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In a recent decision in Patterson v. The Capital Group, on a motion to dismiss a 401(k) plan fee complaint, the United States District Court Central District of California sided with defendant plan fiduciaries. The court found, among other things, that a claim based only on an allegation that the fiduciaries included more expensive share classes in the plan fund menu, when there were less expensive share classes available, was insufficient to survive a motion to dismiss.
In this article we briefly review the court’s decision on this issue, in the context of decisions by other courts with respect to similar claims.
This is an “in-house plan” case, and the complaint involves 401(k) fee-related allegations (including with respect to breaches of ERISA’s fiduciary duty of loyalty and prohibited transaction rules) that would not generally apply to 401(k) plan fee complaints brought against non-financial services company plan fiduciaries.
But the complaint also alleges violations of ERISA’s fiduciary prudence standard similar to the allegations in a number of other 401(k) plan fee cases: that plan fiduciaries used “more expensive” share classes when lower cost share classes were available. Specifically, in this case, plaintiff alleged that defendants had violated ERISA by “selecting, retaining, and failing to remove . . . unduly expensive Capital Group-affiliated investment options [and] permitting Plan participants to invest in the more expensive R5 share class . . . despite the availability of the cheaper R6 share class.”
Typically, the first question a court considering this sort of claim confronts is: is the mere allegation that there was a cheaper investment available enough to get plaintiff past a motion to dismiss? And if not, what more must plaintiff allege?
The motion-to-dismiss stage of litigation is critical because, if plaintiff can survive such a motion, and get to discovery, then she can develop more facts and impose litigation costs on defendants – increasing plaintiff’s chances of a favorable settlement or victory in an ultimate trial on the merits.
Patterson is one of a number of cases presenting this issue (see, e.g., litigation in Anthem, Oracle, and Chevron). But, notwithstanding similar facts, courts have reached different conclusions with respect to it – compare, e.g., the decision in Anthem with the decision in Chevron. In Patterson (like Chevron) the court sided with defendant fiduciaries and dismissed plaintiff’s complaint on this issue.
In describing what it believes to be the right standard to be applied, the Patterson court stated:
[C]ourts have routinely held that a fiduciary’s failure to offer the cheapest investment option is not enough by itself to state a claim for a breach of fiduciary duty. “The fact that it is possible that some other funds might have had even lower [expense] ratios is beside the point; nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund.” Hecker v. Deere & Co._As the Ninth Circuit stated [in _Tibble I]: “There are simply too many relevant considerations for a fiduciary, for that bright-line approach to prudence to be tenable.” … Rather, plaintiffs must plead some other grounds to plausibly suggest wrongdoing.
The quotation from Hecker v. Deere & Co. is a hallmark of the opinions of courts siding with defendants.
In support of its decision for defendants, the court made the following points:
In [Braden v. Wal–Mart Stores, Inc.], the Eighth Circuit considered similar allegations with one key difference – the plaintiff in Braden alleged that both share classes had the same return on investment and differed only in price. … Plaintiff here makes no such allegations …. But fiduciaries are required to consider factors beyond price when choosing investment options. See Loomis v. Exelon Corp.… (retail funds may have certain advantages over institutional funds, such as higher liquidity).
It’s not clear (to us at least) under what circumstances different share classes of the same fund would not have “the same return on investment” (at least, prior to application of the share class expense ratio).
It is true, however, that retail share funds (and, even, retail share classes) may have advantages over institutional funds/share classes. Whether the plaintiff, in her complaint, has a burden of alleging facts that refute (or at least call into question) the possibility that these advantages outweigh the additional cost is still up for grabs.
Courts siding with plaintiffs on this issue generally rely on Braden v. Wal–Mart and Tibble. The latter case can be read as standing for the proposition that the selection (for inclusion in a fund menu) of a retail fund without inquiring about whether a cheaper institutional fund is available violates ERISA’s prudence standard.
In Anthem, on arguably similar facts, the United States District Court Southern District of Indiana sided with plaintiffs:
The Court agrees the Defendants’ reliance on Hecker and Loomis is misplaced. In both Hecker and Loomis, plaintiffs generally asserted that defendants violated their fiduciary duty by not offering certain investment options and selecting investment options with excessive fees. … Neither court addressed whether a defendant violates their fiduciary duty in selecting high-cost investment options where identical investment options are available at a lower-cost. Accordingly, the allegations set forth are sufficient to survive a motion to dismiss. [Emphasis in the original.]
Is that all that is missing from plaintiff’s allegations in Patterson– that the R6 share class represents an “identical investment option available at a lower-cost?” It’s unclear – plaintiff in this case might conceivably amend her complaint to include such an allegation.
It would be reductionist to describe what is currently going on in the courts as: courts-siding-with-plaintiffs cite Wal-Mart and Tibble and courts-siding-with-defendants cite Hecker and Loomis. As we would characterize it, courts are trying to develop a standard for fund selection that falls somewhere between requiring fiduciaries to get the “best deal” and simply a “good enough deal.”
In this regard, the Patterson court clearly comes down nearer to the “good enough deal” side:
Plaintiff must at least allege facts that plausibly suggest the fees were unjustified. That Defendants “could” have chosen funds with lower fees, that “similar” Vanguard funds charged lower fees, and 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. … Unquestionably, fiduciaries need not choose the cheapest fees available to the exclusion of other considerations – or all funds seeking investments from trusts and pension plans would have to charge the same fees regardless of the type of fund, management approach or services, performance, etc. in order to attract institutional clients. As Plaintiff notes, Capital Group “ranks among the largest investment management companies world-wide with $1.39 trillion in assets under management . . . .” … It appears obvious that fiduciaries are investing substantial amounts in the Capital Group funds.
As a matter of policy, the last of these arguments seems pretty compelling. If lots of (presumably prudent) investors are investing in these funds, despite the higher fees, can their inclusion in the plan’s fund menu really be called imprudent?
The courts have for some time been struggling with where to draw the line on this issue. While the Patterson and Chevron courts have sided with defendants, it looks like the Anthem court may be siding with plaintiffs. It will be a while before we have black letter law in this area.
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We will continue to follow this issue.