Excessive Fee Suit Claims Dismissed – For Now

The plaintiffs in an excessive fee suit didn’t manage to make their case in court – but a judge is allowing them a “do-over.”

On March 27, 2018, Plaintiffs Julio C. Alas, Robert J. Bugielski, and Chad S. Simecek – individually as participants in the AT&T Retirement Savings Plan ­– filed suit against AT&T, AT&T Services, and other defendants (John Does 1-50) for an alleged breach of their fiduciary duties. On May 8, the defendants in the case filed a motion to dismiss, on June 18, the plaintiffs filed their opposition to that motion. After considering those arguments in a hearing on July 16, the court made the following determinations.

Case History

As has been the case with many of the excessive fee cases, the AT&T plan was alleged to be a “jumbo” plan (241,000 participants, $34,792 billion in assets as of December 2016), which failed to negotiate the kind of deal that they alleged such a plan could. The plaintiffs went so far as to allege that the fees paid by the plan were “…well above the market rate, and cost Plan participants tens of millions of dollars in unnecessary recordkeeping expenses during the class period,” and that the defendants’ failures with regard to recordkeeping began no later than 2012 and have continued to the present day.

AT&T had hired Fidelity to provide recordkeeping and administrative services, including Fidelity Brokerage Services, LLC, to provide a self-directed brokerage account option. They also chose Financial Engines to provide advice service to participants. The plaintiffs alleged that, beginning in 2014, Fidelity began to receive “indirect compensation” from Financial Engines “without providing any material service to Financial Engines or Plan participants to justify these payments,” and that the defendants’ “…failure to monitor Fidelity’s total compensation caused the Plan’s participants to pay unreasonable administrative expenses to Fidelity” – a structure that they allege was “…part of a “larger agreement” between AT&T and Fidelity, whereby Fidelity offered other benefits to AT&T and was “motivated primarily by Defendants’ self-interest and at the expense of the Plan’s participants.” The plaintiffs further alleged that BrokerageLink “offered retail shares of certain mutual funds when less expensive institutional shares of the same fund were also available.”

Moreover, they claimed that “the way in which the funds were offered to the Plan’s participants” caused participants “to select the higher cost share classes that pay significantly higher fees than necessary, depleting their retirement savings in the process,” and that “The increased revenue sharing payment from the unnecessarily expensive share classes sold to Plaintiffs amounted to pure profit for Fidelity.” The plaintiff-participants also charged that the defendants “…did not properly educate Plan participants about the operation of BrokerageLink and failed to account for the revenues received by Fidelity from the participants’ use of BrokerageLink.”

Dismissal Arguments

In the court’s July 18 decision, Chief U.S. District Judge Virginia Phillips of the U.S. District Court for the Central District of California noted that while the default standard for motion to dismiss is to “accept the plaintiff’s allegations as true,” but explained that “limited exceptions exist,” and that relevant to the case at hand is the exception created by the distinction between “facial” and “factual” attacks on subject matter jurisdiction. The former accepts the factual allegations as pleaded, but “asserts that [they] are insufficient on their face to invoke federal jurisdiction,” whereas a factual attack “disputes the truth of the allegations that, by themselves, would otherwise invoke federal jurisdiction.”

After some discussion, Judge Phillips concurred with the defendants’ argument that the suit lacked allegations that any of the named Plaintiffs invested in a retail share of a mutual fund for which institutional shares were supposedly available – and found that that was “fatal” to that claim in that the plaintiffs had “failed to show the requisite injury with respect to BrokerageLink.”

She noted that while the FAC alleges that Plaintiff Bugielski made investments through BrokerageLink to his “financial detriment,” the suit “lacks any details as to what funds Bugielski purchased or how this led to his financial detriment,” did not allege that “any Plaintiff purchased any of the more expensive retail shares through BrokerageLink,” and that “the allegation that Bugielski was enrolled in BrokerageLink is not sufficient to support a plausible inference that he suffered an injury.”

She concluded that the suit’s “allegations fail to demonstrate that Bugielski has standing to sue on behalf of the Plan in a representative capacity,” and dismissed the claim – though she left the door open for the plaintiffs to amend their suit.

Statute of Limitations Claim

The second claim had to deal with the statute of limitations, and the timing regarding when the plaintiffs became aware of the alleged transgressions. Judge Phillips noted that the plaintiffs filed this suit in November 2017, and did not argue that the Court should apply the six-year statute of limitations for continuing breaches, but did argue that the Court “should … adopt a more literal reading of the ‘actual knowledge’” required to trigger the three-year statute of limitations. “But here,” Judge Phillips wrote, “there is no such allegation that Plaintiffs filed their suit within three years of actual knowledge that Defendants were in violation of ERISA. Nor is there any allegation regarding when Plaintiffs first had ‘actual knowledge’ or when counsel began to investigate Defendants’ conduct with regard to the Plan.”

Judge Phillips explained that the suit currently “…lacks any allegation regarding when Plaintiffs discovered Defendants’ alleged misconduct and the Court is unable to determine whether the statute of limitations applies.” However, she noted that this “defect” does “not appear incurable, and while the Court GRANTS Defendants’ Motion on timeliness grounds, the Court will allow Plaintiff leave to amend.”

That said, Judge Phillips declined to consider the other allegations and defenses raised in this case, but granted the defendants’ motion with leave to amend, noting that plaintiffs must file their Second Amended Complaint by no later than 4:00 P.M. on July 30, 2018.

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