feb. 20, 2018, and that failure to file by that date will “waive the right to do so.”

The case is Patterson v. Capital Grp. Cos., Inc., C.D. Cal., No. 2:17-cv-04399-DSF-PJW, order dismissing case 1/24/18.

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