The plaintiffs and defendants in a new 401(k) excessive fee suit are of different minds as to which precedent(s) should be relied upon in their litigation.
The defendants in this case (Davis et al. v. Magna International of America Inc. et al., case number 2:20-cv-11060, in the U.S. District Court for the Eastern District of Michigan) are the fiduciaries of the Magna Group of Companies Retirement Savings Plans, a $1.6 billion plan (at the end of 2018) with some 27,000 participants that was charged by four participants[i] with failing to fulfill their duties as fiduciaries. The suit alleged that Magna left its plan oversight responsibilities to plan trustee Principal Trust Co., and that in doing so, Magna essentially gave Principal the latitude “to lard the plan with funds managed by the trustee and/or its affiliates.”
The ‘Case’
The suit alleged that the defendants did not act in the best interests of the Plan participants, that “to the detriment of the Plan and their participants and beneficiaries, the Plan’s fiduciaries included and retained in the Plan many mutual fund investments that were more expensive than necessary and otherwise were not justified on the basis of their economic value to the Plan,” that they “…failed to have a proper system of review in place to ensure that participants in the Plan were being charged appropriate and reasonable fees for the Plan’s investment options,” and that, as nearly all of these suits charge, they “…failed to leverage the size of the Plan to negotiate for (1) lower expense ratios for certain investment options maintained and/or added to the Plan during the Class Period and (2) lower recordkeeping and administrative fees.”
What was a little unusual—and this was noted in the new filing—resulted in selection (and maintenance) of “several funds”… that “…wasted the Plan and participants’ assets because of unnecessary costs.” This included—again, as these type suits frequently do—allegations that the plan retained actively managed funds, despite them being “much more expensive that comparable funds found in similarly sized plans,” resulting in the loss of “millions of dollars” by plan participants.
Finally, they participant-plaintiffs alleged that the fiduciary defendants failed to monitor or control the plan’s recordkeeping expenses, utilizing asset-based fees, revenue-sharing, and “a significant amount of Plan assets were invested in funds managed by Principal and/or its affiliates,” who served as the plan’s recordkeeper (Principal is not a party to the suit)—claiming to have seen “no evidence that Defendants negotiated to lower recordkeeping costs,” and that “the total amount of recordkeeping fees paid throughout the Class Period on a per participant basis was unreasonable.”
Alternative ‘Views’
The Magna Plan defendants want the court to rely on the recently decided case of Kurtz v. The Vail Corporation, which was dismissed with prejudice in the U.S. District Court for the District of Colorado. In making that case, the Magna defendants argue that there “the court held that the plaintiff had not plausibly alleged that the inclusion of actively managed funds on the plan’s menu was imprudent”; not only did the menu include other, cheaper options—including passively managed funds—that the plaintiff did not challenge, but there also were no allegations of “self-interested dealing, kickbacks, or inappropriate influence.” They go on to note that, “The same is true here: there are many options on the Magna Plan menu that Plaintiffs have not challenged, including passively managed options, and there are no allegations of self-interested conduct.” They point out that the “Kurtz court also rejected the theory asserted here that the selection of higher-cost share classes suggests imprudence,” after having “reviewed case law across jurisdictions and concluded that such allegations are not enough to state a claim.”
The plaintiffs, on the other hand—in the words of the defendants—are “asking the Court to swim against the tide of case law.” The case they have put forth as precedent is Miller v. AutoZone, a suit filed in November 2019 in the U.S. District Court in the Western District of Tennessee. The Magna fiduciaries argue that there are “important differences between the allegations in AutoZone and those here,” citing AutoZone’s challenge “to actively managed mutual funds and separate accounts on the basis that those options not only had excessively high fees, but also had “hidden trading costs”—while, defendants argue, here the plaintiffs have not only “not claimed that any options on the Magna Plan’s menu had any sort of ‘hidden’ costs,” but “unlike AutoZone, the Complaint here discusses revenue sharing, and Plaintiffs do not dispute that the benefit from revenue sharing is a legitimate reason to choose higher-cost share classes,” And, the defendants continue, “unlike the plaintiffs in AutoZone, Plaintiffs have pleaded themselves out of court by relying on sources showing that the Magna Plan’s fees were lower than the average fees for other plans.”
Will the court be persuaded? We shall see.
[i] The participant-plaintiffs are represented by Donald R. Reavey and Mark K. Gyandoh of Capozzi Adler PC—a firm that has been quite active in this arena over the past several months—and Anthony L. DeLuca of Anthony L. DeLuca PLC. The former has filed suit against Universal Health Services, Inc., and before that Aegis Media Americas Inc., about a year before the BTG International Inc. Profit Sharing 401(k) Plan, earlier this year the $2 billion health technology firm Cerner Corp., and less than a month ago Pharmaceutical Product Development, LLC Retirement Savings Plan and Gerken v. ManTech Int’l Corp. Oh, and Capozzi Adler happens to be one of the three law firms specifically named in at least one P&C insurer’s policy renewal questionnaire, alongside Schlichter Bogard & Denton LLP and Nichols Kaster PLLP.
