401(k) fee litigation – what must a plaintiff allege to survive a motion to dismiss? Forman v. TriHealth and Hughes v. Northwestern
This term the Supreme Court is considering – for the first time – critical issues in defined contribution plan fee litigation, in Hughes v. Northwestern.
In this note we discuss the recent decision (September 24, 2021) by the United States District Court for the Southern District of Ohio, dismissing plaintiffs’ claims in Forman v. TriHealth, Inc. 401(k) Retirement Savings Plan Retirement Committee. Forman illustrates an issue that is also likely to be presented in Hughes: how fact-specific must plaintiffs’ complaint be to survive a motion to dismiss?
At the relevant time (2013-2017), the TriHealth plan had more than 10,000 participants, more than $100 million in assets ($457 million in 2017), and around 25 different fund menu investment options.
Plaintiffs sued claiming that (among other things) TriHealth 401(k) plan fiduciaries breached their duty of prudence by “permitting the Plan to incur high administrative fees and offering and failing to remove … funds with higher fees when there were other, similar funds that charged lower fees and achieved higher returns.”
With respect to administrative fees, plaintiffs alleged that “[f]or every year between 2013 and 2017, the administrative fees charged to Plan participants are greater than the fees of more than 90 percent of comparable 401(k) plans.” With respect to investment fees, plaintiffs alleged that 17 of the mutual funds in the plan fund menu “offered different share classes that charged lower fees and had materially better rates of return.”
The standard of review of a fee claim in a motion to dismiss
The threshold issue in a motion to dismiss “for failure to state a claim” is: what standard of review should the court apply? In this regard, and as a general matter in federal court: (1) the plaintiffs’ factual allegations are accepted as true but (2) “the complaint must lay out enough facts for a court to reasonably infer that the defendant wronged the plaintiff.”
ERISA prudence is about process, and a challenge to fiduciary conduct must ultimately focus on the process the fiduciary used to arrive at the allegedly imprudent action. Thus, ordinarily, in ERISA prudence litigation, the plaintiff must show that, e.g., the defendant did not employ “the appropriate methods to investigate the merits of the investment and to structure the investment.”
The role of “circumstantial factual allegations” and comparisons with other plans/funds
Courts generally recognize, however, that as the court in Forman put it:
[G]iven the early stage of a motion to dismiss, and a plaintiff’s general lack of inside information as to a defendant’s decision-making processes without the benefit of discovery, “[e]ven when the alleged facts do not directly address the process by which the Plan was managed, a claim alleging a breach of fiduciary duty may still survive a motion to dismiss if the court, based on circumstantial factual allegations, may reasonably infer from what is alleged that the process was flawed.” [Emphasis added.]
Typically, the “circumstantial factual allegations” plaintiffs make involve comparison with other plans’ administrative costs and with the fees on “identical” lower cost investment alternatives
The Forman court’s decision – administrative fees
In Forman, the plaintiffs alleged (as the court put it) “only that the administrative fees were high.”
Here the court made a point that does not often come up in litigation challenging administrative fees – that a necessary element of a claim that defendant-fiduciaries imprudently overpaid for administrative services is not just that fees are higher than fees under plans of a similar type/size, but that the services received under those plans were also comparable. “While the size and structure of the plans are relevant to the reasonableness of the administrative fees, similarly relevant is the types and scope of the services offered in exchange for those administrative fees and whether those services are sufficiently similar such that the higher administrative fee amount is unjustified and thus imprudent.”
Because the Forman plaintiffs failed to allege facts with respect to the comparability of services, the court dismissed the administrative fees prudence claim, holding that “Plaintiffs have failed to allege facts that permit this Court to ‘infer more than the mere possibility of misconduct.’”
Investment management fees
In Forman, with respect to the 17 challenged funds, “the plaintiffs identified several funds that they characterize as ‘the lower-cost share classes’ and state[d] that the only difference was the fees.” But, according to the court, plaintiffs offered “no further information to permit the Court to conclude that the funds were, in fact, similar enough to permit an ‘apples-to-apples’ comparison.” In a footnote, the court stated, “To the extent Plaintiffs are reticent to identify the funds in more detail because their argument is, in fact, that Defendants were imprudent for failing to offer institutional class shares in place of retail class shares, numerous courts have rejected this theory.”
With respect to these findings, the Forman court’s discussion of Tibble is interesting:
“[T]he existence of a cheaper fund does not mean that a particular fund is too expensive in the market generally or that it is otherwise an imprudent choice.” [Citation omitted.] … Here, Plaintiffs have not provided sufficient facts to draw such an inference …. Plaintiffs’ reliance on … the Tibble cases … are not dispositive … because those cases were … on a record containing evidence, rather than mere allegations.
In this regard we note that in Tibble (which was disposed of in a trial, not on a motion to dismiss) plaintiffs produced evidence that, e.g., plan fiduciaries did not even inquire about the availability of cheaper funds.
Not all courts are as strict as the Forman court with plaintiffs’ pleadings – some have allowed plaintiffs to proceed with the mere allegation that there were available, “identical” cheaper alternative share classes.
A critical issue in Hughes v. Northwestern – pleadings threshold
One challenge to plaintiffs 401(k) fee claims generally has been that these complaints are often generic, typically involving context-less comparisons with allegedly comparable alternatives. With respect to administrative fees, one of the earliest “wins” for plaintiffs was in Tussey v. ABB, where ABB’s 401(k) administrative fees were compared to fees under a plan for the employee retirement system for employees of the State of Texas.
Defendants generally claim that these sorts of claims are insufficiently specific to survive a motion to dismiss. This issue is certain to be a focus of the Supreme Court’s review in Hughes v. Northwestern.
In Hughes, as in other “excessive recordkeeping fee” cases, plaintiffs alleged that the plans should have paid a flat, per capita recordkeeping fee, and that given the size of the Northwestern plans, that fee should have been $35 per participant per year. And, as in other “excessive investment fee” cases, plaintiffs alleged that there were other identical (or nearly identical) lower cost funds available.
Given the complexity of Northwestern’s plans – which included, as a popular option, a TIAA-CREF Traditional Annuity – Northwestern is certain to argue that these sorts of generic comparisons are inadequate. And that is the conclusion the Forman court reached. But, as we noted, other courts have been less strict with plaintiffs’ pleadings. A Supreme Court decision in Hughes may give us a clearer standard in this regard.
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The Supreme Court has scheduled oral argument in Hughes v. Northwestern for December 6, 2021.
We will continue to follow this issue.