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.”
Surviving a motion to dismiss
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.
Decision in Patterson
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:
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:
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.
Decisions in other courts
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:
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.
A “good enough” deal
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:
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?
Still no clear answer
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.